Small Cap Value Report (24 Mar 2015) - ACM, CTO, GTC, VLK, SKP

24th Mar '15 by Paul Scott

27 comments 25295 reads

Good evening. Sorry for my absence yesterday & earlier today, I've been unwell, so spent 3 days in bed. Anyway, let's get this show back on the road! I'll do a report for today, and then circle back to yesterday's later this week, as I definitely want to comment on results from Spaceandpeople (LON:SAL) as it's not clear to me why the market marked the shares down 20% yesterday, as they reported in line with revised expectations.

Accumuli (LON:ACM)

Trading update - this IT security group reports that group EBITDA is line with management expectations for the year ending 31 Mar 2015. The detail sounds positive too. However, Accumuli inexplicably fails to mention the elephant in the room, which is that they've sold the company!!

Recommended acquisition - a separate announcement is today issued by NCC (LON:NCC), saying that it has agreed with the Board of Accumuli to buy Accumuli for mainly shares, but some cash. Normally when you look at takeover deals, you think to yourself, this is a done deal. However, in this case I think this deal looks a bit wobbly.

Firstly, the premium to the market price is not enough. They are only offering a 19.1% premium, at 32.8p. Takeover deals really should be at least a 30% premium to tempt shareholders to bank the profit now, rather than going it alone.

Secondly, the deal is only 5.97p in cash, and the balance of 26.83p in 0.1218 new NCC shares. Trouble is, NCC shares have already dropped sharply, down by 7.7% today to 203p. So that now values the takeover at 5.97p cash + (0.1218 * 203p) = 30.7p. That's now only an 11.6% premium to the share price last night. It's not enough, so I think NCC will have to dig a bit deeper to get this deal done.

However, the big shareholders have agreed the deal, and the company has 57.3% irrevocable undertakings to support the deal.

My opinion - this doesn't look a particularly good deal for Accumuli shareholders, but maybe the big shareholders prefer the idea of holding more liquid shares in a much bigger group (NCC is about 10 times the size of ACM in market cap). I would be pushing for NCC to sweeten the deal with a higher price, so…

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sirsege

24th Mar '15

Hi Paul, really, really, really missed your reports these past 2 days, especially with the deluge of annual results released. Great to know you are feeling much better. Thanks so much for your valued opinions.

Henry Walpole

Hi Paul relieved to hear you are ok, was worried as you were 'offline' for so long.
Really missed your reports and your tweets!

Cheers
Jon

MichaelFBS

Echoing others. Glad you are ok and nothing serious.

Shelboy

Hi Paul glad you're feeling better. Welcome back.

MaxPower27

Hi Paul, Hope you continue to feel better. Like others, really enjoy reading your reports. Any views on IQE's results today too? Thanks.

Damian Cannon

Good to see that you're on the road to recovery Paul - I was wondering if completing your accounts had finished you off!

As for Spaceandpeople (LON:SAL) my feeling is that the outlook statement was rather bland and didn't give me the feeling that the company was about to come roaring back. So while the balance sheet has nicely protected the downside I'm of the opinion that we'll need a bit more red meat from the directors in order to get the share price moving upwards.

Paul Scott

Hi RandomAmbler,

Yes you could be right. I quickly skimmed the SAL results yesterday on my iPad (in bed), and was staggered to see the share price down 20%, when the figures were actually a bit better than I had been expecting.

Possibly the narrative spent too long dwelling heavily on what had gone wrong in 2014, and maybe that somehow set a negative tone? It might had been better if they had just kept it short & sweet on the problems in 2014, and said that they've fixed the things that went wrong. Sometimes less is more.

Still, it's looking dirt cheap again, mkt cap of £10m, and a good divi yield of c.4%, with scope for that to rise considerably, given past divi history. The balance sheet is fine. Outlook - as you say, not sparkling, but I think the market has overlooked the potential for their new "promotional pods" - the economics of these are really very good indeed, and my back of the envelope figures suggest that they could drive a big increase in profits over the next 2 years, as they are rolled out.

So 100% upside on Spaceandpeople (LON:SAL) is the target I have pencilled in. It's cheap on a fwd PER basis, Stockopedia has it on a fwd PER of only 7.7, with a 5% forecast yield. Moreover, they're battle hardened now - having had a tough year, I think mgt have sharpened up their act & slimmed down the reporting lines internally, etc.

