Small Cap Value Report (14 May 2015) - CHW, TUNG

14th May '15 by Paul Scott

24 comments 17990 reads

Good morning!

Chime Communications (LON:CHW)

Share price: 273p (down 8% today)
No. shares: 100.7m
Market Cap: £274.9m

Profit warning - today's AGM update from this group of PR companies (with a specialism in sports marketing) is a mild profit warning. The key part of today's update says;

So the problems seem contained within one division - sports marketing - which made up about 41% of turnover and divisional operating profit in 2014.

Outlook - the rest of today's statement sounds quite positive, in particular this bit;

That sounds interesting, and makes me wonder if today's profit warning might be a blip, which is presenting a buying opportunity perhaps?

My opinion - personally, I'm not keen on PR businesses - they're too dependent on individuals, who can leave to set up on their own, or join competitors and take key clients with them. Also, this type of business usually has a weak Balance Sheet stuffed full of goodwill, and bank debt. So when bad times hit, there's nothing much to support the share price. Also, they are highly cyclical - PR and advertising are the first costs to be slashed when the economy turns down.

On the other hand, as I've been saying for a while, this is probably the right point in the economic cycle to be buying cyclical companies like this perhaps.

Balance Sheet - I don't like the Balance Sheet at Chime, but it's not disastrously bad. Net assets are £190.3m, but take off £243.6m goodwill & other intangibles, and the NTAV is negative at -£53.3m. That may sound bad, but in the context of a group that made an adjusted operating profit of £32.2m last year, and so could be heading for about £36m+ this year, it's bearable.

Dividends - this group has a good track record of growing divis by 10% p.a. compound since 2009, and the forecast yield for this year is about 3%, and that will be a bit higher now the shares are down 8% today, so a bit under 3.3% - not bad considering that's growing each year.

Overall - today's profit warning looks mild, and the outlook sounds promising, which combined with a valuation that now looks quite reasonable, means that I might have a closer look at this company over the weekend. As always, reader views are very welcome.

UPDATE (14:35) - I've…

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Laughton

14th May '15

Hi Paul,

Had hoped for your comments on today's finals from New River Retail as I think you've covered this company before.

saadmustafa

Hi Paul,

Was wondering if you could cover Amara Mining (LON:AMA) again? They just released what on the face of it looks like a pretty good Pre-Feasibility Study, but the share price has gone down by about 4%. Would love to hear your thoughts?

boothbym

Tung look to be heading towards£1 However:

Canaccord Genuity restated their buy rating on shares of Tungsten Corp PLC (LON:TUNG) in a report released on Thursday. Canaccord Genuity currently has a GBX 369 ($5.70) price objective on the stock.

Canaccord Genuity has also taken action a number of other stocks recently. The firm reiterated its hold rating on shares of Fuel Tech Inc. They have a $4.00 price target on that stock. Also, Canaccord Genuity reiterated its buy rating on shares of SABMiller plc. Finally, Canaccord Genuity gave shares of SunOpta, Inc. a new $13.00 price target. They now have a buy rating on that stock.

Tungsten Corp PLC (LON:TUNG) opened at 140.0000 on Thursday. Tungsten Corp PLC has a 52-week low of GBX 135.4000 and a 52-week high of GBX 409.7500. The stock’s 50-day moving average is GBX 183.63 and its 200-day moving average is GBX 225.38. The company’s market cap is £144.94 million.

Also:
Tungsten's share price fall represents buying opportunity, Canaccord Genuity says
By John Harrington February 25 2015, 1:58pm "Tungsten's cost of funds may be exposed to interest rate rises; however, we believe Tungsten should remain competitive as a structurally lower cost provider over the long term," the broker said.
Tungsten's (LON:TUNG) joint broker, Canaccord Genuity, has issued a note addressing the issues raised by a short-seller on an investment web site.

The research note follows on from the announcement by electronic invoicing (e-invoicing) specialist Tungsten late yesterday responding to Tuesday's share price decline.

Commentators on the web speculated that a cash-raise by Tungsten could be in the offing, but the company reassured investors that, along with the resources available to its banking arm, the funding agreement with Insight Investment Management means the group has the wherewithal to satisfy the required funding for its invoice finance offering at this stage of its development.

