Small Cap Value Report (27 Apr 2016) - SEPU, PRES, BLUR, OUT

27th Apr '16 by Paul Scott

23 comments 16352 reads

Good morning!

Another busy day today for announcements, I'll cover as many as I can this morning, as am busy working with a private company this afternoon, with my FD hat on.

Sepura (LON:SEPU)

Share price: 64.25p (down 30.9% today)
No. shares: 184.4m
Market cap: £118.5m

Trading update & financial position - in my report of 4 Apr 2016 I covered Sepura's profit warning, and warned that a discounted fundraising looked inevitable, therefore the shares were much too high risk to consider catching the falling knife at 120p. The price has nearly halved since then, as my fears over its weak capital structure have been confirmed.

The company today says:

The Company's current net debt and consequential leverage position is largely the result of the working capital expansion referred to above. The working capital position is expected to significantly ease during this financial year. However, the Company is subject to short term cash constraints which the board expects will require an extension of its banking facilities and a waiver of a possible covenant breach at 30 June 2016.

Discussions with the Company's debt providers regarding the Company's liquidity requirements and the possibility of covenant breaches are ongoing. The Company has also commenced discussions with major shareholders regarding an equity capital raise of up to £50 million to reduce leverage and provide the working capital to support the development of the business.

So a substantial equity raise is on the cards, as I expected. We're now in the realms of the unknown. It all depends whether existing shareholders are keen to support the company, or not. To a certain extent they have to support it, otherwise the value of their existing shares could be destroyed if a deeply discounted Placing occurs.

If major shareholders are indeed supportive, then the discount on the new equity fundraising might be quite modest. Or it might be quite large, we simply don't know.

There's a risk that private shareholders may not be allowed to participate in the fundraising. Therefore for us, buying shares now would be little more than a gamble.

The rest of the information given in today's statement sounds reasonably alright - i.e. in line with the trading update given on 4 Apr 2016. Although note that the more precise revenue & adj. EBITDA figures given today (for y/e 1 Apr 2016) are near the bottom of the previously…

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sirsege

27th Apr '16

Average PE of health care equipment is closer to 19. I can smell a massive rerating. Or maybe something is being overlooked.?

GavSmith01

I think you are including a non-recurring item in your EPS calculation. Stripping this out, the company made 28c EPS, putting them on a historic PE of 14 after today's rise.

Richard Goodwin

Snag is that Lifeline Scientific Inc (LON:LSI) are considering the future of their AIM quote. It is a vicious circle, little interest in the shares leads the company to leave the exchange, the risk of which leads to little interest in the shares. Lifeline have been a slow growing fast growth stock for years, so either it is all coming together now (perhaps in time for a departure?) or is it a blip?

vik2001

hi paul. will you be covering Dillistone, great results from them today.

roger ashworth

Hi Paul, Any chance that you can comment on Trak's trading update yesterday, as I know you had an interest in this stock.

dustyie

The issue here with this company is why a small unknown US company is listed in the Aim market , it a red flag to me , The track record of foreign companies list on the Aim market is very poor , The question to ask . Is why investors in there country not willing to invest in them ?

cig

A batch of US small caps listed on AIM a few years ago to enjoy cheap capital and a lower regulatory burden (see 2-tiered share structures some of them have to avoid SEC reporting). This wouldn't make sense today, but is nowhere near as dodgy as more exotic foreign listings. Indeed there's potential upside to them converting to a domestic listing on say NASDAQ, which should be reasonably seamless if your broker supports US stocks.

pcbloods

Thanks Paul for your analysis of Sepura - got out at the right time. Such a pity about them as Teltronic seems a very good buy going forward.

doug2500

I'd like to thank Paul for his previous coverage of Sepura which has saved me a lot of money.

I'd read the profit warning and decided that the damage was done now and I'd hold onto my shares. Then I read Paul's commentary in which he predicted a placing at a discounted price, and pointed out that sales slipping into next year should really lead to an increase in forecast earnings. Then I slept on it, read both again, thought about it and sold out for a good profit at 126p. The risk of him being right was far greater than the reward of sepu muddling through, in my opinion. Had I held my profit would have vanished, so thanks Paul and keep up the good work.

