Small Cap Value Report (17 Sep 2014) - EGS, IND, SAL

17th Sep '14 by Paul Scott

18 comments 19680 reads

Good morning!

eg Solutions (LON:EGS)

Share price: 82p
No. shares: 16.5m
Market Cap: £13.5m

This is a small software company which sells back office optimisation software to large companies (e.g. insurance & energy companies). They had a stand at the Stock Market Show last Saturday, so I dropped by and had a chat with a Director about the company, and learned a bit more about what they do. I bought a little stock for my pension not that long ago after an intriguing contract win announcement - I like small companies which report large contract wins with large customers - that tends to be good evidence of the company having a valuable product which might continue to sell well elsewhere.

So even though the historic performance of EGS has been poor, I was satisfied from talking to the Director that there were known reasons for previous poor performance, and that the company was now getting onto the right track. Because of the lack of liquidity with these shares (very small market cap, and shares are tightly held) I would only ever have a small position in this company - it's important to be able to exit if something goes wrong, and that can only be done with a small position usually.

Interim results for the six months ended 31 Jul 2014 are published today. As you can see from the headline figures copied below, the numbers look good:

Although note that the company had already indicated that turnover would be around £4m, and profit above £600k, in its trading update of 20 Aug 2014, which I reported on here.

Outlook - today the company says;

The Company has made a strong start to the financial year, with significant growth in revenue, profits and cash generation. We are making demonstrable progress in the global workforce optimisation market, with multiple new and existing client wins during the first half. This improvement has been achieved with measured enhancements in our operating infrastructure. The Company has a substantial market opportunity and the leading software product. We will continue to invest to ensure we achieve the true growth potential of the Company and remain confident of delivering our full year financial performance in line with expectations.

Note that an H1-weighted year is expected, with the full year forecast only seems to be £0.3m, suggesting a loss…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Beginner

17th Sep '14

Hi Paul
I am probably jumping the gun here, and I saw your tweet, but do you have anything else to say regarding your meeting with Spaceandpeople (LON:SAL) managment? All help gratefully recieved.

cycle

Hi Paul, would be very interested in what you found out about Spaceandpeople (LON:SAL) yesterday when you met with them. Really appreciate your professional and thoughtful reports, thanks!

Henry Walpole

Re eg Solutions (LON:EGS) this company seems to be run for the benefit of the CEO as her pay is astronomical for such a small company!

FREng

Paul, I'm intrigued to know how many different shares you hold, as a small position in eg Solutions (LON:EGS) would appear to have to be little more than £1k (NMS 1,000 at 79p) to give you the freedom to exit quickly if trouble occurs.

Ramridge

Re. eg Solutuons. The CEO Elisabeth Gooch is the founder and she currently owns 32% of the company. Presumably the eg in the company's name stands for her initials. Shades of the Mike Ashley syndrome.

rmillaree

I was a bit scared venturing over to read Pauls tweet in relation to SAL but nothing untoward thankfully.
Im pretty new to SAL and am trying to do a bit of bottom fishing on the basis that the wheels can go back on the truck - lets hope this is the case.

Apologies for going OT (i dont do twitter) but i think its unfair (IMHO) to criticise the Scots for asking and being granted an independence vote by the powers that be, the powers that be when they sanctioned the vote should have at the same time come up with a sensible roadmap as to how the main things currency/debt etc would progress without descending into outright chaos (as seems to be the case) . Nearly all polls (and bookies have confirmed that the odds back this up) have show the majority against independence - but the majority would agree that having the vote is the right thing - the added bonus of a no vote is that it puts the issue to bed for the forseable future (10 years plus lets hope?) job done. I don't particularly like the attitude of the outsiders complaining about issues that have only minor relevance to the issue when its a very good sow of democracy in action - something UK/England should be proud of. Having said all that as an exciled Scot i don't really qualify as being worthy of having an opinion officially speaking :)

Paul Scott

Hi FREng,

From memory I've got 6,000 shares in eg Solutions (LON:EGS) in my pension.
I wouldn't want any more, as the lack of liquidity then becomes a problem. It should be possible to dispose of that sort of quantity reasonably easily, although if trying to sell on bad news, then the price would probably take a nasty hit & the MM might want to bid me a couple more pence below the quoted price?

Hopefully the company will do well though. If the newsflow remains positive, then I'll hold the shares for a few years probably.

Regards, Paul.

