Small Cap Value Report (13 June 2017) - PKG, IOM, CML

13th Jun '17 by Graham Neary

44 comments 18179 reads

Good morning,

Paul is a bit busy at the moment, so you're stuck with me a little longer.

Cheers

Graham

Park (LON:PKG)

Share price: 78.5p (-4%)
No. of shares: 184.4 million
Market Cap: £145 million

Final Results

Steady progress at Park Group, a major gift voucher/gift card provider.

"4.6 per cent rise in operating profit to £10.9m (2016 - £10.4m)
4.2 per cent growth in profit before tax to £12.4m (2016 - £11.9m)
5.1 per cent advance in billings to £404.5m (2016 - £385.0m)"

The dividend is increased, and year-end net cash creeps up to £31.4 million.

I note that that Park's digital reward platform (technology for providing vouchers to customers and employees) has been expanded to for international reach - some decent growth potential, perhaps?

CEO change: a new CEO is needed as the incumbent wishes to retire - after 30 years of service! He will stay for at least one more year.

Outlook is good:

The current year has started well as we have, again, maintained the progress of the previous period. The outlook for our corporate and consumer businesses is positive, with order books ahead of their position at the same time last year.

My opinion

Seems like a decent business, not too exciting but cranking out decent results years after year and moving with the times in terms of the use of technology, e.g:

The cost to us of opening a new account is now close to half that of 2011, while the cost of servicing a retained account has fallen some 70 per cent during the same time frame

The company's Facebook followers are up from 72,000 to 100,000 - sounds great!

Overall, something I'd potentially be interested to purchase. It's not at the same level as Visa or American Express in terms of desirability but perhaps it's not so very far away.

iomart (LON:IOM)

Share price: 327p (-3.5%)
No. of shares: 107.7 million
Market Cap: £352 million

Final Results

I last covered this cloud computing company at the interim results in December, when revenue was up 16% and adjusted PBT up 23%.

Full-year results are in the same ballpark, revenue up 17% and adjusted PBT going at a slightly slower pace, up…

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iwright7

13th Jun '17

Trifast (LON:TRI)

As it has not been covered by Graham - My summary take of Trifast finals today...

Sales up 15%, EPS up 22% and Divi up 25%, helped a lot by exchange rates. ROCE increased from 18.5% to 20%. Move into car handles/locks looks promising. Brokers too cautious and competitive moat, (most likely to be 24/7 delivery service) Confident outlook and multi European manufacture shields against Britexit difficulties. I hold ,but please DYOR. Ian

WarrantStar

Yes very unsexy. But there is plenty of scope to become more interesting.. A value rank of 75 gives plenty of upside. It's doing rather well with a business transformation with changes to an internet based model which is going global.

Effortless Cool

FREng,

Agreed regarding the excellent announcement from Water Intelligence (LON:WATR) today. Growth from both their franchise stores and their corporate-owned stores was ahead of my expectations. Updating my revenue projections on a reasonably conservative basis produces $15.8m for 2017 and $17.2m for 2018. These compare with broker forecasts before today's update of $14.8m for 2017 and $16.3m for 2018, so I foresee upgrades in the pipeline.

This seems an overlooked opportunity and, as a microcap, would seem to offer multibagger potential but, being consistently profitable and having a decent balance sheet, would also seem to offer lower downside exposure than normal for such a share. I have gone into it in a reasonably big way with 65,000 shares, but am feeling very comfortable with that investment at the moment.

Paul Scott

Hi Laughton,

Yes, I attended a group meeting last week with a Director of Revolution Bars (LON:RBG) and had the opportunity to quiz him about what went wrong, and what they're doing to fix it.

Basically, it reassured me that there's nothing wrong with the business. There was a period of time where the finance team lost several key senior staff, and financial controls & budgeting went to pot. The new CFO is now sorting things out.

We talked about the slower maturity of new sites too. The crucial thing is that new sites are taking 9-10 months to reach high levels of profitability. So the payback period is now about 3 years, because the initial 6 months is cumulatively about breakeven. Thereafter, new sites are generating levels of profitability described as "astonishing" - i.e. in line with previous guidance, of ROI of about 38%.

