Small Cap Value Report (15 Oct 2014) - CNCT, VTU, ANCR

Good morning! I attended ShareSoc's seminar on improving shareholder rights last night, and must say what a fantastic event it was - ShareSoc is really pulling out all the stops on this, and organised a highly professional meeting with some big name speakers such as Lord John Lee, Michael Kempe of Capita, Professor John Kay (of the Kay Review), and four others. Everyone made good points, and it seems to me that we now have the ear of policy-makers (a lady from the Govt BIS Dept was there too) and everyone is pulling in the same direction - i.e. it is recognised that the nominee a/c system currently disenfranchises small shareholders, and that an electronic system is long overdue, which will allow us all to be directly listed on the shareholder register - thus no more hassle with letters of representation for AGMs, but most importantly shareholders will now be able to stop errant management in their tracks by sacking them more easily, voting down excessive remuneration packages, etc.

Some people say, well we can do that already, or I don't invest in companies where management abuse their positions, etc. However, in my view some company management get away with murder because there is nothing to stop them - they know that a large part of the shareholder list can't or won't vote. As I said yesterday, an absentee shareholder base that is disenfranchised has created a greedy, self-serving management class. I am really looking forward to changes in the rules that will give shareholders teeth again. Sadly, we will have to wait years for these changes, I think 2025 was mentioned. Surely reform can happen more quickly?

To view ShareSoc's proposals on shareholder democracy, please see their publication here. Also there is a petition for signature here.

Connect (LON:CNCT)

Share price: 162p
No. shares: 189.3m
Market Cap: £306.7m

Preliminary results - for the year ended 31 Aug 2014 are out today. They look quite good. This is a distributor of newspapers & magazines, that has also branched out into other areas.

Turnover and profit are both flat against last year, at £1.8bn and £50m respectively.

What they call underlying EPS is up 2.8% at 21.7p.

Valuation - it looks attractively priced on a PER basis, which is a PER of only 7.5.

However, on digging a bit deeper, the valuation is low due to the company having a weak Balance Sheet.

Balance Sheet - net debt is too high in my view, at £93.0m. Also, if you write off intangibles, the Balance Sheet net equity is heavily negative at £107.8m! That's really not a prudent financial position at all. Moreover, working capital is negative, with the current ratio being a worrisome 0.72, which is far below what I would consider to be an acceptable level.

This may not matter when times are good, but what happens if the company runs into trouble of some kind? It would then be completely reliant on the support of its bank. That would scare me too much to invest here.

Dividends - The company is paying an attractive divi of 9.7p, for a yield of 6.0%. Personally I don't like financially weak companies paying big divis. They should cut the divi and rebuild the Balance Sheet in my view.

Outlook - sounds fine;

Recent trading is in line with current management expectations and we remain in a good position to build on the progress made this year.

My opinion - I can see the attraction, if you like a low PER and a good dividend yield, and are not too bothered by a weak Balance Sheet.

Vertu Motors (LON:VTU)

Share price: 57.2p
No. shares: 340.3m
Market Cap: £194.7m

Interim results - for the six months to 31 Aug 2014 are out today, and look impressive to me.

Revenue is up 29.5% to £1,084m, helped by acquisitions. Profit before tax is up 49% to £12.8m. Not bad going.

Balance Sheet - this looks solid, with £34.4m in net cash, and lots of freehold property.

Valuation - looks reasonable, on a current year PER of about 11, although the dividend yield is not great at only 1.8%.

My opinion - the listed car dealers all look priced about the same level, and there's not much to choose between them in my view. Whether there is any more upside on the new car market is the big question, after several years of strong growth?

Animalcare (LON:ANCR)

Share price: 136p
No. shares: 21.0m
Market Cap: £28.6m

Full year results - for the year ended 30 Jun 2014 are published today. They look OK - revenue up 6.3% to £12.9m, and underlying profit up 4.4% to £2.8m, so a strong profit margin there.

Underlying EPS is up a little to 10.8p, so that means the shares are valued at a PER of 12.6, which is probably about right.

I like the strong Balance Sheet with net cash of £3.8m.

As with most small caps, it's just drifting down in price, as everyone sits on the sidelines waiting for prices to bottom out. So there should be some strong rebounds when confidence returns, as a lot of people will pile in at the same time.