Small Cap Value Report (18 Nov) - VLK, SNTY, FWEB, DQE

18th Nov '13 by Paul Scott

13 comments 17798 reads

Good morning. Regulars here will know that I've been keen on Vislink (LON:VLK) since the Spring, based on a sensible turnaround strategy under new management, a series of positive trading statements, broker upgrades, and a strong Balance Sheet with net cash, and the icing on the cake being a helpful dividend yield too. So from my perspective, this share pretty much defined GARP (growth at reasonable price) when I originally bought in around the 30p level earlier this year. So you might think that with the shares 60% higher now (currently 48p) that they are fully priced? Actually, I don't think they are - because, as is often the case with improving performance, the broker forecasts seem too cautious, lagging behind the company's recovery.

In this case, Vislink has repeatedly stated its target of achieving £80m turnover and £8m operating profit by the end of calendar 2014. There has been slight confusion over whether that means for that financial year, or to have reached an annualised run rate of those levels by Dec 2014. I asked this question directly of management at a meeting myself & other investors had with them earlier this year, and they rather confusingly said that they had used the two terms interchangeably in previous announcements. So I was left somewhat unsure, but they seemed to be saying that the £80m turnover & £8m profit target was for the year-ended 31 Dec 2014.

That target is once again reiterated today, and they say will be achieved by a mixture of organic growth and further bolt-on acquisitions. The company spends a high proportion of turnover on R&D, so that is a big plus (since that tends to drive better performance). Also, it has net cash available for smallish acquisitions, and management with a track record of making large numbers of acquisitions in previous roles - which should lead to the right decisions being made here.

The key paragraph in their IMS this morning says, reassuringly;

Since the half year results overall trading has been in line with our expectations and although our order book visibility remains limited, we remain on track to meet the Board's expectations for the full year.

The limited visibility comment is just the nature of the business unfortunately. Vislink are trying to build recurring revenue streams, and that…

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shanklin100

18th Nov '13

Hi Paul

Other than VLK incessantly repeating their goal for two years out, can you see any evidence that they are likely to achieve it?

The sentence you highlight seems more likely a warning of a potential warning than a positive statement, but then, as I don't hold VLK, I may be biased to the downside... ...I just have never achieved enough confidence that their stated goal is anything other than hot air.

Best wishes, and well done so far with VLK. I will continue to watch.

Martin

Paul Scott

Hi Martin,

Well if they keep repeating a target which turns out to be hot air, then management would have zero credibility & would have to resign. So I don't think that is likely at all - why would anybody set an unrealistic target for themselves?

They've always been very open about the fact that their £80m/£8m target would require additional acquisitions, but bear in mind that the last acquisition they did seems to have generated a very high level of EBITDA already - there's something in the most recent Edison note about that, I seem to recall - and management keep reiterating that they think they can achieve it. So unless there is any information or figures which disprove their chance of achieving target, then I would be inclined to think in terms of them hitting target, or at least getting reasonably close.

It looks as if the limited visibility comment has spooked a few people this morning, with the shares currently down 3%, but that's just the nature of the business - they don't have a lot of visibility on the order book. Although putting in a comment like that will always spook some people, who will think that it's leaving the door ajar to a profit warning later. Although with only about 7 weeks to go in the current financial year, they should pretty much know where they stand for the full year.

There's a lot of VERY short term money in small caps at the moment, so people look for any opportunity to bank profits. But to my mind the message from VLK is perfectly clear - that calendar 2013 should be in line with market expectations, and their ambitious target for 2014 is reiterated.

All open to interpretation of course, that's what makes a market!

I would add that their last interims were pretty good - adjusted EPS doubled from 0.9p to 1.8p. So that's a bit more than "hot air"!

Regards, Paul.

Brokertobroker

Shareholders and brokers like a 3 year plan. It provides easy valuation and a useful gauge to judge the management's success. I'm a fan of VLK, but I was disappointed that it did not display the revenue and orders received figure for the 9 months (like in previous announcements). What's to hide if it is on track? Question is, how much are they relying on acquisitive growth?

Word on Volex: If the new management can bring the group to anywhere near historic levels of profitability the upside is 200p+. I believe the new management will, and sub 100p for a two year hold is very attractive. An interesting turn-around story.....

Roger Lawson

Just taken a quick look at Synety. One reason I would not invest in this company is because they did a placing in August to selected institutions at 150p when the day before the share price was 230 - and had been even higher a few days before. As this company seems to be consuming cash at a fair rate, any private investor is taking a big risk of being prejudiced by further placings.
Roger Lawson, ShareSoc

madmix

Re: VLK. It's worth comparing today's IMS with the Interim Results at the end of August, which were well received.

I'll pick out a couple of sections :

Interims : "Economic conditions in our core markets of the US and the UK and Europe remained challenging and we continued to witness relatively long decision making cycles. Nevertheless, against a background of a low opening order book, due to a relatively low order intake in Q4 FY12, we have achieved good levels of business in these regions."

Today's IMS : "Economic conditions in our core markets of the US, UK and Europe remain challenging, however the Group has a well-established international sales force, a strong brand and market-leading products and this has enabled us to secure key business opportunities."

Interims : "Whilst the Group continues to operate against a background of a challenging economic environment and continued limited order visibility, it is confident that it is successfully executing against its medium term plans that will enable it to deliver its strategic targets."

