Small Cap Value Report (15 Aug) - DOTD, TRI, LTC, ACM, PVCS

Thursday, Aug 15 2013 by

Good morning. Apologies for today's report being a little later than usual.

dotDigital (LON:DOTD) is an email marketing software company which has been mentioned here before several times by myself, and also Marben100 and StrollingMolby. They presented to investors at the ShareSoc Tech Seminar in the spring of this year, and I remember being impressed with their growth, and a very impressive client list. Although I did have some concerns over the longevity of this type of product.

They have issued a positive-sounding trading update this morning, which has boosted the share price by 12% to 17.88p. The statement says that the company has looked at a number of potential acquisitions, but not found anything likely to create shareholder value. Instead they plan spending up to half their cash pile of £6.1m on driving accelerated organic expansion.

In the core division, turnover grew by 28% to £12.2m for the year to 31 Jun 2013.

As with most software companies, they quote EBITDA, in this case for the full year ended 30 Jun 2013 they expect to be "slightly ahead of the current market forecast (of) £3.8m". Last year they capitalised £1.2m in intangibles, so assuming no change, then profit as I would look at it (i.e. taking out amortisation charges, and adding back capitalised development spending) is probably around £2.6m. Take off tax, and you're in the £2m ballpark. So the £50m market cap after today's rise in share price is an earnings multiple of around 25. That seems very pricey to me, even allowing for the net cash, and the fact that the company has a good growth track record.

It might well grow into this rating over the next year, but personally I don't like paying too much up-front for growth, so the price is too high for me to take it any further. Also, I still have a nagging feeling that email is a bit old hat. Personally I unsubscribe from as many email lists as possible, as so much time is wasted every day constantly reading & replying to emails, it must take up about half my working time at a guess. Other people must surely feel the same, so I think there are better ways for companies to communicate with their customers other than email (e.g. social media). Email just strikes me as a scatter gun approach, where the vast majority of marketing emails sent are never read.






Industrial fastenings group Trifast (LON:TRI) issues a positive IMS today. There are no figures given, and no indication of how they are performing against market expectations. However, they do say that trading in Asia, Europe, and the USA continues to be strong.

Broker consensus is for 5.22p EPS this year (ending 31 Mar 2014) and 5.66p next year, which gives a reasonable PER of 10.9 and 10.1 respectively. This type of business is probably never going to achieve a premium rating, but with economic recovery beginning in Western economies, you could see the PER rising to say 12-13, so there's a bit of potential upside here possibly.

Dividends are poor, having been cut in 2008/9, and passed altogether in the two subsequent years. However dividends resumed in 2011/12, and a payout of just under 1p is forecast for this year, giving an unexciting but well covered yield of 1.7%.

Looking back in our archive here, I last commented on Trifast's results in Jun 2013 and was impressed with their strong Balance Sheet. So altogether, with the PER now dipping to about 10, this one is beginning to look slightly interesting. It's just such a boring business though, fastenings. It's always going to be very competitive, and low margin, so maybe a PER of 10 is about right? I'm in two minds about this. On balance, think I'll put it on the watch list, and maybe look to grab some cheap on a market correction, but I'm thinking in terms of a sub-50p share price, to have enough margin of safety.





Latchways (LON:LTC) is a lovely business - high margins, niche products, a steady dividend payer, and with a rock solid Balance Sheet, I get a warm glow whenever its figures come up for review! Today's IMS does not disappoint. Although it's phrased cautiously they conclude by saying that growth is expected in H1, and a stronger H2 (their year end is 31 Mar 2014). The outlook sounds good:


Looking forward, despite the prevailing economic weakness in our core markets, we are well set to continue to deliver profitable growth.


So I definitely like it still, but what about the price? The shares have risen about 30% this year, and at 1315p per share that is now 17.6 times current year broker consensus forecast EPS, dropping to 15.9 times for next year. To my mind that's probably about as high as these shares should go for the time being. Although the dividend is reasonably attractive at a 2.95% forecast yield for this year, rising to 3.2% next year.

I can't really see any upside on the current share price, but will keep it on my watch list as the type of thing that I would pounce on if they issued a profits warning, and a cheap entry price became possible.





 Accumuli (LON:ACM) might be worth a look. They have issued an "in line with management's expectations" trading update today. I last looked at this company on 25 Jun 2013, and couldn't really come to a conclusion from a quick look, as it needed more research. 

The same is true now. Historically they have been loss-making, but based on forecasts the PER is now looking reasonable. So one would need to ascertain how reliable those forecasts are, and dig through all the historic RNSs, to get a handle on what events have occurred here.

I believe they disposed of some IP to Juniper Networks in the USA, then did an acquisition (presumably using some or all of that cash).

If any readers have the time, it might be worth checking it out & put some thoughts in the comments section below, as I'm running on slightly reduced mental capacity today!






PV Crystalox Solar (LON:PVCS) is a very unusual special situation, in that Chinese dumping of solar panels below cost price has fairly effectively killed off a lot of the European sector. PVCS were insulated from this to a certain extent, with long term supply contracts fixed at much higher prices, which are now coming to an end.

