Small Cap Value Report (26 Jul) - TNO, NBI, STT, GDWN

Good morning! There was bad news for RSM Tenon (LON:TNO 2.25p pre-opening price) shareholders yesterday afternoon, as the shares plunged a further 32% to just 2.25p on an announcement of a possible takeover, but at lower than the current share price. Tenon is the latest in a line of accountancy groups that have expanded too fast, and got themselves into serious debt problems. It beggars belief that having made such a mess of their own finances, they then charge clients for financial advice services such as audit, tax, insolvency, corporate recovery, etc.

I warned readers here as long ago as 26 Feb 2013 that the finances of this group were so bad that it could only be considered "ultra high risk". The shares have fallen 65% since then, and might even end up being worth nothing, because the debt is so high.

Exceptionally lenient behaviour by the Banks (under political pressure) in the last few years has meant that many zombie companies have continued trading, even though they have insurmountable levels of debt. I think this has lulled many investors into a false sense of security, with some disregarding Balance Sheets altogether, in the foolish belief that Banks will not put a zombie company into Administration. This can occasionally be very lucrative - e.g. shareholders in Thomas Cook (LON:TCG 154p) were extremely lucky that it survived, despite having probably the worst Balance Sheet I can ever remember seeing, before it's recent refinancing.

However, in most cases a very weak Balance Sheet full of debt will end up with either insolvency, or a dilutive share issue at some point. As the economy recovers, and Bank Balance Sheets become strong enough to take the write-offs, expect more zombie companies to go to the wall. So do be careful!

Hence I shall retain my core policy of carefully scrutinising all company Balance Sheets, and flagging up poor situations like RSM Tenon as high risk, in the hope that readers will not get caught in such disastrous shares. We might risk missing the odd multi-bagger, but we should never see any 100% losses, if we focus only on companies with decent Balance Sheets.

 

 

 

 

Northbridge Industrial Services (LON:NBI 377p pre-opening price) issue an upbeat-sounding trading update for the six months to 30 Jun 2013. They say that H1 of 2013 will show results "substantially ahead of the same period last year". They go on to say that "a forecast satisfactory second half year performance will achieve results for 2013 as a whole which should be in line with Directors' expectations". So that sounds encouraging.

Stockopedia show forecast EPS for this year of 31.4p, which is 32% up on last year's actuals. At 377p the shares are therefore on a current year forecast PER of 12, which looks reasonable. As you would expect with a hire company, there is some debt, but they indicate today that 2013 has seen, "significant reductions in net gearing levels that will continue into the second half of 2013".

So this one looks potentially interesting, especially if they have a strong H2, then they might out-perform against forecasts? There's probably not enough percentage upside on the current price to interest me (I normally look for things where I can see a 50-100% upside on the current price within a reasonable timescale), although it wouldn't surprise me to see these shares continue to rise somewhat from here. Although as with many shares, they have already risen a lot, and you wonder how much further this very strong market for small caps can go before a correction?

I would need a very compelling reason to buy now, when the chart looks like this:

 

 

 

 

Next I've been looking at Straight (LON:STT 32p after 24% rise this morning), a micro cap maker of kerbside recycling boxes. It's much smaller than the usual type of thing I look at, but in a bull market I'm prepared to be flexible, although there is always a risk of de-Listing with micro caps, so you need greater upside to compensate for this additional risk.

Their AGM statement this morning reads very well. Sales for H1 (the six months to 30 Jun 2013) came out at £13.9m, with an expected EBITDA, "to exceed £1.0m". That's pretty impressive stuff for a stock with a market cap of only £3.8m (at this morning's higher price of 32p, up 24% on yesterday).

Looking at last year's accounts, their depreciation charge was £1m, so divide that by two for a half year, and we can deduct £0.5m from the above EBITDA figure, and then some more for interest cost, so at a rough guess it looks like profits would be around £500k perhaps for H1?

It has a weak Balance Sheet, so on that basis it's not for me, combined with it being such a small market cap, but it does look as if this company is on a roll now, and I wouldn't be at all surprised to see these shares push quite a bit higher in due course.

The outlook also sounds good, with them saying that, "we...believe this progress is not only sustainable but can be built upon", and "The Group is now profitable and with its order book consistent with levels achieved in recent years, we can look forward with renewed confidence.".

So for those of you who like micro caps, this might be worth a look, but as always this is definitely NOT any kind of recommendation, and please do your own research.

 

 

 

 

Shares in Goodwin (LON:GDWN 2360p) have responded well to their excellent results issued today, up 4% to £23.60 per share.

I don't know to what extent positive trading has already been flagged by them, but very unusually for something with a £170m market cap, at £23.60 per share, there do not seem to be any broker forecasts in issue.

Looking at the figures for the year ended 30 Apr 2013, pre-tax profit rose a whopping 65% to £20.3m, on revenue up 17.7% to £127m. The improvement in profitability is explained as having been driven by: vertical integration between group companies, dynamic performance in meeting customer needs, economic designs, and excellent manufacturing efficiencies. Those don't sound like one-offs to me, so I wonder whether this performance can be maintained?

The order book is up 16% versus the same period last year, and is about six months work for most group companies. This paragraph from today's results is interesting (my bolding):

 

The decision to only increase the ordinary dividend by 10% to £2.54 million but grant an extraordinary 50% bonus dividend is designed to reward shareholders for their loyalty but similarly not to commit the Company to a base dividend that it would maybe have difficulty in maintaining in coming years. The past financial year was an exceptional year, but with the Group order book 16% higher as at 30th April 2013 and with the petrochemical industry remaining buoyant along with significant orders being won by two companies which were short of orders (Goodwin Steel Castings £7.6 million and Easat Antennas £3.9 million), it may allow the Group to perform similarly well next year also.

 

 

So it's not entirely clear if this level of profits can be maintained. Therefore how do we value it?

EPS was 211.76p, so at 2360p the shares are on a historic PER of 11.1, which looks reasonable. However, with no forecasts available, I'm not really sure where to go with this.

The Balance Sheet looks good, with net current assets of £36.6m partially offset by long term creditors of £20.2m, so that's fine given the highly profitable nature of the group - great profit margins too, with an operating profit of 16.7% demonstrating excellent pricing power, not something you normally expect in the metal bashing sector. So they must have niche products, and considerable expertise to make those kind of margins.

I can't see a pension deficit on the face of the Balance Sheet, which is a positive, as this type of company do usually have pension deficits, but would need to check the Annual Report to be sure.

All in all, this looks a really nice business. It's purely a question of whether they are on a roll, or whether this was a one-off good year. I don't know anything about the business, so can't make a judgment on that, but it certainly looks worth investigating.

 

 

 

Right, I'm done for the day, and the week.

Have looked at a few other results & trading statements, but nothing that floats my boat.

Have a smashing weekend, and see you back here as usual from 8 a.m. on Monday morning!

Regards, Paul.

(of the companies mentioned today, Paul has no long or short positions)