Today's IMS : "Since the half year results overall trading has been in line with our expectations and although our order book visibility remains limited, we remain on track to meet the Board's expectations for the full year.

So the tone remains unchanged. I've topped up at 45p.

Hi Brokertobroker,

I agree - and wish more companies would set out a clear 3-5 year plan, with financial targets, for the reasons you mention. Although it's unusual practice in the UK, and seems to have caused confusion & uncertainty in the case of Vislink (LON:VLK) - i.e. investors seem to be fretting over whether they will hit target or not, whilst ignoring the fact that even if they come anywhere near, it will represent a huge improvement in performance over historic levels!
Anyway, I've used the dip this morning as an opportunity to top up on VLK.

As regards Volex (LON:VLX), I suspected that the company might have another profit warning in it, but wasn't too concerned about that because its net debt was minimal, and there was a good dividend yield. So my plan was to ride out any further downturn.

However, the results last week were unsatisfactory from my point of view - because net debt has risen so sharply, that I now see debt as a serious threat to the group, where it wasn't before. They say this was part of a strategy to extract keener prices from suppliers by paying faster, but it also makes the shares much higher risk. The dividend was also withdrawn, which pulled another leg of support away. So reluctantly, I decided to throw in the towel on this one. It might well pull off the turnaround strategy, but the outlook statement sounded very uncertain to me - so rather than having confidence in a turnaround, it seems to be more on a wing & a prayer now.
If the facts change, such that risk/reward shifts negatively by a considerable amount, then for me that makes the shares an easy sell. It wasn't really something I agonised over at all, the facts & figures made it clear that, for me, the investing case was no longer strong enough to hold Volex. Good luck to people who remain holders though, but for me risk/reward is no longer attractive there.
I've kept a few personally, but have sold the bulk of them.

Regards, Paul.

john bradney

good morning Paul

whilst i agree with you about indian and chinese stocks in general i am intrigued by NBU.
they pay a dividend, seem to have cash in hand, debtors seem reasonable, rates highly.
what am i missing ?

john

Ramridge

Re. Chinese companies. Generally speaking I agree with Paul's sentiment and caution. Last December I bought into Camkids with a view to a long term holding. A month later I chickened out taking a small profit. On the face of it, CAMK looks fantastic: PE = 2.9, Div yld = 6.3%, ROCE = 47%, ops margin = 29%, and a cash pile over 40% of market value. Enough to make a competitive UK retailer salivate with envy. But, but... it is a chinese operation registered in Jersey, trading in the loosely controlled AIM market. It fails my "I'd like to sleep soundly" test. So on balance I got out.

Hi Roger,

Good points, and a useful additional wealth warning to add to the copious warnings in my original article piece about Synety (LON:SNTY).

A good example of where this type of high promise, but cash burning company went wrong, was 2Ergo (LON:RGO). I blasted them here for doing a Placing at 10p when the shares were (from memory 42p), but as readers pointed out at the time, they can only get Placings away for whatever price investors are prepared to stump up fresh cash.

So my view is that you have have to treat such blue sky, micro caps as being almost binary bets. I monitor them closely for evidence of the product taking off, and there being sufficient cash remaining. If the newsflow is inadequate, and the projected cash remaining is small, then it's best to just get the hell out of the shares, well before the next cash call - which is likely to be at a steep discount the more desperate they get.

So I escaped from RGO without too severe a loss, I cannot remember the amount, but it was about a 30-50% loss on a small position, from memory. The key thing is not to fall in love with the story & keep averaging down on something that just is not fundamentally going to work.

Also, try out the products! I did that with RGO, and found their App was absolutely terrific, but the trouble was, they had hardly any retailers signed up for it (and I tried it in central London, and the nearest restaurant was about 2 miles away!!). It then dawned on me that they would need a massive marketing spend to get anywhere, and that's what convinced me to sell the shares.

The thing I like about SNTY's model is that they can sell it as an Add-On through existing major CRM software companies. It's a complete no-brainer for the customers, as it has such a rapid payback period. So it's now purely a question of whether they can ramp up sales fast enough to excite investors & have them knocking on the door to buy stock in the next Placing (maybe even at a premium to the share price), or if sales disappoint then the next Placing will be essentially an emergency fundraising at potentially a much lower share price.

So undoubtedly very high risk.

regards, PAul.

nevilleaustin

I totally agree with Ramridge.
I bought 10k of NBU not long ago, that same night I just could not sleep. The following morning I sold half my holding and I then slept a bit better. A week later I sold the rest, amazing result, I slept like a log.
These Chinese stocks may have a PE of 1 and cash etc, but they keep you awake at night for two reasons -

1. They are Chinese
2. The figures are too good to be true

Anyway, I am looking forward to Mello tonight.

Neville

cig

Synety (LON:SNTY) fails the ten minutes google research test for me: world + dog is doing VOIP integration of CRM software, and they're apparently nowhere to be seen when you google "salesforce voip" or browse the salesforce app store, where you can find numerous competitors.

Richard Goodwin

Would you put HCM into the same category Paul? It is largely speculative anyway but I've always taken comfort from the associate with Hutchison

19th Nov '13

I've always liked the story associated with Lifeline Scientific but apart from any valuation issues I've never had the courage to buy because of the low volumes and overseas company issue which you have outlined.

Small Cap Value Report (18 Nov) - VLK, SNTY, FWEB, DQE

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Paul Scott

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