I will keep watching sepu and might well be back when the dust settles.

shanklin100

Hi Paul

I'd just like to apologise for clicking on the Vote down button when I meant to click on the Vote up one. Its unfortunate there is no way to correct this, albeit I will be more careful in future.

Best Regards, Martin

Paul Scott

Hi Everyone,

I've got a long list of stocks that I want to report on, but don't have time at the moment, as I'm splitting my time this week between the usual Stockopedia reports, plus being FD for a couple of private companies in the afternoons, and spending time with family (as I am up North visiting them this week). So I've only had time to focus on fewer stocks.

However, I will do a catch up report at some point, or maybe a video (as it's quicker), to report on the following companies:

From yesterday:
Trakm8 Holdings (LON:TRAK)
Carpetright (LON:CPR)
Sprue Aegis (LON:SPRP)
Ab Dynamics (LON:ABDP)
Snoozebox Holdings (LON:ZZZ)

From today:
Synectics (LON:SNX)
Proactis Holdings (LON:PHD)
Crawshaw (LON:CRAW)
Character (LON:CCT)

Just thought I'd let you know that I will get round to reporting on the above stocks in due course.

Regards, Paul.

Thanks Martin!

I was wondering who I had upset & why. It's usually fairly clear why there's a thumbs down vote - someone who is long of a particular stock, and doesn't like me telling it how it is!!

Regards, Paul.

Hi Paul

LOL, on that basis perhaps I should post a list of my holdings so you will know when I might be tempted to do a thumbs down vote :-)

Cheers, Martin

P.S. I do have shares in CRAW but thankfully was not caught out by any of the weakly trading and/or B/S disasters of recent days.

ganthorpe

Re Dillstone comment above
I looked briefly at the figures this morning , but I didn't think they were particularly good. I must have missed the good points.
I realise that they pay a dividend on a yield of 5% but not great cover.

rjmahan

Hi Paul another company which reported today is Rasmala Rasmala (LON:RMA) a - I am interested in this as the BS has c £80m of cash and a Market Cap of £25m, it returned £20m of capital last year.

What do you think...

My blog on it is here:
https://deepvalueinvestments.wordpress.com/2016/03/14/rasmala-investment-manager-trading-at-less-than-net-cash/

truegent

hi everyone, the problem with LSIC as i saw it was that they were burning cash quite rapidly and a placing was surely on the cards if this continued....however todays set of results showed great cash flow, if they can do this every year then its problem solved. anyway the cash situation was the reason i didnt invest when they released their 'above expectation's RNS a few months back.

Beginner

28th Apr '16

The Dillistone (LON:DSG) dividend cover seems to be x1.5, and recurring revenues now seem to raise all the costs of running the company. If this is the case, it seems to me that the dividend should be sustainable at a decent level. I should say I am a long term holder here. The seems to me to be a well-run company with good resources in terms of staff and assets.

Ref Dillistone
My reservations briefly
1) There is a tax rebate of £140K credited in the latest year against a £160K charge in the previous year - a swing of £300K , allowing that a normal tax charge may have been £160K in the current year, Note also that the tax charge is well below the usual 20% in the previous year.
2) If you take out the Goodwill and Intangibles the net tangible assets are a shortfall of £2.5M
3) I noted the relatively large acquisition based charges in both years ,
4) If you adjust the tax charge referred to in 1)to a more normal level the profits are down from the previous year.
5) I don't rely on tax rebates to calculate dividend cover or earnings per share , which Dillistone do.?
We have differing views and now you have the negatives.That's what makes the Market
Some see a glass half full others half empty.
Best of luck with your investment

xcity

Dillistone (LON:DSG) price rose 10% on day. Net cash on balance sheet, as usual. Dividend covered by FCF. Outlook positive. Not one to buy if you want excitement but do seem to be well managed with a good position in their (competitive) industry. I bought a few the last time Paul mentioned them, and will probably buy more if/when they have a setback. Quite a wide spread, so better for long term holders than traders.

andrea34

Is it just me, or is the market rather more volatile than it used to be? We seem to be seeing massive price movements, some of which are totally irrational, as per OUT. Maybe part of it is due to increasing greed over profits from market makers...?

Small Cap Value Report (27 Apr 2016) - SEPU, PRES, BLUR, OUT

Sepura (LON:SEPU)

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Paul Scott

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