Small Cap Value Report (21 Mar 2016) - TUNG, BRY, TFW, KBT, EPO, PTD

21st Mar '16 by Paul Scott

38 comments 23921 reads

Good morning!

Late reports from last week

It was a busy weekend for me, with 3 SCVRs to write, in order to catch up, which I've done as follows;

Mon 14 Mar - 2 interesting companies dissected, TUNE & GOAL

Tue 15 Mar - mainly FCCN, but brief comments on: ZTF, PEG, SAT & BGO

Fri 18 Mar - RBN, IDEA & HCL (delisting)

Also, just to clarify, these reports are free. They're not part of the Stockopedia subscription. I work 52 weeks per year, as such the arrangement I have with Stockopedia is that I can take the occasional duvet day. So there will be a report here most days, but not every day. Duvet days are usually days where there's very little news of interest, as I check this on my iPad at 7am each day.

Furthermore, I don't commit to covering all companies - over 500 in my universe would be ridiculous for one person to cover comprehensively. So each day I select what look to me the most interesting results & trading updates, with a particular focus on profit warnings, and any other unexpectedly good or bad news. That's the stuff which is most interesting to investors, and where I can add value by untangling things. I'm not going to waste my, or your time writing a dreary article about in line results - that doesn't add any value at all.

If a report is late, then I catch up later. Sometimes reports will be finished by 1pm, when the email goes out, often they're not, and I carry on updating the article during the afternoon/evening. So it's always worth refreshing the page later in the day. I Tweet if an evening update is done.

You might feel that the above sounds unprofessional, but I've found it's the only way I can maintain a 52-week per year service on my own. You can't keep your foot to the floor permanently, or you'll burn out. Also, I'm a freelance writer, not an employee, so it's designed to be flexible.

I hope that clarifies things for anyone who required clarification - although most people seemed to have already worked it out & be perfectly happy.

Interviews

I recorded another (very long!) investor interview over the weekend, with renowned investor/trader Richard Crow, that is also available free, on my ad-free website here.

I hope people find it interesting, I certainly did - Richard…

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rpmeurope

21st Mar '16

Here is a direct link to the audio file - http://qualitysmallcaps.co.uk/wp-content/uploads/2016/03/20160319-R-Crow-audiocast.mp3

Denisc

rpmeurope thank you for the direct link

Whitbourne

Andrew, you asked (Post 11) "how do you value a loss making company that claims to move into profit at some point?" That's a fair question and no-one seems to have taken you up on it, so I'll give it a go.

First, let's assume that the valuation is based on a cashflow multiple. You could use earnings, but they are prone to manipulation and anyway the company may be amortising goodwill for years to come - look at Vodafone (LON:VOD) for example. Cash is the best measure. There are special situations where the company is investing in property or building an asset and you might use NAV, but mostly the company is loss-making becauise it is investing in a business model that is expected, at some point, to produce a positive cash flow. It's striking that some companies can command high valuations withough any clarity of what that business model will be. Look at Powa - it's a sobering tale told at http://www.bbc.co.uk/news/technology-35860814 - or WANdisco (LON:WAND) which Paul wrote about recently.

Let's assume that the company is making losses for the next several years as income builds. My first question would be: When do I expect substantial free cashflows to occur and how fast will they be growing? Maybe not the first year it turns positive, but the first year of 'steady-state' growth. Based on this, what do I expect the cashflow multiple to be? Clearly, If company A has FCF of £100m expected to grow at 20% thereafter, it should be valued more highly than company B with the same FCF of £100m in the same year, which I expect to grow at 5%. That gives me a base valuation, several years into the future.

Then you would need to decide on the discount you will apply to reflect (i) the cost of waiting and (ii) uncertainty (or execution risk as it's often called). That gives you a valuation today. You might want to adjust again for cash balances and hidden assets such as freeholds. Bear in mind, though, that cash on the Balance Sheet today may be gone by the time the company breaks into positive FCF. You can't benefit from it twice.

My personal view is that if the breakeven point is more than 2-3 years away, I am not competent to judge the execution risk and I won't invest. Paul's investment in French Connection (LON:FCCN) is an example of a risk I wouldn't take, I understand the logic of the turnaround but I don't feel I have enough insight into the company's strategy or the sector.

I hope that helps. It's very general, but there are so many business models that it's hard to be more specific without considering a real example.

oldludlovian

Paul
I have only commented once or twice in the past, but I feel compelled to write today. I have to add my thanks to you for all your SCVRs. I have been a subscriber since June 2014 and in that time I have learned so much from your insights. I had not realised that this was a free service and for what it's worth I agree with PabloAguas and suggest that the SCVR should only be available to subscribers. It beggars belief that people can complain about not receiving a guaranteed daily report. Most of us I'm sure truly appreciate all your hard work. Nil desperandum etc.
Best wishes
oldludlovian

Bigclaw

Paul,

I echo the thoughts of oldludlovian and no doubt the vast majority of readers. Your reports are excellent and aside from the Individual companies you cover they give a really good insight into reading and interpreting reports and statements. As several people have said before- you really should write a book on your approach.

I'm a stockopedia subscriber and I've always viewed your reports as a bonus to the service I subscribe to, to get your emails for free it's astonishing that anyone would twist on about them not appearing in their inbox at the same time everyday. I suppose you can look at it as a backhanded compliment in a way!

Keep up the great work.

jamesalastair

Thank you again for all your hard work and intelligent commentary.