Hi rmillaree,

The point I was making on Twitter last night, is that I think Scots will discover that they have done enormous damage to their relationship with the English, and that I think this will cost them dear in reduced tourism, etc.

As an Englishman, I've had to endure a couple of years now of anti-English rhetoric from Scots on the TV, and to be honest I'm sick of it. This is bound to have an impact, even if subconsciously with a lot of English people. I was talking to some Irish people about this a long time ago, and they said that there had been a realisation in Eire that they had to drop the anti-English stuff, as it was more important to be welcoming & friendly in order to get the tourists' pounds. Scotland is going to learn this lesson the hard way too in my opinion. If you make your immediate & much larger neighbour feel unwelcome, then it's going to be a serious self-inflicted injury. Anyway, that's just my view.

I understand the desire for self-Govt, but it's unleashed a particularly strident & ugly type of aggressive Nationalism in my view.

Regards, Paul.

Paul - really appreciate your write-up of the meeting with Spaceandpeople (LON:SAL) yesterday, thanks!

Was any mention made in the meeting about the potential effects of Scottish independence in the event of a Yes vote? (Sorry to raise that thorny issue!) I know that the majority of their business is in rUK but surely there's a danger that they'll be affected by lowering business confidence and the problematic currency issues...

shauniekent

I want to mention Cenkos Securities resutls this morning which were a cracker. Rev +226% and PBT up 653% - plus plans afoot to return cash to shareholders.

brucepackard

Thanks for the Space and People update. One thing that doesn't make sense thoughy

"The company has a much sharper focus on higher margin business now, and is not renewing contracts which generate turnover but little profit (hence the drop in UK business recently)" - the UK was the higher margin business, the international expansion was the lower margin business.

The original profit warning saw a drop in profits, but not in revenue, because they were losing UK business. I think we are not getting the whole story!

pesquera

Pity you feel like that, Paul, I've noticed very little anti-English sentiment and the level of debate has been several notches above the usual rubbish.
You'll be welcome in Scotland but you can obviously choose to stay in England with the ever more popular UKIP welcoming all-comers with open arms!

Sharechap

Paul thanks for your excellent write-up of the SAL meeting.

As this is easily the worst performing share that I've ever had (I usually sell out long before and should have done so here) I'm very interested to see how the Management can turn this business around. I think the fundamentals really stack up and it represents a bargain for the brave and patient. Whether I will be increasing my exposure at these cheap prices is a decision I have yet to make.

Camtab

Paul,
Thank you for your write up on SAL. As I read it there is still plenty to do in reorganising the business to cover the holes that we have seen this year. It is possible that we may see another profit warning or disappointing numbers low end of expectations. I agree these should be turning now but sentiment being what it is and given the size of the business I can see these shares drift lower until some concrete evidence is received by the market that they are not seriously holed. Maybe the arrival of the new hires will be the beginning of that process.

Hi Camtab,

Management at SAL know that they'll be toast if they issue another profit warning.
So it's very much a case of "we've GOT to achieve these numbers".
That said, I can fully understand the market not yet giving them the benefit of the doubt, hence the current very low valuation. The company has to earn back investor trust, which they know.

Regards, Paul.

ericb

when you say they will be toast ... what would actually happen to them .... nothing! management rarely ever get booted out n matter how bad they are, one might be a sacrificial lamb, but on the whole the smart talking ones will get away with outright failure and theres not much anyone can do about it

Sully8786

Hi Shaun,

I saw them and have topped up by a further 30 odd%

I think Cenkos Securities (LON:CNKS) will continue to do well over the next 12-18 months.

Best,

Sully.

valueinvestorshouse

29th Sep '14

Hi Paul,
I know you are a fan of SpaceandPeople (SAL). We have just published a main write up on this stock - I wonder what you think about our fundamental case:

Based on our fair value estimate the stock offers a big fat juicy 82% upside from the current share price.

Our estimate is based on a DCF fair value estimate of GBP 16.5m versus the current market cap of GBP 9m. Following are our key subjective assumptions:

- full recovery in operating cash flows in 2016 to the average levels seen between 2011 and 2013
- zero growth after 2016
- maintenance capex at current depreciation levels in line with the zero growth assumption
- 10% discount rate (WACC)

full details can be found here: wp.me/p57Kw2-K

let me know what you think, appreciate your comments as our treasured UK Small Cap specialist :)

Best,
Michael

Small Cap Value Report (17 Sep 2014) - EGS, IND, SAL

eg Solutions (LON:EGS)

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

18 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...