It scores a very high StockRank too, of 96. So in my view this looks like a good buying opportunity, possibly, providing nothing else goes wrong of course.

Regards, Paul.

jimbobjames2002

Glad to hear you're on the mend Paul, it's been a quiet couple of days without you're cracking reports!

Any thoughts on PMR if you get the chance would be much appreciated - I see they're finally paying a divi again, but the market's not been too keen, down 5.9% today.

Thanks, James

simoan

Hi Paul,

Worth noting that Getech also announced the acquisition of ERCL today which will change the balance sheet and number of shares in issue. Details as follows:

· On the date of completion, an initial payment of cash £1,750,000
· On the date of completion, an initial issue of 2,176,630 shares. Application will be made to admit these shares to trading on AIM and it is anticipated that trading in the shares will commence on 13 April 2015. It is agreed that the shares will be retained by the ERCL shareholders for a minimum period of one year from completion. A further announcement will be made when the transaction completes and the shares are issued.
· Deferred consideration, based on the performance of the company over a three-year period. This has an expectation of generating a total of £1,550,000 over the three years if performance targets are met. The deferred consideration will be based on the profit before tax to the extent it exceeds a hurdle level in each year.

Bank loan

Although Getech has strong cash levels, a loan has been arranged with RBS/NatWest for £1.1m, repayable over four years or less (at Getech's discretion), with interest rate at 2.04% above base rate. The loan is secured against the Getech office building in Leeds. The Directors believe this is the prudent approach and will reduce the up-front net cash cost of the deal to £650,000.

The expected value of the aggregate consideration is £4,300,000.

Glad to hear your Mojo is back!

All the best

These are all good points and I'm inclined to agree with them but it's worth remembering that this is a £10M micro-cap which has shown itself capable of being badly wrong-footed by its customers. So it's not clear to me that the company deserves any sort of premium rating at the moment and it's going to take time to re-build trust in the management - and this won't happen without the management delivering and being a bit more positive!

Also the forward P/E of 7.7 is for 2016 - for this year the forecast is 9.3 and I don't think that that's unreasonable given how far the EPS forecast has been downgraded (12.6p to 5.34p). So I don't think the Spaceandpeople (LON:SAL) is massively cheap at the moment but it could be if the next management statement has a bit of life to it!

Cheers, Damian

25th Mar '15

Hi MaxPower27,

I've had a very quick look at IQE's results. My problem with this company is that I don't really understand what it does, nor its marketplace.

Adjusted profit is up nicely, from £13.0m to £16.2m, but the adjustments are big, at £10.9m.
The segmental analysis shows turnover down sharply, and profits halving at its largest division, Wireless - that's a worry, and could explain why the shares appear cheap on a PER basis, maybe?

The fwd PER is only about 9 for 2015, so it might be worth a deeper look? No divis though, which I'm not keen about.

If you like it, then do pls feel free to explain why.

Regards, Paul.

Hi RandomAmbler,

A nice summary, which I think is fair.

Note also that, given the debacle of 2014, management at Spaceandpeople (LON:SAL) have radically changed the forecasting process, and this was something I discussed with them face to face last year. From now on, they are not forecasting ANY new business. Just existing business. So the forecasts really should be close to the worst case scenario (unless they fail to win any new business AND lose existing clients, which I suppose is possible!)

Cantors reinforce this point today in a note which said;

"Results today confirmed SpaceandPeople’s 2014 profits came in a shade above management’s £0.8m-£1m guidance for adjusted pre-tax profit. Management was able to successfully replace business from 2013 that did not repeat and has put the company on a firmer footing going into 2015. Management prudently guides to stable sales this year with profit growth coming from more efficient operations. We think that's conservative given all the main units continue to actively pursue new business but base our forecasts on that outlook to also stay prudent. We expect new business to drive growth from 2016 onwards. Our 2016 EPS implies our new TP of 73p (from 68p). The 30% upside means we maintain our BUY recommendation."

Hi jimbobjames2002,

I had a very quick look at Panmure Gordon & Co (LON:PMR) results (which I hold), and thought they looked good, with positive outlook. So very odd that the shares fell. Very illiquid micro caps do this sometimes though - it only takes one or two holders who haven't really been following trading updates, to look at the results, and think they're bad, and to sell, to knock the price back temporarily.

What is your views on the results from PMR?

