Small Cap Value Report (13 Jan 2014) - OFF, TCM, SIM, STT, TRAK

Good morning. Quiet for news today. Office2office (LON:OFF) has put out a profit warning. Their shares have fallen from about 100p to 28.5p in the last year, and I would imagine are likely to take another tumble today. In their year end trading update issued today, the company says that underlying profit for 2013 will be around £4.2m. Borrowings are reported as down from £29m a year ago to £23m at 31 Dec 2013, but that's actually a negligible change from the last interim report at 30 Jun 2013.

Unusually for this early in the year, they warn on profits for 2014, saying that;

 

...trading conditions in this market will remain at least equally challenging this year, with continuing pressure on margins.

 

The problem here is the Balance Sheet. It's terrible. Once you write off the £57.4m intagibles, net assets are negative £40m. Given the poor outlook I'd be surprised if shareholders are willing to stump up the level of fresh equity that would be needed to fix the Balance Sheet, but you never know, we're in a bull market and surprising things can happen. Also, further cost cutting is underway, as you would expect.

As regards risk/reward though, my view is that it's pretty awful here. There's a high risk of the company going bust, due to its high debt, and extremely weak Balance Sheet. Yet there seems little upside, due to the poor trading outlook. So these shares are very much a bargepole situation. So the ultra-low PER of 2.55 shown on Stockopedia is a value trap in my opinion. It depends on whether the Bank are prepared to give the company time to trade out of this situation, if that is possible? It's difficult to see how that will happen, as any cashflow they generate will probably be used in paying bank interest, and in exceptional costs, as evidence by the negligible reduction in bank debt in the last six months.

Therefore in my view these shares are probably worth nothing, but good luck to them. House broker WH Ireland very surprisingly have issued an "outperform" rating on the shares this morning - how on earth does that make sense going in conjunction with them downgrading their forecast earnings for 2014 by 31.4%?! Although they do acknowledge that "the risk profile remains high". I should say! Although they also point out that the EV/EBITDA is reasonably modest at 4.9. It will certainly be interesting to see how this one pans out, from a safe distance!

 

 

 

Telit Communications (LON:TCM) has issued a trading update for the year ended 31 Dec 2013, although I've read it twice and am surprised that it doesn't give any information at all about profitability. So it's not really a trading update at all, but more of a marketing announcement.

Turnover is mentioned, and has come in slightly ahead of forecast for the year ended 31 Dec 2013, at $243.5m (versus forecast of $240m, and prior year of $207.4m). They have been acquisitive, so one would need to check how much of the growth is organic, and how much has been bolted on from acquisitions.

Net debt has risen from $12.7m at the end of 2012 to $17.1m at end 2013.

This is a growth investment, so it's not something I feel capable of valuing, having not done any more in depth research on the company, therefore I don't really have an opinion on this, other than to note that the market cap is looking pretty warm at nearly £200m, based on limited profitability in the past. Their activity, of selling wireless modules that enable machines to talk to each other, sounds interesting though, and the sort of thing that would trigger some investor excitement in a bull market like this.

 

 

 

 

As regulars know, I generally avoid overseas companies Listed on AIM, but make the occasional exception if the company is profitable, has a good track record, and pays a regular dividend.

Israeli flight simulator company, Simigon (LON:SIM) has cropped up on my radar a few times. Its market cap has risen 6% this morning to £14.3m (at 30p per share) on the back of a trading update for the year ended 31 Dec 2013.

The company says that the strong trading reported in H1 has continued into H2. This really is an excellent trading statement, as instead of a lot of vague waffle that so many companies report, they actually give specific figures. So revenue for 2013 is expected to be at least $7.9m (16% up on the prior year), and profits are in line with expectations.

Also they report cash of over $8m at 31 Dec 2013. That's a material figure in relation to the £14.3m market cap. So the $8m cash is equivalent to £4.9m at the current exchange rate of £1 = $1.64.

I've had a quick look at their last reported Balance Sheet, and it's excellent. Current assets were 334% of current liabilities, so an extremely healthy liquidity position. Long-term liaibilities are only $0.9m, so no issues at all there, it looks very solid, and the bulk of their net cash can genuinely be regarded as surplus cash, in my opinion - hence adjusted for in the valuation.

As you can see from the Stockopedia "Growth & Value" graphics on the left, it might be a nice company but the valuation looks very full now.

It's a tall order valuing a tiny, overseas company on a PER of 20. Especially where the company doesn't pay dividends, despite being cash rich. Why not? Maybe it's an Israeli thing that companies like to hoard cash, rather than pay dividends, as the same is true of Pilat Media Global (LON:PGB).

The other thing to consider is the risk of a profit warning. Given that one imagines simulators for airlines & the military are large, lumpy orders, then there could be a chance of a gap appearing in the order book, and a profit warning happening.

Although I don't know anything about the business, so that point is more of an assumption on my part.

It's the type of situation where you would need to research the company in-depth to understand what its prospects are like, in order to decide whether or not the shares are likely to be a good investment or not. To my mind the valuation is too high to make it worth spending the time doing the research, so I'll pass on this one.

 

 

 

 

Shares in wheelie-bin maker Straight (LON:STT) have shot up 24% to 44p this morning, on news of a contract win. It's a tiny market cap, but might be worth a look? Although historically the company's performance has been mixed, and generally unimpressive. It stopped paying dividends in 2011. You do wonder why it's Listed on the Stock Market, being so small, and such an uninteresting activity?

 

 

 

 

Telematics company Trakm8 Holdings (LON:TRAK) has announced its biggest ever contract. This is a nice little growth company, with good management, who are building it into a bigger business, following a relatively large recent acquisition, that has scaled up the business considerably. Their shares are up 8% today to about 38p.

 

 

 

Right, that's me done for today. Thank you for reading, and please bear in mind that I update these articles gradually, from 8am until about noon, so it's worth keeping it in open in a browser tab, and then refreshing later to ensure you see the full content.

Regards, Paul.

(of the companies mentioned today, Paul has no long or short positions)