Tungsten had £27.7mln of free cash at the end of October 2014, and Canaccord asserts it has enough cash to support cash burn to at least October of this year.

"With a ramp in financing and analytics volumes, funding requirements should be pushed further back," the broker predicted.

Canaccord Genuity said it would be sticking to its forecasts, which were revised last month.

It is forecasting that annualised e-invoicing volume will rise from £7mln in fiscal 2015 to £257mln in fiscal 2016 and to £566mln the year after that.

Turning to the short-seller's back-of-the-envelope estimate of Tungsten's net interest margin, Canaccord noted that Tungsten's net interest margin has ranged from 4% to 15% to date. Canaccord's forecast is for a net interest margin of 5.5% overall.

"We expect Tungsten to balance net interest margin against volume and cost to maximize profit. In addition, we believe Tungsten's cost of funds via Insight may reduce as the relationship becomes proven over time," the broker said.

The web article by the short-seller (someone who has sold stock he does not own in the hope of buying it back cheaper later) also suggested Tungsten had overpaid for e-invoicing firm OB10 in a competitive bidding process.

Canaccord observed that OB10 may be loss-making but its value to Tungsten is strategic, in the same way that OB10 rival Ariba is to German software giant SAP; the German firm paid eight times sales for Ariba, versus the five times sales paid by Tungsten for OB10.

The spectre of interest rate rises looms over the lending industry, but Canaccord believes Tungsten's lower cost base will give it a competitive advantage over the long term.

Visibility of invoice status reduces administration costs and a captive customer base reduces sales costs, the broker argued.

"Tungsten Bank is planning to begin taking deposits in March 2015. The bank and its licence allows Tungsten to enter certain markets where Insight alone may be restricted. We do not see significant downside to owning and operating the bank. At the same time, we believe Tungsten could sell the bank without significant loss." Canaccord Genuity said.

It concluded by saying that, it its view, the recent share price decline represents a long-term buying opportunity, as they trade at just nine times the broker's forecast for underlying earnings per share in fiscal 2017.

Ramridge

Hi Paul - re Tungsten (LON:TUNG) completely in line with your thinking. As an investment, short or long term, not to be touched.

However I have taken a punt with the share price dropping 14%. Market cap has come down to £129m and the valuation on a debt free/ cash free basis comes down to £98m. Low enough for possible bounce in the next two days. Whatever the outcome I will liquidate my position no later than 48 hours from now.

Marky

Tungsten: another solid victory to StockRank

bsharman

Hi Ramridge,

Are you a politician by any chance??

"As an investment, short or long term, not to be touched"

and in the next sentence you go on to say you have bought some.

That made me chuckle!

Rusty2

Maybe he means its a gamble?

No contradiction. I make a clear distinction between investing and taking a punt or gambling.

Hope the gamble works out then!

Cisk

13 mentions of Canaccord Genuity. I'm almost surprised today's stock report isn't about them...

boothbym - useful to know what those overpaid monkeys are thinking but you'd be better off with the comments of some of the more seasoned posters on Stockopedia.

Cisk - those overpaid monkeys are dancing to the tune of the organ grinder - in this case Tungsten. Disgraceful.

Paul Scott

Hi Marky,

Indeed - whenever I look at a company, and see it has a StockRank below 50, I try very hard to pull away. So it's a very useful metaphorical bucket of cold water to help stop me being sucked into too many story stocks!

Having said that, when you do buy into a story stock, you do so on the basis that most will fail, but the odd one will be a major multi-bagger. So it's a different thing altogether from value investing.

Much safer to steer away altogether from story stocks - I'm trying hard to resist them, and even though I have bought into one recently, I studiously avoided mentioning it at all in the SCVR!

Regards, Paul.

jonthetourist

Hi Paul

Interesting that no-one has picked up on your mention of Proactis. I always struggled to get anyone to discuss them on TMF. If I remember rightly you weren't keen previously because they capitalised development costs, although I thought it was legitimate because they were building an ever-bigger suite of product.

With their SAAS model I have quite a lot tucked away as a safe investment until they eventually get taken out by a rival. Although I notice they had a price drop today on no news other than you announcing that you hold ;)

Hi Jon,

Haha! PHD shares had already dropped about 9% today before I mentioned it!! There seems to be a clumsy seller in the market - fine with me, as it means more & cheaper stock for me!

