Small Cap Value Report (16 Sep 2014) - PTCM, CRW, THAL

16th Sep '14 by Paul Scott

12 comments 15438 reads

Good morning! Busy day for me today, as I have to get this report written, and then meet management of Spaceandpeople (LON:SAL) for lunch, to discuss in more detail what's gone wrong, and what they are doing to fix it.

Porta Communications (LON:PTCM)

Share price: 9.0p
No. shares: 229.7m
Market Cap: £20.7m

Interim results are published today, which look pretty good to me, although you have to be a bit sceptical with this company, as they've heavily over-egged results announcements before - which presented an overly optimistic view of performance in the past, in my view. This was most in evidence with stripping out "start up costs", which looked ridiculous, being defined as the first two years' losses!

Profitability - I'm pleased to see in these interims that headline EBITDA of £1.37m benefits by only £237k by stripping out start-up losses, versus £850k start up losses in H1 last year. This suggests that all individual parts of the group are either profitable or close to profitable.

So it looks as if Porta is now a viable business, with a whisker over £1m in positive EBITDA in H1 of calendar 2014. That's a good turnaround from last year, as the following table from today's results shows;

5417eb36dfa2fScreenshot_091614_084727_AM

There were some early buys first thing, as you would expect when much improved results are announced, but a big seller seems to be whacking the price at the moment (08:48), so I am pondering whether to buy some more? Although before pushing the buy button I'm trawling through the figures & narrative again, to ensure I haven't missed something that the big seller has spotted.

It looks as if the £1.0m continuing operations EBITDA figure has benefitted from the £475k "Gain on bargain acquisition", whatever that is? So altogether a rather confusing array of adjustments - what should we treat as bona fide, and what should be stripped out as genuinely one-off? It's difficult to decide, but at least it's clear that the company is trading a lot better than last year.

Ah, I've found a brief comment on the £475k credit to the P&L, which the company describes;

The acquisition of the WSM Digital business resulted in an estimated gain of £475,394 which has been included in the Income Statement in accordance with IFRS accounting requirements.

So I think that needs to…

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Ramridge

16th Sep '14

Hi Paul - Re. PTCM. I liked the results this morning and took a small holding. But with the price dropping I re-examined the accounts in more detail. The only red flag I found this time was (as you point out) , net tangible assets are near zero. Otherwise looks fine.

However there is a large entry of -£3.5m , decrease in trade and other payables, which is pushing the net operating cash flow to -£2.3m. Looking at the balance sheet, under current liabilities, the 'trade and other payables' has hardly moved from 31/12/13 to 30/6/14.
Question: does it mean a decrease in operational activity such as reduced customer demand for their services? or is there an accruals element that is distorting the picture?
Thanks, Ram

maffs0

Hi Paul,

Thanks for the comments. My concern is with cash flow which remains firmly negative. I know they have spent on acquisitions but that isn't going to stop! It looks to me that unless their organic growth is massive, the cash will continue to diminish and a fresh placing may be required. Any downturn in business will obviously exacerbate this.

UI've had my finger on the top up button all morning but the cash flow is pulling it back.

M.

mikelevie

Hi Paul, interested in your view on what happened with THAL today, if you can squeeze it in.

Paul Scott

With respect to both comments above, yes I agree that the cashflow at Porta Communications (LON:PTCM) is negative - it's bound to be, as they are growing rapidly (some of their companies were start-ups remember), which inevitably will cause Debtors & WIP to rise considerable.

Turnover is annualising at about £32m, and the Debtors will include VAT remember, so that grosses up to £38.4m. Therefore £8.0m Debtors is 0.2083333 of turnover grossed up to include VAT. Multiply by 365, and you get Debtor Days of 76 days. A little higher than I would like (60 days is normal), but not horrendous by any means.

If you invest in a company which has the stated aim of rapid organic growth, then you expect working capital to increase, surely?

Regards, Paul.

