Small Cap Value Report (15 Aug 2016) - BVS, PEN, LOOK

Good morning!

It's very quiet for company news today, so just a short report.

Also, FYI I'm off on holiday this coming Saturday - to Corfu, then the beautiful island of Paxos, which we enjoyed so much in 2014 we're going back - by we, I mean a gaggle of family, nieces & nephews, etc. So it should be a scream - nice that the young ones want to go on holiday with us oldies!

SCVRs should continue largely as normal, although as I unwind they'll probably get a bit shorter than usual. Am taking my laptop, so the plan is to write my reports in the mornings, then do holiday things in the afternoons and evenings. It worked well in summer of 2014, and in any case I enjoy keeping tabs on the markets, even when on holiday.

I'll be away for 2 weeks in total, can't wait - it's been such a busy year, that a proper holiday is very much needed.

Bovis Homes (LON:BVS)

Strong interim results from this mid cap builder.

I mention it mainly because the outlook/Brexit comments are of interest. It's the latest in a string of builders to say that there's been little to no impact from Brexit so far. Here are some excerpts from today's narrative, which caught my eye;

Whilst it is too early to judge the impact of the EU Referendum and the Bank's monetary policy response on the UK housing market, the underlying market fundamentals for UK housing remain positive.  We have been pleased with the resilient level of interest shown by potential home buyers contacting us...

Reservation rates improving after a short term slow down in July...

The demand for homes in the market is strengthened by low interest rates and good mortgage availability.  The level of ongoing support from the Government, with the Help to Buy scheme and the overall positive influence of planning policy, remains high at this important time to drive new build activity for the country...

We continue to see robust levels of customer confidence and have been encouraged by the resilient level of prospects generated in what is traditionally a quieter time of the year, with a strong increase on the prior year...

That last paragraph is remarkably upbeat. It seems increasingly clear that consumer confidence has been largely unaffected by Brexit. This, and continued policy of ultra-low interest rates, seems to be what's driving share prices to a remarkable recovery post-Brexit.

Mind you, how much further this current rally has to go, is open to question.

I take the point that nothing has actually happened with regard to Brexit yet, but the market doesn't seem to be worried about the impact. If it was, shares would not be gaining so strongly. A lot of bears must be nursing nasty losses. Certainly my short positions have been heavily loss-making, so I've had to slink away with my tail between my legs on a couple of those! Thankfully I'm mainly long, so overall it's been a good patch lately.

Lookers (LON:LOOK)

Share price: 130p
No. shares: 396.2m
Market cap: £515.1m

(I no longer hold a long position in this share)

Acquisition - I reported on this company 5 days ago, when the shares were 112.75p, on the disposal of its parts division for £120m.

Some of the proceeds has been committed to an acquisition announced today of 7 Mercedes dealerships (trading as Drayton Group) in the Midlands for a total of £55.4m cash. The price being paid looks fairly full to me - it works out at a PER of about 13, by my calculations.

Given that the parts division was sold for a PER of about 12, I don't really see the logic for this strategy. Accordingly, I decided to bank my profit this morning, and move on.

Pennant International (LON:PEN)

Share price: 60p (down 4.8% today)
No. shares: 26.5m
Market cap: £15.9m

(at the time of writing, I hold a long position in this share)

Placing & trading update - there's often a lot of useful information in a fundraising statement, so they're always worth reading, if you own, or follow the particular company. I have a tiny scrap of shares in this company.

Private shareholders have every right to be annoyed with this placing, because the discount is too steep, and there's no open offer. The placing is being done at 55p, which is a 12.7% discount - that's too much.

In section 7 of today's report the company says that there was excess demand for the shares, so the CEO is selling 1m of his shares. Hang on a minute! If there was excess demand for the shares, then they should have been placed at little to no discount to the current market price. Instead a 12.7% discount has been given away - harming the interests of existing shareholders. So this looks like a duff deal for existing shareholders. The deal was done by W H Ireland - I think they've botched it - with excess demand being present, they should have pushed for a 60p price, not 55p.

I don't like companies doing discounted placings, as it steals a little bit of the company from existing holders, and gives it on a plate to new subscribers, who are handed an instant profit. That is not good. In certain, distressed circumstances, fair enough it has to be done. However, we are told that this fundraising was over-subscribed, so there was surely no need for a discount at all?

Interestingly, 1,528k shares are being sold from Treasury, so that reduces the number of new shares being issued.

£500k is being spent on acquiring a freehold adjacent to an existing site, which sounds a good use of some of the funds.

Trading update - big orders mean performance is improving, but is only breakeven for H1;

The results for the six month period ended 30 June 2016 are scheduled to be announced on or around 27 September 2016 and are expected to show a profit before tax of approximately £10,000 on turnover of £6,600,000.

The Company indicated in a statement made on 16 June 2016 that it expects a substantial improvement in trading in the second half based on the level of the confirmed order book.  Trading since that date has been in line with market and management's expectations.

My opinion - I'm not happy with the discount for this placing. However, as the company points out, this is the first fundraising it has done since 2001. The level of dilution isn't too bad, and the funds are being raised for a positive purpose - to facilitate big contracts.

I've only got a tiny scrap of shares, so will probably sell them at some point in the next few weeks or months, just to tidy things up & make it one less share to monitor.

All done. See you tomorrow!

Regards, Paul.

(usual disclaimers apply)