Small Cap Value Report (20 Mar 2015) - DGS, BDI, BJU, CVSG, ESS

20th Mar '15 by Paul Scott

12 comments 18460 reads

Good morning! There are four companies which have caught my eye this morning, so I shall report on them. Then I'm taking the afternoon off, having a long lunch in Brighton with a friend who is visiting for the day. So expect more gibberish than usual on Twitter this evening!

May I just make another point. Reading a bulletin board elsewhere, people were slagging me off, saying that my "share recommendations" were rubbish. This is odd, as I categorically NEVER recommend any shares to anyone! All these reports are doing is to give one investor's opinions on shares that look potentially interesting to me. The ethos of this site is for everyone to do their own research. Sorry this has to be repeated yet again, but it STILL doesn't seem to be getting through to some people!

Also, we've had some fascinating discussions in the comments section this week, about various strategies, etc. I'm perfectly happy to accept that my more speculative share ideas have done pretty badly of late! (but I do get the occasional multibagger). So there is certainly a lesson in there, that maybe I should just stick to the boring old value situations, and high StockRank stuff (which is where I tend to make good money) and not flirt with the more speculative stuff (which is where I tend to lose money!)? All food for thought, and all up for discussion!

Digital Globe Services (LON:DGS)

Share price: 65p (down 51% today)
No. shares: 29.9m
Market Cap: £19.4m

Interim results - for the six months ended 31 Dec 2014, which have clearly gone down like a lead balloon, with the shares having halved in price today.

This is what the company does - "a leading provider of online customer, lead, and inquiry acquisition and digital marketing solutions for large, consumer-facing organisations". Reading a bit more of the blurb with today's results, it seems to recruit customers for American cable TV companies.

The business has been reasonably profitable in the past, but now seems to have had a poor first half. An operating profit of $1.1m last year H1, has turned into a £529k loss in H1 this year. I very much like the presentation of the P&L (see below), where individual costs are itemised. I wish UK companies would do this too, as you can really understand the moving parts in the…

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GrindertraderUK

20th Mar '15

I personally think there is nothing wrong at all in having a punt at the speculative stuff if it is a small part of ones portfolio. I guess the 'good night sleep guarantee' is my principle rule on speculative shares. If I dream about it, worry about or worst have sleepless nights over it then of course the risk is simply not worth it.

But for me to remain disciplined in the 90% cash allocation of my safer long term value and growth stocks, I do need to satisfy the gambler in me with the other 10% This is why i take punts at aggressive marketing story stocks before bailing out quickly when the share price spikes, or plunges. I find the speculative punts exciting and by keeping the the risk to my portfolio small I am able to satisfy the gambling in me without me taking silly risks on my larger funds.

Your opinions are well valued that sometime it is hard not to take them as advice whether meant to or not. Your knowledge in the area of the balance sheet especially is of interest to me that on occasions I mistake your opinions for well educated advice.

I make no apology for that however I do know recognise that it is not your aim to advise rather than allow us an insight into your investing strategies and opinions that are valued by many readers.

AnonymousUser39518

Whack out the £3.5m development spend and BDI doesn't look even remotely cheap for a low organic growth company

Paul Scott

Hi Investor2015,

I checked that, and Bond International Software (LON:BDI) looks OK to me. If you look at note 4c to today's results (see below), the adjusted EPS figure is calculated AFTER the amortisation charge for capitalised development spend. The only amortisation charge which is ignored is the one on goodwill, which is fine.

I accept that the company capitalised more into intangibles than it expensed in the year.

Bezhe

I don't want you to feel like I'm having a go just as you are heading off for the weekend but...

Bond International Software (LON:BDI) has negative net tangible assets (£4,575k) and a fairly poor net current assets ratio (by your standards) of 1.02.

Have you made an exception to your usual requirements in this case?

colinhow

Paul I just want to offer a sensible word of support. We know your report is entertainment, not recommendations and is just your views on various companies that you provide for free, thank you. Whilst I am interested in the companies and your comments, I most interested in the method of assessment and what you look for that I can apply to other ideas or incorporate into my own research.

Regarding speculative vs sound stocks, I have had a similar 10% rule as Grindertrader but I must say it has so rarely worked out that I am increasingly thinking 0% is the way forward!

Monty9

Its about 33% high risk for me - each to their own. As you might imagine that has been a poor allocation in the last year!

dandiline

Theres an error with CVS, it's meant to be CVSG, not CVS ;)

brucepackard

CVS I met the founder who started the business in the 1990s. We had a couple of beers, and we talked a couple of years ago, so my memory is a bit hazy. But he couldn't believe how leveraged it was, because originally he had no debt, but properties were leasehold. He thought it was going to blow up, because now it is leasehold plus lots of borrowing. Look at intangible assets, a £59m are greater than net assets!
Back then it was below £1. In retrospect I made the wrong decision not to get involved, because sometimes boring business with weak b/s generate the cashflow, they can be "baggers", geared into the recovery.
Anyway - there's more than one way to skin a cat. I agree with your fear of weak balance sheets, particularly where we are now in the cycle.

fifthcolumn

Hello Paul, re your opening statements about your stock choices, I for one accept that they are opinions based on your knowledge and are not Tips. I like to read through and then take a look at them myself in the stockopedia ranks etc. Some look great and go onto a watch list while others I don't like the look of are dumped. It is good to see how a professional looks over a stock and forms an opinion. Your stock picks are your business and no one else's. You clearly make a good living out of it so the proof of your pudding etc. Keep up the good work and thanks for sharing your knowledge on this page with newbies like me.

jpsc01

DGS is selling to customers with real issues. The customer merger DGS refers to is a reflection of this.

The Cable companies have expanded to largely cover the market and any significant further expansion requires direct competition for customers. This will be costly and likely mean less revenue per customer, so mergers are a possible way ahead. Rather than compete they could just milk their local monopolies.

This is coupled with a market where the Cable companies have been charging circa $80.00 a month for TV. With the arrival of Netflix and this months HBO - Apple tie up you can see the momentum is against the current model. If Disney was to allow ESPN on Netflix, or Apple TV or Amazon Prime the Cable companies would be in huge trouble. As it is they will have to start creating much lower cost more flexible bundles, as you see with Sky. The list price on Sky Movies is £17.00, Netflix is £5 or 6 and Apple is bundled into Prime. So Sky is now selling Movies for £8.50.

However you cut it customers are going to be worth less to the Cable companies. Possibly a lot less. I do not believe they will continue to pay as much for each new acquisition so DSG will need to run faster to stay put.

Just my opinion - DYOR

Hi dandiline,

My apologies, you're right. Thanks very much for pointing out my error - I've now corrected the ticker in the article & title.

Regards, Paul.

MichaelFBS

'....I must say it has so rarely worked out that I am increasingly thinking 0% is the way forward!'

I would agree. That is how I feel. I would, I think, rather control the gambling urge in me (which I think is pretty small) by using check lists and investment rules than allocating even a small part of my portfolio to speculative stocks. That said I'd Synety (LON:SNTY), which I bought yesterday and is my only speculative stock, performs I may think differently!

Small Cap Value Report (20 Mar 2015) - DGS, BDI, BJU, CVSG, ESS

Digital Globe Services (LON:DGS)

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Paul Scott

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