Small Cap Value Report (17 Mar 2014) - TRCS, RGS, IDEA, KBT, FBT

17th Mar '14 by Paul Scott

12 comments 22288 reads

Good morning!

Tracsis (LON:TRCS)

Results and trading statements from Tracsis always seem to contain good news for shareholders, and this morning is no exception. The headline figures look very good, helped by an acquisition that looks to have kicked in fully in this half year. Three performance measures are given so take your pick!

There is also a bullish outlook statement, indicating that broker consensus forecast of 11.1p EPS for this year (ending 31 July 2014) is now likely to be beaten;

The second half has started well and the full year outturn is now expected to exceed current market expectations. The Directors are confident of achieving further progress in the second half of the year, given future work flow scheduling and the strength of the sales pipeline. A number of exciting opportunities are being evaluated and 2014 looks set to be a great year for Tracsis as its overseas strategy is accelerated...

So assuming they achieve say 12p EPS this year, then at 241p the shares are on a PER of 20, so priced fairly fully already for a small cap, I would say. That said, the company has delivered consistently well in the past, so it seems to me that there is enough red meat in today's results to take the shares on another leg upwards.

A reminder too that Tracsis has an excellent Balance Sheet, with no debt, and cash of £7.6m. This protects the downside so well that you can effectively be certain that there is no risk of this company going bust in the foreseeable future. Other people might like to play fast & loose with Balance Sheets, but I don't - if you eliminate the worst downside risk (of a company going bust), then the upside tends to look after itself a lot better in the long run.

The other thing to consider is that, because Tracsis has over-delivered in the past, then its upbeat-sounding outlook is more credible than might be the case for companies which are always forecasting jam tomorrow, but don't deliver. So if management are excited about expansion possibilities, then I would say they probably have good things in the pipeline.

Framework agreements, and recurring revenues on software, plus the increasing size and geographic spread…

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Beginner

17th Mar '14

Hi Paul
Both off track and jumping the gun here, but I remember a year or so back you bought J Sainsbury (LON:SBRY) at c330 (very wisely). I would be grateful for any comments on the company now. It seems a possible buy now (or after tomorrow's report). However is the retail world still too fragile and unpredictable?

And then there is Brady (LON:BRY) , which I know you are not keen on. The chairman says he is 'confident that profitability will be significantly higher in 2014 and beyond' presuambly on the back of both cost savings and the delayed contracts. It has a 2.8% yield in the meantime. I have a few of these, so need to declare the interest.

Thanks again for providing my favourite daily read: concise and insightful.

rick

Hi Paul,

Any comments on Telit Communications (LON:TCM) results today?

cheers, Rick

kenobi

Interesting to note that VNET are up 12% today on no news, perhaps a favourable result re the pubs/flow monitoring equipment is in the offing ?

Mark Simpson

Maybe this mention by John Lee might be the reason for the Vianet (LON:VNET) rise:

http://www.theguardian.com/money/2014/mar/15/investment-isas-shares-millionaire

jjis

Hi Paul, I would agree with your comments on Regenersis (LON:RGS) re hiding away the fall in headline earnings etc. I note they do not share your concerns about the dividend which they put up by 97% guess time will tell? I sold out recently so will be watching it with interest from the sidelines.

johnrosier

Hi Paul, I think you are being a little harsh on RGS. I applaud them for actually investing in order to grow the business. I can understand people being a little suspicious at the emphasis on Headline Operating Profit, hence the early sellers, but it is not as if they covered up the fact that actual profits were flat; given the increase in central costs that is fairly impressive I think. What I like is that management are taking long term decisions and acting as owners rather than just focusing on short term profits. Operating margins of 16.5% in Advanced Solutions looked pretty impressive to me. As for valuation, I agree it looks a bit steep but I think things get better quite quickly given forecast growth. So still a happy holder in the JIC Portfolio!

My posting from earlier this morning below:

Regenersis (market capitalisation; £178.2m, 358p and 3.7% of JIC Portfolio); interim results for the six months ending 31st December 2013, published this morning, show strong underlying growth at the business with revenue up 11% to £99.7m,(at constant currency growth would have been 17%). The company has chosen to present profit figures ex the increase in corporate costs principally associated with the investment in top new management; the following from my December 2nd 2013 post, “Simon Harper has been appointed Chief Operating Officer from HTC, where he had global responsibility for multi-channel customer contact, service and support for all HTC devices and services and, Pritpal Matharu was appointed Managing Director of the Group’s new division, Renew. Pritpal joined from Carphone Warehouse where he held the position of Sales and Operations Director and will have global responsibility for Renew, which brings together the Group’s Recommerce, Refurbishment and Digital Care activities.” So, before the increase in corporate costs from £5.6m to £6.8m, operating profits were up 21% with an improvement in margins from 6.2% to 6.8%. Including the increased corporate costs, profits were flat at £4.6m.