DJLJ23

Hi Paul,
Ref $CRW, found myself drawn to this one prior to reading your review, what intrested me was the reference to contracts signed over longer periods, (7 & 9 years) and 84% increase in contracts signed, with revenue expected to benefit future years.
So hopefully a company with a .number of potential routes upwards, if your thoughts on a potential takeover target are included.
many thanks for your reviews David

SteMiS

Thalassa Hldg (LON:THAL) - in line with comments in the interims the house broker has lopped $10.3m off the full year forecast revenue to give $26.3m (H2 is generally stronger). They're predicting that'll deliver a PBT of $4.5m. THALs market cap at 132p is $54m, about 1.1 x tNAV which includes $21m of cash. This is a profitable, well capitalised business encountering some short term turbulence due to the situation in Russia but the long term growth case remains in place (IMO obviously).

rosered

Paul,
A general comment and a question. I am impressed by the speed with which you analyse news and I enjoy your honest comments so I can be more lazy and ignore most companies on which you make negative comments and look into those which are positive. The question is that you make comments on news which is not yet on Stockopedia so where do you get breaking news?
David
PS It is a lonely business being a private investor so I also appreciate your leads into ShareSoc, Mello etc. Keep it up.

skyjacker

Hi Paul,

I‘m regular reader of the small caps report but probably this is my first poste here.

Before I start, I would like to point out Thalassa Hldg (LON:THAL) is another of Simon Thompsons from IC tips...

I had a brief look at the company it does look fairly attractive on the surface but when you delve more into what is reported no longer so sure about it. First of all there is uncertainty of what will H2 will look like, also in worst case scenario there could be $4.1m hit in H2 if they cannot recover receivables from Russian partner and repatriation costs for equipment.

However, my biggest concern is that P&L does not reflect actual director pay, according to Directors report, pay received by directors is very minimal and is passed as consultancy cost, so Thal is avoiding employer NI but this is tiny worry, especially considering that directors have set up trust to top up their income. There is asset of $7.3m in P&L related to loan to the trust at 3% interest per annum. Although accounting treatment might be correct but, in effect this is Directors pay which bypasses P&L. I don’t think this money will ever be recovered by the company and P&L will be continue to be flattered by the non-existing interest income although it is immaterial in grand scheme of things, so I would write this off completely.

In H1 Thal contributed almost $5.4m to the trust, in FY 2013 $1.9m was contributed to the trust. In addition 1m shares were sold to the trust from treasury at 26.4p when share price at the time was well north of £2.

So overall I don’t think shareholders interest is top of the priority of existing directors. I might be too far too cautious but given outlook for oil and on going situation with Russia, company is not investable for me at this level. Perhaps at less than £1 I would consider a put.

Camtab

Hi Paul,

How did your lunch go?

Kind regards

Guy

Gray Woods

Regards Thalassa (£THAL), I just had a look over their accounts. Everything looked good until I got to their current assets. There, it states that they have now loaned over $7m to an entity named the Thalassa Discretionary fund. In the notes, it is written 'The THAL Discretionary Trust is a trust, independent of Thalassa, established for the benefit of individuals or parties to whom the Trustees wish to make awards at their discretion.'

In the last three interim periods (18 months), loans to this entity have risen from $0.7m to $1.8m, to now over $7m. In the notes, they state that:

On January 8 2014, the Trust acquired:

• 1,000,000 ordinary shares in the Company at £2.70 per share,

• 1,078,667 ordinary shares in the Company at £0.264 per share.

The average price of these purchases is about 145p, which means they are now loss making. But in reality, that doesn't matter. The question is, what the heck is the purpose of this fund, and why has it now been loaned $7m? For a company Thalassa's size, it seems beyond belief. They set up a fund, loan it near on $5m (just this year) to purchase shares in themselves? Are they going to continue doing this, and if so, why? Baffling times. Though, just to note, I've only just given the results a quick glance over, so I may be missing something obvious...

jamesdougal

20th Sep '14

Hi Gray

Just had a quick search for that.

This article:

http://www.investegate.co.uk/thalassa-holdings/rns/share-dealings/201401081515022171X/

Says that:

"... the THAL Discretionary Trust ... holds the shares for the benefit of the Company's employees, directors and consultants."

There's more info at the link above.

DLG12

1st Oct '14

Hi Paul on the basis of the recent Porta results I picked up a small holding. The price has continued to fall since. I can't see anything greatly wrong with the accounts but seems not to have pleased the market. Any further thoughts since your last review. Also to note this sale yesterday http://www.investegate.co.uk/porta-communications--ptcm-/rns/holding-s--in-company/201409301654450689T/. Cheers.

Small Cap Value Report (16 Sep 2014) - PTCM, CRW, THAL

Porta Communications (LON:PTCM)

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Paul Scott

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