Overall, I think it's a terrific, and highly cash generative business, so have been buying more shares personally around 114p, and also in BMUS. The EV/EBITDA valuation is now less than 4. That's great value, in my opinion. Remember the business has no net debt too, so it's super-safe, in my view.

Politically, whoever is in Govt is going to have to loosen the purse strings. So I think younger people could end up being electorally bribed, hence having more disposable income, hence money to spend in bars. Maybe?

RBG is a self-funding roll-out, which is also paying a fairly generous divi.

Time will tell, but to my mind, on valuation grounds, I think RBG looks compelling right now.
Investor confidence is on the floor, which is great!

Regards, Paul.

abtan

14th Jun '17

HI Graham

Both figures are pretty much the same thing as far as I'm aware.

"Likes" imply that someone both likes the page & wants to see posts/updates in their news feed.
"Following" implies that someone only wants to see posts/updates in their news feed.

For reference I think the 100k figure they're referring to is this page:
https://www.facebook.com/ParkChristmasSavings

Based on the interactive comments, I imagine FB IS a good marketing tool for them, though I find it remarkable that they would get an additional 28,000 likes/followers (ie a c40% increase) through word of mouth alone.

gus 1065

Morning Paul.

Thanks for reporting on your meeting with Revolution Bars (LON:RBG) . As a holder, I hope your positive assessment comes through although the sceptic in me thinks back to the similarly positive vibes you took away from your meeting in March, prior to the market reassessment of the company's prospects. It wouldn't be the first time a silver tongued CEO has papered over the cracks although I'm sure you're in a much better position to judge having met him first hand. I guess the future results will prove things out one way or another.

Gus.

Deegee Eff

Thanks for clarification Abtan, either way I think that it is a solid business, and contrary to a previous comment that there is considerable scope for growth. The foreign currency card and arrangement with Visa for example.

Hi Gus,

Fair points. In fairness, I think the CEO probably wasn't aware that things were going wrong on costs, when I met him previously, because it was a failure of previous finance dept people, who just got basic budgeting wrong. Then there was a vacuum when a series of key people left.

My most recent meeting was with the new CFO, who was open & forthcoming, explaining clearly what had gone wrong, and what they're doing to fix it.

As I've said here before, there's nothing wrong with the business. It's achieving targeted sales & & gross margins. They just saw costs get out of hand, due to key & long-serving finance people leaving, and a failure to properly budget for cost increases that were already known about. It's all very unsatisfactory. However, measures are now being taken to sort things out.

The key point is that new sites are fantastically profitable after 9-10 months. So this remains a very attractive, self-funded roll-out, which is net debt free. Once the dust has settled over the recent problems, then I think other investors may begin to focus on how cheap the shares are.

New sites are being opened where rent is only 5-6% of turnover, which is amazingly low. This is a much better business than the current valuation suggests, in my view. Just look at the cashflow statement, to see what a cash cow it is.

Regards, Paul.

PhilHofGrowYourDough

So on reflection how do you feel about the previous narrative that the CFO left to spend time with his young family?

Thanks Paul.

As I say, I'm a holder so I agree with the view that the problems are soluble and that at these low levels the shares look very good value. Not quite ready to "back up the truck" and go all in but have topped up on my original position and am willing to give the benefit of the doubt. I would still like to see a vote of confidence from either the Directors or some of the bigger institutional shareholders increasing their holding.

Thanks again.

Gus.

simoan

I would still like to see a vote of confidence from either the Directors or some of the bigger institutional shareholders increasing their holding.

Absolutely! Unless they are in a closed period, which I don't believe they are, you'd expect the executive management to be emptying their piggy banks and helping themselves to free money by buying Revolution Bars (LON:RBG) shares in the market. Actions speak far louder than words IMHO. It's like having an open goal and yet they all seem to be Ronnie Rosenthal's...

All the best, Si

robbiep

Anyone looking at NXR. Market cap of approx £110 million and op cashflow of £30 million. Okay it has a pension deficit of £60 million and debt of £23 million. But seems very cheap and forward guidance today is strong.

Hi PhilH,

"So on reflection how do you feel about the previous narrative that the CFO left to spend time with his young family?"

