Small Cap Value Report (13 Sep 2016) - CHRT, FLO, GOAL

13th Sep '16 by Paul Scott

23 comments 15272 reads

Good morning!

We have about 20 people coming along to ShareSoc Brighton tonight, which is (just) above the threshold where it's worth doing. So I'm putting the finishing touches to my talk on small caps.

I'm dreading the train journey from London to Brighton. It's bound to be packed full of people who've thrown a sickie from work, to do some sunbathing! Summer is putting in one final appearance today apparently.

Cohort (LON:CHRT)

Share price: 315p (up 1.6% today)
No. shares: 41.0m
Market cap: £129.2m

AGM statement & Q1 update - this group of defence sector companies has a 30 April year end. So it's reporting today on the first quarter (May, June & July), although the figures given are as at 31 August, so that's actually 4 months, and not just Q1.

Anyway, the order book looks strong, and the all-important in line with expectations message is given;

The Group's order book stood at £128m as at 31 August 2016, underpinning a higher proportion of our externally forecast revenue for the year compared to this time last year.

The pipeline of orders beyond this and expected renewals give us confidence that the overall performance for the year will be in line with expectations, despite SCS's market in technical consultancy remaining a challenge.

The cash position remains healthy, although note that most of it is ear-marked for hoovering up minority shareholders in existing subsidiaries;

"The group's net funds as at 31 August 2016 stood at £14.4m. The reduction in the Group's cash position since the year end was as signalled in our final results statement, stemming from the partial reversal of working capital inflow during a very strong fourth quarter of last year.

A further £9m is expected to be spent in the rest of this financial year in acquiring a further 23% of EID, taking our holding to 80%, and the remainder of the shares (49.999%) of MCL, taking our holding to 100%.

That all sounds fine to me. Also, note the valuation is hardly demanding;

My opinion - it looks good value to me. Although I'm not madly keen on this sector, as contracts can be lumpy, leading to the ever-present risk of a profit warning. Or, something might go wrong with a major contract.

Mind you, at the current valuation, the risks seem…

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valueman

13th Sep '16

Paul
Are you not concerned that the returns FLO makes are derisory and that it ,as Charlie Munger puts it ,over the long term the share price will match the ROCE of a company ?

doug2500

Don't know if I'd recommend buying shares in Thalassa Holdings (LON:THAL). They've gone from being a pure value share IMO to blowing all their cash on non-core investments.

I would however definitely recommend reading the chairman's report as mentioned by grb! Always interesting.

Deegee Eff

It certainly does.

JohnEustace

Encouraging half year report from Keywords Studios (LON:KWS) - up 5.8% as I type. I'm a holder
http://www.investegate.co.uk/CompData.aspx?code=KWS&tab=announcements

oscar247

Paul

I'm sure readers would appreciate a transcript of your talk at tonight's ShareSoc event.

warmerjo

Brexit has not yet seriously affected FLO, but it is early days. We ain't seen any of the potential
nasty effects of Brexit yet. Costs of imports are bound to rise, this will bring about inflation,
which in turn will push up interest-rates - which would spell gloom for the construction industry
IMO..

JDW72

OK. As promised, some thoughts on K3 Business Technology (LON:KBT) .

- CEO is becoming chairman and search for a new CEO is in advanced stages. The CEO looked a bit jaded to be honest so I think a change is not necessarily a bad thing.
- The business model is moving from one-off up front payments to per user per year type which impacts on cashflow in the short term but is more lucrative longer term. It's a model that many other suppliers are starting to adopt with Microsoft actually refusing to do anything else for some of their products.
- Restructuring costs are specific to this year (business too big in one geography and synergies being realised in another region). The recent acquisitions won't attract any restructuring costs although it has to be accepted that any new CEO might want to reshape things....
- Recent acquisitions expand geography into Scandi and Germany (DdD) and vertically (Merac)
- MyLocal going into admin cost £830k. No chance of getting anything back.
- On track to be debt free by 2018 (although with the changing cashflow profile I'm not so convinced by this - heading in the right direction though.)
- Pipeline at record levels
- Dividend growing by 0.25p each year. It's covered 14 times so maybe there's something that could be done here?

If you knock off this year's restructuring and acquisition costs and take out the MyLocal impact the market expectations for next year are virtually in the bag already. With the pipeline up 23% I would imagine that there's scope for an upgrade all things being equal.

Draw your own conclusions as to whether it's good value at this level or not.

JDW72 (no position)

zho

>>Costs of imports are bound to rise, this will bring about inflation, which in turn will push up interest-rates>>

Not convinced by that. RPI averaged 5.2% during 2011, caused, I think, by commodities going on a tear due to a construction boom in China. The BoE could see that inflation wasn't caused by increased consumption or wage inflation at home, and sat on its hands.

jaykaytee

Hi Paul, you have previously covered STM, which has published it's results this morning.
The revenue and Profits have dropped but the forward looking statement is interesting.
Just wondered whether you would have time to review them tomorrow perhaps? Would be interested in your thoughts.
Regards
JKT

shauniekent

STM (LON:STM) - look at cash flow though - it's well above profit. It looks very cheap on fcf/EV basis imo and with positive outlook to boot.

Otemple1

Hi Paul

Any view on IQE?

jonesj

The Sharesoc do sounds interesting, but getting from Milton Keynes down to Brighton for a mid week evening do is difficult, with other commitments like work.

Paul Scott

14th Sep '16

Hi DurhamMike,

I visited Redstoneconnect (LON:REDS) at their office recently actually.

It's on my watchlist. I like the CEO & FD, but wasn't convinced the value right now is good, in terms of risk:reward.

The broker forecasts look nonsense to me, so the PER would be too.

I'll keep an eye on it for the next 2 years. Could become interesting in due course. But I would ignore that daft forecast.

Regards, Paul.

IQE - no I didn't have time to look at it, and don't feel I have any understanding of their business.

The clue is that I didn't report on it originally.

PP.

People have travelled down from France, Leicester, and even Abu Dhabi to hear my small cap talks in Brighton.

You're complaining about Milton Keynes?!!!

DurhamMike

Thanks Paul, look forward to getting a better understanding of it over time, the space is certainly interesting.

Best

Mike

FREng

A classic report! Thanks for the link.

WDWombat

My little memo on Cohort written a fortnight ago
'Problem here is the possible exit of Scotland from the Union and the likelihood of an end to Trident if that occurs. Otherwise a vg company and perhaps at 300 worth buying for a probable bumper year in 2018'

16th May '17

K3 Business Technology (LON:KBT) is down 40% today.

Small Cap Value Report (13 Sep 2016) - CHRT, FLO, GOAL

Cohort (LON:CHRT)

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Paul Scott

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