Small Cap Value Report (26 Nov) - UBI, CMH, TPT, RNWH, SRT, CAMB, COG, VP., SCPA

26th Nov '13 by Paul Scott

9 comments 24814 reads

Good morning! There's an interesting-sounding statement from a recent addition to my portfolio, Ubisense (LON:UBI) - the company announces a strategic partnership in Asia, and the passing of regulatory hurdles such that their product can now be sold in Japan. No financial details are given, and no revenue impact is expected until 2014, but this sentence intrigues me (see bolding below), as it seems to be pointing towards potentially significant growth perhaps?

Cambridge, UK - Ubisense Group plc ("Ubisense" or the "Company") (AIM: UBI), a market leader in real time location intelligence solutions, is pleased to announce that it has entered into an exclusive strategic partnership with one of the world's leading automotive logistics companies in Asia.

Following an engagement and trials over the last 12 months, both companies have agreed to work together to deploy an integrated automotive logistics solution to new and existing customers, built on the Ubisense Real-time Intelligence Platform. The solution will be deployed on sites at large scale Asian ports and leading automotive OEMs.

At almost £50m market cap at the current share price of 218p, Ubisense shares cannot really be valued on the historic figures. So this is very much a speculative, growth company. I would only buy into something like this in a bull market, when the market is highly receptive to growth situations, and is tending to put an optimistic valuation on growth potential. You certainly couldn't justify a £50m market cap on the historic numbers, as the Stockopedia graphical history below makes clear. However, I think it looks an interesting growth stock:

Broker forecasts show a loss of 2.53p per share in calendar 2013, and a tiny profit of 0.46p EPS in 2014. So the valuation hinges on the market believing that further growth will see a decent move into profit in 2015 and beyond. So today's announcement can only help in that regard. NB - this shares is considerably more risky than the usual things I cover. The problem with growth companies is that if they disappoint on the figures, then the share price can lurch downwards suddenly & violently. However, they also have exciting upside potentially.

I've had a quick skim of the interim results…

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bsharman

26th Nov '13

I always enjoy investor presentation evenings as it is great to meet like minded investors over a few glasses of wine/beer! There is an Edison Seminar tonight featuring BrainJuicer, Fastnet and Outsourcery. This is the first seminar they have run and it will be interesting to hear the Dragon, Piers Linney presenting his cloud solution business - Outsourcery. We get the chance to grill a Dragon! Is anyone else going? To attend you just need to email rsvp@edisongroup.com. The venue is 200 Aldersgate, EC1A 4HD

nigelo

Hi Paul,

£VP's interims show potential dilution due to share options of 9.3%. To me that seems as though the directors are transferring a lot of the potential future returns from the outside owners to themselves. Would you agree or have I misunderstood?

shanklin100

Hi Paul

You quite reasonably commented negatively on the state of TPT's balance sheet.

I am a little surprised you didn't make similar comments re RNWH. The business is obviously doing well currently but if they have one contract that goes badly or a bad period of trading at some point (the latter which currently looks unlikely), there is absolutely no B/S support for the current valuation. Indeed with every acquisition they make, intangibles increase and the B/S gets weaker.

Do you see the situation at TPT and RNWH as fundamentally similar... ... or different for some reason I may be missing?

Thank you, Martin

P.S. I have held RNWH in the past but cannot bring myself to re-invest in it due to the B/S weakness despite the fact that the business seems currently to be going gangbusters.

