Small Cap Value Report (22 Jan 2016) - TRAK, CCT, TMMG, CRW

Good morning!

It's a big rebound day today, with confidence apparently returning in part. Whether it's a strong but short-term rally in a bear market, or a more positive change of trend back into bull mode, nobody knows yet.

I've been doing lots of shopping today & yesterday - hoovering up many decent quality companies at relatively attractive prices, where sentiment alone has slammed the price down. The key thing I look for is an up-to-date, positive trading update. If that is in place, then you know the selling is purely sentiment-driven, and hence Mr Market is handing you a bargain on a plate.

Like the markets, I also had a late surge last night, and wrote brief comments on 5 more companies in yesterday's report, in case you missed it. I can't remember covering so many companies at this time of year before, it seems very intense this year. Good thing I've been doing Dry January, and haven't touched a single drop of the devil's urine since 29 Dec 2015, so a pat on the back for me, and hopefully readers are benefiting from my increased energy, and mental clarity!

I love market sell-offs, as the market just throws bargains at you. There's lots of money to be made in conditions like these, if you keep a cool head, and of course have some firepower to deploy. It's no good being 100% invested at the top of the market, as you can't buy the dips then.

A few themes that have popped into my head;

Highly indebted companies

As regulars know, I have an aversion to heavily indebted companies, because things can so quickly unravel if trading deteriorates. Also, I think ultra-low interest rates have caused mis-allocation of capital on a colossal scale - whether it's inflated property prices, inflated bond prices, far too much capex (leading to over-supply of almost everything, globally), and unwise takeover bids.

We're finally starting to see the negative impact of too much QE, and interest rates that have been left too low, for way too long. Therefore, there simply has to be a day of reckoning at some point, when the bad debts will need to be flushed out. The longer it is postponed, the worse it will be.

For this reason, I'm actively avoiding companies which are cyclical, and rely too heavily on bank debt. These will be the future disaster stories, when credit conditions really seriously tighten up again.

Living Wage/Profit Margins

This is a continuing concern. Note that J D Wetherspoon (LON:JDW) commented that its profit margin would be hit quite hard by Living Wage, and remember that this is the thin end of the wedge - it will be rising well ahead of inflation for the next 3 or 4 years. A good thing socially, in my view, but a bad thing for company profit margins.

So I think wage cost pressures will increasingly curb investor returns at many companies, not just ones which employ low paid workers.

This needs to be factored into valuations - sales may rise at many companies, but I reckon profit margins could actually fall. Which means some shares should be rated more cheaply than they are perhaps?

Trakm8 Holdings (LON:TRAK)

(at the time of writing, I hold a long position in this share)

A very topical company - I am interviewing the CEO on Monday. So please use this link to: submit your questions for the interview, in the usual way.

It's no holds barred - the company has agreed that I can ask them anything. I certainly won't be vetoing any difficult questions either - quite the opposite, I want to hear the answers to some tough questions too, so let's make this one a good interview with some smart questions from you please.

Character (LON:CCT)

Share price: 496p (up 3.6% today)
No. shares: 21.4m
Market cap: £106.1m

Trading update - covering the year to date (ending 31 Aug 2016).

• Solid Xmas sales
• YTD sales up 6%
• On track to meet market expectations for the full year
• Early reactions to new product ranges is enthusiastic
• Confident about the future

Valuation - forecast EPS is 45.7p, so it's on a PER of just under 11, which looks reasonable to me. Although note earnings are forecast to be flat against last year, so if ex-growth then the PER should be modest.

My opinion - I like it. StockRank of 99.

Mission Marketing (LON:TMMG)

Share price: 42p (up 6% today)
No. shares: 83.6m
Market cap: £35.1m

(at the time of writing, I hold a long position in this share)

Trading update - for calendar 2015. Key points;

• Strong H2
• 2015 in line with market expectations
• Recent acquisitions are trading well

Acquisitions/Debt:

Our recent acquisitions are trading well and although their addition to the Group will result in an increase in our year-on-year net debt position, our balance sheet remains strong and our gearing and debt leverage ratios are expected to be at similar levels to those of 2014 and comfortably within the Board's target.

Memo to TMMG management - your balance sheet is actually weak, not strong! Go to the bottom of the class! A few stats from the last reported balance sheet, as at 30 Jun 2015, to back up my opinion;

• NTAV is negative, at -£5.6m, i.e. a weak position
• Current ratio is 1.05, which is weakish
• Bank debt - considerable, for the size of business, with gross debt of £10.4m, and net debt of £7.9m
• There is an additional £4.5m in liabilities related to previous acquisitions (deferred consideration).

Put this together, and it's a weak balance sheet. Not dangerously weak, given that the group is profitable, but weak nonetheless. It infuriates me when management state they have a strong balance sheet, when the figures show quite clearly that they don't! They're either delusional, or are misleading us deliberately - which to blunt, is what marketing & PR is all about. Neither is good.

I'll continue holding the shares though, because trading is good, and the valuation looks modest - the fwd PER is only about 6.5, exceptionally low.

Craneware (LON:CRW)

Share price: 790p (up 1.3% today)
No. shares: 26.8m
Market cap: £211.7m

Trading update - for H1, to 31 Dec 2015. Key points;

• Confident in meeting market expectations for FY (full year)
• Long term visibility of revenue under contract
• Cash of $45m + $50m bank facility available (but presumably not used?) - gives scope to "investigate strategic opportunities" to expand
• Confident outlook comments

My opinion - nice company, and a reassuring update, but the shares look very expensive, on a fwd PER of about 25. Compounded growth in EPS has been 11% p.a. (per StockReport), so the PER looks aggressively high for not exactly spectacular growth.

That said, maybe the market is anticipating future expansion using the cash & debt facility mentioned above? It doesn't interest me, at this high valuation.