As far as the strategy is concerned it seems to be working. Advanced Solutions achieved an 86% increase in operating profits to £2.6m with margins of 16.5% compared to 10.0% in the prior year and Emerging Markets saw an 18% increase in operating profits to £3.3m. Net debt at 31st December was £13.8m, up from £1.9m at the year end. The dividend has been increased by a massive 97% to 1.32p per share.

There is a long list of examples of recent contract wins which I won’t go into here but in the outlook statement Executive Chairman, Matthew Peacock, is pretty upbeat saying, “Current trading is in line with market expectations for the year ending 30 June 2014. Profit growth in H2 is expected to come primarily from Emerging Markets and Advanced Solutions. Opportunities for growth both organically and by acquisition remain strong and growth continues to accelerate.”

Conclusion; I think that the Company was right to explicitly lay out the increased costs incurred with beefing up its management team to drive the business on to its next stage of growth. Now that has, in effect, been taken on the chin, we should hopefully see the fruits of that investment as Advanced Solutions and Emerging Markets drive both sales and margin growth at the business. The shares have had a strong run up in the last few weeks and on current consensus forecasts of 18.0p earnings per share for the current year ending 30th June, the shares are valued at 19.x for 23% earnings growth and for the year ending June 2015 the shares are on 16.7x for 18% growth. 19.9x might seem a bit “toppy” but it includes the significant increase in central costs and further out we should see strong growth at the operational level so that the price earnings ratio quickly falls to more attractive levels. According to ShareScope, the forecast for June 2016 is 28.5p earnings per share, 33% growth on the prior year and putting the shares on only 12.5x. Happy Holder.

Delpher

Hi Paul
Confusing Accounts.
I learnt my basic understanding of accounts from a handy little easy to read book "The Investor's Guide to Understanding Accounts" by Robert Leach who for two years was a judge of the Stock Exchange Awards for best published accounts. About EBITDA he says "the term is as flowery as it is meaningless...as you cannot invest in underlying operations, but only complete businesses......EBITDA is often served with other exotic ratios, all lavishly garnished so that you cannot taste the real flavour. If you are tempted to invest in a company because you have become excited at its EBITDA or mindshare (which he says "is like buying an interest in Jack's Beanstalk, and with a similar credibility"), make yourself a cup of Ovaltine and lie down in a dark room. If you are still feel the same when you wake up,put your money in National Savings, cancel your subscription to the FT and buy the Beano instead."
It's unfortunate that today so many companies still put an emphasis on EBITDA.

Maybe this mention by John Lee might be the reason for the Vianet (LON:VNET) rise:

aha, could be, I wonder if now might be a good time to reduce if this might be just a spike prompted by a share tip in a paper ?

thanks K

trhere

Ideagen was tipped by Midas in the Daily Mail on Saturday, that's possibly behind the rise today.

Paul Scott

Hi,

I don't know about you guys, but personally I am lightening the load into newspaper tipping spikes up in price.
This is because, more often than not, the price rises don't seem to hold, and the price usually slips back down again within a few weeks.

People who buy on newspaper tips seem to have very short attention spans. There again, that's probably how we all started investing - buying on newspaper tips, so these spikes need to be seen as being driven primarily by inexperienced investors, and therefore potentially a good opportunity to consider banking a windfall gain.

Regards, Paul.

Paul,

I agree with the logic that those following newspaper tips tend to be inexperienced and short-termist and the experience that spikes are often reversed quickly. However to sell one must have a better idea to recycle that money into and cash earning zero in an ISA doesn't do that for me in the long term. That VNET is on a P/E of 9 and yield of 6% meant it was a top-slice for me this morning to maintain my desired position size rather than an outright sale since I'm still bullish in the long term and not certain enough in my reading of the market psychology to be sure that I can buy-back cheaply.

Cheers,

Danger

marben100

Well done Paul for your work in setting up the Brighton ShareSoc group and for your exhortation for others to do likewise.

I'd just like to point out that ShareSoc can offer support to any members interested in doing so, a) in the form of advice on how to organise such meetings; b) by publicising your event to other members in your locality.

Contact info@sharesoc.org or phone us on the number given on our contact details page.

Cheers,

Mark

Small Cap Value Report (17 Mar 2014) - TRCS, RGS, IDEA, KBT, FBT

Tracsis (LON:TRCS)

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Paul Scott

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