They have disposed of their German facility to management, and are holding on to some manufacturing capacity in the hope that conditions might change. The EU has back-tracked from imposing anti-dumping duties on the Chinese, instead imposing a minimum price (set too low according to PVCS), and an import quota.

I don't see much likelihood of PVCS surviving long-term, so all that is left is the cash pile, and a 7.25p return of cash to shareholders, which is in the pipeline. So at 11.2p the shares really give you a cash return of 7.25p, and a 3.95p option on some part of the business becoming viable in the future, or there being an additional cash return at some point.

It looks fairly finely balanced to me, with not enough potential upside to make it worth getting involved. I did some rough calculations on net current assets, less an estimate for shut-down costs & losses, and it drops out slightly below the current share price. Hence not of any interest to me.



That's all for today, see you at the usual time tomorrow.

Regards, Paul.

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


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dotdigital Group Plc is a United Kingdom-based company, which is engaged in providing software as a service (SaaS) technology and tools for digital marketing professionals. The Company is engaged in providing Web-based marketing services. The Company's core product suite includes dotmailer, which provides e-mail and cross-channel marketing automation solutions. dotmailer provides marketers with a solution to engage customers through e-mail, mobile, social media and landing pages to develop customer lead generation, conversion and retention. The dotmailer platform and tools share data with clients' customer relationship management (CRM), e-commerce and third party applications. dotmailer also provides a range of design and campaign management services. The Company's subsidiaries include dotmailer Limited, dotsearch Europe Limited and dotmailer Inc. more »

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Trifast plc is a United Kingdom-based manufacturer and distributor of industrial fastenings and category C components. The Company provides design support and problem solving solutions to its customers. The Company designs, manufactures and distributes mechanical fasteners on a global basis to both distributors and original equipment manufacturer (OEM) assemblers. The Company offers a range of plastic components, metal fasteners and fixings. The Company has six manufacturing sites in Asia and one in the United Kingdom; with a global logistics capability from approximately 25 business locations within the United Kingdom, Asia, Europe and the United States. The Company offers brands, including Pozidriv, Polymate, Binx and Hank. Hank is the Company's fastenings brand for sheet metal fasteners. These are principally rivet bushes and self-clinch products. more »

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Latchways plc is engaged in the production, distribution and installation of industrial safety products. The Company's operating segments include Safety Products and Safety Services. It designs and manufactures fall protection equipment, which are sold across the world, both directly to end users and also through a network of installers. Certain products, such as the self-retracting lifeline (SRL) and personal rescue device (PRD) range, are sold through distributors. Its business consists of Horizontal business, which include systems for those working at height, such as on rooftops and crane rails, and Vertical business, which include systems for those climbing to or from height, such as ladders, telecom masts and electricity transmission towers. It also offers personal protective equipment, guardrails and walkways and rescue equipment. The Company's subsidiaries include HCL Group Plc, Height Solutions Limited, Sigma 6 d.o.o., Latchways Australia Pty Limited and Latchways Inc. more »

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  Is dotDigital fundamentally strong or weak? Find out More »

3 Comments on this Article show/hide all

rick 15th Aug '13 1 of 3

I agree that PVCS is being valued as a basket case. It appears to be trading at expected cash return to investors at about 11p. i.e. 7.25p soon and about 3 to 4p later after costs of winding up.

Looking at it another way - the market is ascribing zero value to the business, its IP or its future profits & revenue. Also look across the water at US solar chip manufacturers like SunPower Corp, First Solar etc. they have made quit a powerful share price recovery over the last year, albeit under a more protectionist/anti-dumping environment that has protected them from the big state subsidies of the chinese. It is a shame that the EU did not see fit to do the same. Management are playing down future prospects whilst they should be opening sales offices in the US and Japan.

On a contrarian view point all the "bad news" appears to be in the PVCS share price so the downside is negligible, so an interesting risk-reward environment for the value investor.

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dubeye 15th Aug '13 2 of 3

Would agree dotd is now fully valued, but on the subject of effectiveness of email marketing, it's an analytics rich channel, so it's possible to observe with accuracy open rates and engagement, so I would disagree it is a scattergun approach, any more than PPC is, which is Google's bread and butter. On the other hand, I agree email is vulnerable to disruption and I'm an ex holder of this share.

Any thoughts on BLUR?

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dangersimpson 15th Aug '13 3 of 3

Blur (Group) (LON:BLUR) trades on 45xSales, never made a profit, cashflow sufficiently negative that even if they meet consensus forecasts they will need a placing to keep the business going in the next year. SP momentum is good but the value stock rank is 2nd percentile suggesting that it is significantly overvalued. It will make a great short when the momentum subsides imo.

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About Paul Scott

Paul Scott

Paul trained as an accountant, then spent 8 years as FD for a ladieswear retail chain.He became a professional small caps investor in 2002 to date.Paul writes a small caps report for on weekday mornings. He joined Fundamental Asset Management Ltd as a research associate in 2014, as part of their Small Cap Value Portfolio team. more »


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