At the time he looked & sounded honest when giving that slightly perplexing explanation.

It's clear now that there was more to it than that. I've already sent myself a memo saying to be more sceptical of such explanations in future!

Trident

Hi Simoan

I may be tripping over matchsticks , but I do find it curious, unless Sean Curran, the 'founding' CFO used general words, and meant something else when he used the term Gardening leave.

Most people have to work their notice, and when they leave in a shorter period of notice they don't normally get paid. Gardening leave is used as a term when possibly someone is going to a competitor, and are effectively suspended on full pay during their notice term. Frankly this is an unusual constraint for a CFO.

He has been on 'gardening leave' for nearly a year. Was this is an indulgence by the CEO to allow his ex-colleague a period out of business on full pay? Complete speculation on my part, of course! Normally AIM directors are on 6 mth notice periods. I would have to go back to the admission document to see if notice periods in Director contracts were mentioned.

I have reviewed the admission document, and it seems that the Execs had 12 mths notice.

So that at least ties in with the Gardening leave statement by Sean Curran.

I may be tripping over matchsticks , but I do find it curious, unless Sean Curran, the 'founding' CFO used general words, and meant something else when he used the term Gardening leave.

Personally, and I realise others feel differently about this, I don't care why he left, it's history, and I would file anything he said under "he would say that, wouldn't he". There's no point speculating about it, something has clearly happened and the old "spend more time with the kids" BS has been wheeled out. Given the profit warning, as a shareholder I'm glad he is able to enjoy his garden more... just don't let him loose with the Roundup.

Si

Onwards on upwards and all that, but he was on circa £225K per annum plus other incentives.
Something more to be told, I would suggest.

Anyway good luck on your investments.

Regards

Trident

VegPatch

Gus
I am not sure i agree with you point re institutional shareholders "I would still like to see a vote of confidence from either the Directors or some of the bigger institutional shareholders increasing their holding."

I was one of those institutional shareholders for 20 years at 2 of the largest London located fund management firms. We / I often got things wrong. Just because you work at a big house doesnt make you infallable. I have seen colleagues panicked out from shares at the bottom or buying more at the top. As a private investor you probably dont have daily inflows or outflows and in many ways can take a more considered view. So, my view is, follow you own instincts.

The Directors are another matter. They see the monthly Management Information schedules: sales, gross margins, costs, staff turnover etc They have better info than any shareholder. If they put down significant capital, and especially if they arent rich, then to me its usually a good sign. My 2 favourites are when Tony Pidgeley bought over £1m of Berkeley Group shares and they soon doubled and Henry Engelhart bought £7m of Admiral Shares at 700p (now c2000p) after a profit warning. These guys now their business backwards having founded them and are smart operators. You just have to know the context of the directors - who they are, the connection to the business, their track record or buying shares in the past (some are rubbish).

Hope this helps

VegPatch

smatthews1

I find the subject of credit fascinating. We live in such a fast paced world where everyone wants the latest "thing" yesterday, we want next day delivery, and we want to pay 12months later (or never).

I believe these are now the habits of our millennial generation. What ever happened to, can't afford it, not having it.

Social media is now such a big influence on our lives, we don't just see billboards and TV adverts with shiny new cars on them, we now see our friends on facebook driving them, what could influence of us more than that. The credit bubble of 2008 was an interesting one as it was mainly the housing market. But I believe this bubble just moves on to smaller purchases such as cars, Holidays etc. Which has probably caused all the pay day loan companies to spring up everywhere.

You only have to travel to America and witness the stampede of adverts inviting you to buy their cars, tv's and lawnmowers on credit, to realise there is still a problem here but just on a smaller scale.

Let's not be complacent about what's happening here, it's an increasing wave of buying with money that's not yet earnt.

This is an Interesting read https://www.google.co.uk/amp/s...

Flackwell

15th Jun '17

smatthews - if you think that about consumers then what are your thoughts on a potential labour government who operate in much the same fashion but on a far far grander scale?

spend now - pay back never

Small Cap Value Report (13 June 2017) - PKG, IOM, CML

Park (LON:PKG)

iomart (LON:IOM)

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Graham Neary

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