Regards, Paul.

carmensfella

Great to see you back Paul and hope you are back to full fitness for the ED event tonight ?. If I had just a tenner from everyone who has asked me where & how you are ? then I could have set up a competing bid for ACM this morning ! lol Seriously you are massively followed, much respected for your honesty and regular updates and more importantly loved by thousands for the person you are. Do not feel obliged and take rest when you can but just keep one or two of us posted as everyone takes for granted that you will be tweeting and posting at all hours....D

Thanks Paul, PMR is a bit of a frustration for me. I bought after decent results in September and it's been a hard slog ever since! Was hoping for a positive reaction yesterday but that didn't happen. The introduction of a divi after 8 years has to be good news and profits up 84% too. It just doesn't seem to get the markets interested despite it being so cheap. I'm kind of in 2 minds, but if I put my long-term value hat on it still seems an anomoly to be this cheap - I just wish management would release a few more meaningful RNS's to publicise the company's progress a bit more, maybe it's just under the radar for most investors.

Thanks Paul that's very interesting - so management have swung towards being pessimistic just so that they don't caught out! If all goes well then this could lead to upgrades to forecasts later in the year. That said I'm going to wait for the chart to flatten out and kick up like I thought it had earlier in the year - wasn't this something that CockneyRebel mentioned as a way to avoid buying a share that hasn't stopped sinking?

Splode

I'm more with RandomAmbler/Damian than PaulyPilot/Paul on Spaceandpeople (LON:SAL). Over the last year on these pages I have been very critical of SAL's management and communications with the market but I'm a little less so on the latter point now. I wonder about Paul's remark:

Possibly the narrative spent too long dwelling heavily on what had gone wrong in 2014, and maybe that somehow set a negative tone? It might had been better if they had just kept it short & sweet on the problems in 2014, and said that they've fixed the things that went wrong. Sometimes less is more [my bolding].

We need all relevant information we can get particularly on a company attempting a turnaround. The volume, relevance, clarity, and veracity of RNSs are important and spin should be minimised (a forlorn expectation, I know).

monzo

Welcome back Paul.

Re: Panmure Gordon & Co (LON:PMR) I came close to picking some stock up within the last few months ahead of a good set of expected results and resuming dividends. I didn’t buy so have no position. The headline figures for me look lacklustre. H1 pretax profit £1.9m, full year £2.15m. H1 of 2014 was a good time for IPO’s in general for the whole industry. I’d like to see another set of results before I take a position here.

Paul do you have any insight into the employee benefit trust that the company runs? They add 20,000 shares PCM which now equates to approx 8% of the company. Presumably this is by way of giving employees a share of the company / a bonus. Would they then be free to sell down those shares? Not that these would all come to market at the same time but isn’t this like having a massive overhang which could drag the already illiquid shares down in the future?

Hi RandomAmbler,

Exactly. Spaceandpeople (LON:SAL) mgt came in for a lot of heavy criticism (rightly so) from shareholders last year, and they listened, and acted. So the budgeting process has been changed that instead of putting out their best guess internal budget to the market (which will make assumptions about existing & new clients), they now put out the "base case" budget - i.e. the minimum they think can be achieved on business they already have.

Therefore, we should see a new pattern emerge, of the company gently revising up forecasts as the year goes on. Of course you can't rule out another setback, the nature of their business is that they do lose clients every now and then, but in the past they've had no trouble replacing them. 2014 was unique in that, after 5 successful years, a whole load of things went wrong simultaneously.

You can see from the Stockopedia graphs that from 2009 to 2013 inclusive, the company had an excellent track record of increasing turnover & profits each year. To my mind this should be taken into account, whereas at the moment the market is harshly judging the company on one bad year.

I'm too tired to come into London today for the presentation by SAL meeting at the EDIF meeting, but would be interested to hear any feedback from people who do attend.

The market has not yet latched onto the fact that SAL has successfully trialed high margin promotional pods (available on weekly rental slots to multiple organisations) in some UK shopping centres, and that these are going to be rolled out in 2016. They should provide quite a substantial boost to profitability.

For that reason, I'd be surprised if SAL shares don't get back to 100p+ in 2016.

cig

Agreed. Also given the slack they got for not communicating enough at the time of the original profit warning, we can't now blame them for communicating too much and too clearly.

Small Cap Value Report (24 Mar 2015) - ACM, CTO, GTC, VLK, SKP

Accumuli (LON:ACM)

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Paul Scott

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