I've dismissed Proactis Holdings (LON:PHD) in the past, because I just looked at the numbers in a conventional way. However, when I cottoned on to the fact that they are also shortly to offer the same thing as Tungsten - they already have an e-invoicing platform, and a deal with a finance provider (which refers to Proactis' 500 clients already handling £60-80bn invoices, with 1m suppliers p.a.), but the market cap of Proactis (£29m) is a fraction of the price of Tungsten & it isn't burning cash, then it started to look a bit more interesting.

Although Proactis's client list seems to be more UK-based than international, whereas Tungsten seem to be going for the bigger international stuff, although of course Tungsten's e-invoicing company OB10 is an American company to begin with.

The forecast PER of Proactis is only 12.0, but with the shares in freefall at the moment, on no news, I do worry that there might be a profit warning in the pipeline - I seem to be a magnet for them at the moment :-(

Regards, Paul.

I think the FD has announced an intention to leave with the interims, which doesn't suggest there is a huge boom around the corner. You also get some visibility on trading because they announce contract wins, and there haven't been many lately.

A lot is resting on whether they can get suppliers to pay to be on the system - codename Activate.

Finncap have indicated they will get them down to do a presentation to PIs, which could be interesting.

Jon

ericb

This article on TUNG is misleading and out of date.
It refers to Tungsten bank begin to take depositis in March 2015, yet today the official statement reverses this detail.

chemistdude

Re: Tungsten (LON:TUNG)
It's a sad day for UK Plc that shorters in the market would rather stifle a growing UK company's ambition of trying to improve the cash flows and therefore prospects of UK business's which would lead to economy growth, security and increased employment amongst spending efficiencies for both public and private sector organisations like the NHS.

On the other side of the pond, the companies are allowed to grow and become billion dollar companies before they've made a cent.

Out here, they latch on to rapid growth cash burning companies and stagnate their prospects.

As much as a capitalist that I am, there was a level patriotism that I felt backing a UK company with the potential to affect thousands of business's in the UK giving them security, helping them to grow and keep people employed. Conservation of the environment by reducing paper expenditure.

The last 12 days have taken the fun out it for me but I remain very confident in the management team, of that I am certain.

rhomboid1

15th May '15

Hi chemist dude

There is definitely a different mindset amongst US finders of tech startups but that is the only part of your post I agree with.

Tungsten are dressing up an existing product and service as if it is totally new, IMHO it is not substantively different and that is why the growth trajectory has not followed Mr Truells earlier expectations . They would also be far better served by issuing fewer and more factual RNS's that are shorter on hype and give a clearer idea of the financial impact on Tungsten and thus their shareholders.

As it stands it looks spookily similar to a latter day Infobank/ Izodia to me and that makes it of no interest to me and of great and legitimate interest to shorters

good luck with your shareholding

Hi Chemistdude,

I understand the point you're making, but in my view the problem lies with management.

The business climate in the UK is that if you have a loss-making, cash-burning growth business, then you MIGHT be refinanced when you need cash, if the market happens to be receptive to it. At other times the financing window will be slammed shut.

That's the deal in the UK, and everyone should know that. Therefore, if you are going to embark on a business plan that requires heavy funding, it is essential to raise all the money up-front.

Truell should have known this, he's a very experienced financier. So don't blame the shorters, blame the incompetent management.

Same mistake was made at Synety (LON:SNTY) unfortunately.

Cash-burning business models need to be fully funded, including a large contingency reserve, as they always take longer & cost more than originally planned.

Blaming shorters is a cop-out in my view. Shorters look for weakness, and over-hyped story stocks, then pounce when reality is beginning to come home to roost.

If you want to avoid shorters, then buy sensible companies with sound finances, sustainable profits, and dividends, at reasonable valuations. They won't ever get shorted usually. It's the over-hyped story stocks that get shorted, especially ones which have run out of cash.

It won't destroy the business anyway. It just means existing shareholders are likely to be shafted in the next fundraising. That's the way it often goes with speculative stocks, hence we need to redouble our efforts to avoid buying them! (I'm talking to myself as much as you here!!!)

Small Cap Value Report (14 May 2015) - CHW, TUNG

Chime Communications (LON:CHW)

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Paul Scott

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