Nopunting

Severfield Rowen - SFR - Interim results today. Far too overvalued in my view. All the recovery is priced in. They are £180m market cap (having done a deeply discounted emergency rights issue at 22 pence/share) and net cash of £1.5m plus a defined benefit pension deficit of £11m. So EV of around £190m. Underlying operating margin was just 2.5% (albeit they have guided to 5% as a medium term target). The underlying operating profit was just £3m (excl. amortisation, restructuring and impairments and the Indian JV losses) for 6 months. Even if they hit the 5% medium term target that MIGHT give them an annualised underlying operating profit of £12m. No dividend of course. "Some signs of UK market improving into 2014". Billington (small competitor) told me they don't think the margins (EBIT margins of 10%) from the era pre 2008 will ever come back. Assuming a normalised tax charge - PERHAPS WHEN they get the margins to 5% they will achieve 3 pence in earnings = PE of over 21 currently. For a business where growth will be minimal. They have had to stop chasing any old revenue growth as the work can end up being unprofitable. While it is market leader in structural steel there is lots of excess capacity in the market. From 2000 to 2008 the UK market for structural steel was around 1.2m to 1.4m tonnes per annum. Post 2008 it dropped back to circa 0.8m tonnes and Tata forecast it to increase to around 0.9m tonnes by 2015 - so no big uplift back to the levels prior to 2008. It is cannot grow top line very much, this should be valued as a "mature" company probably justifying a PE of 12 = share price of around 36 pence.

Paul Scott

Hi Martin,

Actually that's a very good point you make. I had it in my head that the Balance Sheet at Renew Holdings (LON:RNWH) was good, but on double-checking it this morning, it isn't. Net assets are £10.3m, but that includes £33.1m of goodwill, and £4.0m other intangible assets. Write those off, and net assets turn negative to the tune of £26.8m, so I definitely wouldn't invest because of that.

Although I note that RNWH seems to finance its business through trade creditors, rather than bank debt. I would imagine there's a fair bit of deferred income included in that - i.e. up-front payments from customers. Which is fine, providing those payments continue rolling. But if for any reason those contracts unwind, then the group would run into serious cashflow problems, and would need to arrange either bank facilities, and/or an equity fundraising.

Thanks for flagging this, and apologies for the oversight.

I also agree with you that the problem with big turnover, low margin infrastructure companies, is that it only takes one big contract to go wrong, and the cost over-runs can cause major problems, so inherently risky.

Regards, Paul.

Hi Paul

Thank you for your helpful reply.

Cheers, Martin

P.S. Discussing this earlier with David S., I highlighted the weak B/S and hence the potential SP downside associated with one poor period of trading. It was he who reminded me that such an eventuality could be caused by one big contract going wrong.

27th Nov '13

Hi Martin,

I agree - RNWH has a very weak Bal Sheet (therefore is high risk), and the shares have had a big re-rating on improved trading this year, so it's an obvious sell in my view. I've closed it out in Paul's Picks.

Regards, Paul.

DJLJ23

29th Dec '13

Hi Paul,

UBI: Regarding Ubisense, Since your review they have
Bought a Company
announced a number of fairly large extensions/wins

and a report on the industry in general has been produced (link below)
http://www.einnews.com/pr_news/182307599/global-real-time-location-system-rtls-market-2014-2018
it suggests CAGR growth of 38% over next 4 years.

So certainly a company in a growth area, my current concern is wether they are growing to quickly.

They are the investor show in London in Feb, hope to find out more then.

Just like to echo my thanks for your reports, have a great new year
David

24th Feb '14

Unfortunately they were not at the show, which was disappointing
However i have done some more digging and i'm more convinced that this is a company whose time could be coming and could exceed expectations.
I have read the information on their site and clearly they are growing in germany, where they are looking for 10 staff (out of 18 they are looking for), presumably to support the 3 automative companies referenced in case studies in germany they are apparently supporting. only BMW is mentioned by name, but the case studies claim a significant increase in productivity. From the contract annocements i get the impression each production line is circa £1m revenue, lots of production lines out there.
Nearly 30% of revenue is maintenance and i don't think this is the sort of technology easily replaced once installed, so a bit of a moat there.
Airbus is another customer, where the parts are tagged at the production sites across europe and then managed (tracked in the factories& externally on the roads) via the Ubisense technology to the assembly site, so that bits arrive just intime.
They also have a system used to access/track gas pipes and record leaks, which completely replaces the paper systems currently inuse, apprently significantly increaseing productivity, and reducing costs.
That just touches some of what they do.
My concern is still that they don't have the people to deliver all the work they appear to have.

As always do your own research, but any views comments much appreciated

Small Cap Value Report (26 Nov) - UBI, CMH, TPT, RNWH, SRT, CAMB, COG, VP., SCPA

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Paul Scott

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