DarwenLad

Ditto all the above praise for Paul's regular commentaries. They are much better and more comprehensive than anything that appears in the City pages of the Daily Press, and he gives the IC and Shares mags a good run for their money. The fact that the commentaries are written by an active investor as opposed to an often inexperienced journalist is a big plus. I would be happy to subscribe (within reason) for access to Paul's daily musings. He is not always right, like the rest of us, but his ability to flag up numerous investment ideas that we can assess at a more leisurely pace, free from his daily deadline pressures, is a fantastic help for anyone interested in small cap investing. Many thanks Paul. You are a real star.

AlanJenkins2

Playing devil's advocate - and perhaps I'm missing something here,but couldn't some of Earthport's losses actually be exceptional,due to the Baydonhill fraud ?

seadoc

Thanks Phil, yes of course. I was going by the narrative on the pdf I have downloaded from the company website. The £5m is there in the detailed cash flow. (Mind you it is marked Draft - Not for Circulation.) Agree with you about future, I got into Domino's Pizza (LON:DOM) soon after it came to main market and it has given me a total return of over 500% to date (annualised at 30%). Not been in DP Poland (LON:DPP) as long but it did seem a bit of a bargain when it dropped under 10p. I am pleased with return so far, 175% but this annualises at a whopping 60%. As an aside: My daughter trained with a Pole, and on the basis of a one man survey the future looks good.

murrb

I would like to add my appreciation to Paul for the education his reports provide to other investors. In reply to PabloAguas I would say that while sites like Stockopedia may be affordable for serious experienced investors who have built up substantial portfolios, many small private investors like me just starting out would be much poorer both literally and metaphorically if Paul's report was no longer freely available.

carmensfella

22nd Mar '16

With regards to Earthport and the Baydonhill fraud....I think the £5m that was extracted and any associated costs are still to come as that happened one month after the reporting period so losses are likely to be increased in the next results.

This company always seem to increase overheads faster and greater than revenues so the break even point, if ever there will be one, just gets pushed further and further out. How this company was valued at half a billion six months ago is beyond me and the fact that it has a value well over £100m is probably down to the fact that they have had the incredible ability to print shares like confetti over the last ten years.....maybe the wedding and certainly the honeymoon period is over !

Thanks,Carmensfella.

Funnymoney

.......I agree. We are not getting a "desk" of journalists, we are getting one person. I think that Paul should go on holiday for 6 weeks a year and not feel the need to report (as he frequently does) from those locations. I think it would be good if we could have an early a.m. notification of anything which looks interesting e.g. "Widgetco WGC.L very good results, update by 11.00am". Having said that, it may be only necessary to do that two or three times a month.
I guess on the "only available to subscribers" issue Ed has decided that the traffic/membership generated by the reports is too valuable to do this.

All the best

garbetklb

I read Paul's reports on a previous site - and came to Stockopedia because Paul's reports would be available. From the extracts Paul puts into his reports, I saw that the Stockopedia subscription was good value - so signed up.

So, I guess, I'm the model customer brought in by the free SCVR service.

I think the reports are excellent - much more useful that IC. Comparing Paul's sceptical look aver the accounts with, as someone with a pretty similar focus, Simon Thompson's naive acceptance, there's no comparison. And paul likes people asking questions / putting an alternative view. During the various China / Globo / Quindell farces could I ever get a response from Simon?

Carry on the superb work Paul!

Andy

andrewdb

Thanks

(Disclosure - I am long TUNG and wanted to try to work out what it is worth in a rational manner)

LongbeardRanger

How curious, sounds like they've messed up a bit there!

Impressed at your returns both in Domino's Pizza (LON:DOM) and DP Poland (LON:DPP) , I am much later to the party in both cases, albeit Domino's Pizza (LON:DOM) has done well for me - DP Poland (LON:DPP) is a much more recent investment.

A lossmaking business like DPP isn't normally my kind of thing, normally I invest in solid, established, profitable businesses, but I have made an exception here as it's not a blue sky situation, but rather the expansion of an immensely successful business into a new territory. That's no guarantee of success of course, as DPP could fail to gain critical mass, or do so only at the cost of huge dilution - but I think the odds are in DPP's favour as system sales are growing strongly and store economics appear to have become properly profitable. The delivery pizza business model really is excellent if you can establish yourself as number one in the territory:

- simple, repeatable product to produce, meaning you can guarantee quick delivery and consistent quality as well as having an efficient supply chain and economies of scale in purchasing ingredients

- no need for fancy premises - rents can be kept low

- an affordable treat and the ultimate convenience food, as people can eat their pizza out of the box with no cutlery, plates etc, so no washing up!

- high returns on capital and cash generation as expansion is funded by franchisees' capital, plus (in the franchisees) an army of highly motivated entrepreneurs at the store level

It's an unusually good business (well, it has been in the UK and US) so I am watching DP Poland (LON:DPP) very closely.

barrywp

23rd Mar '16

Paul,

Thanks for your SCVRs, Like others I find them highly educational. As a (reasonably satisfied) shareholder for several years in Brainjuicer (LON:BJU), I'm looking forward to reading your views on it.

rjmahan

Hi Paul - dont worry about posting every day - quality over quantity, always...

I do think you should look a bit more about listed trusts - just the interesting ones - like SIHL / TCF / DUPD - opportunity in these.

I post a bit on my blog www.deepvalueinvestments.wordpress.com

Realize you cant cover everything though - and it might not all be to your taste but there can be very easy money made at times on the investment trusts - at a lower risk than individual equities....

hayashi22

29th Mar '16

Just doing a catch up here. A very valuable resource. The Pittards' main site is in Somerset not Devon -not that it really matters. I don't suppose the Pittards management have much of a clue where they are either judging by the dismal results dished out year after year.

Small Cap Value Report (21 Mar 2016) - TUNG, BRY, TFW, KBT, EPO, PTD

Late reports from last week

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Paul Scott

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