Small Cap Value Report (29 Dec 2014) - INL, STAR

29th Dec '14 by Paul Scott

24 comments 19628 reads

Good morning! I trust everyone had a relaxing break over Christmas. Four days of the markets being closed is enough for me, so it's good to be once again getting an adrenaline fix from the markets today!

As expected, there's not much in the way of news today. However, I always like to keep my eyes peeled at this time of year for unusual price blips up or down, which can create good opportunities for things on the watch list, where I'm already fully prepared on the fundamentals, so know exactly what prices would be attractive to buy or sell at.

Year end tips in the press can also distort prices in a thin market.

Inland Homes (LON:INL)

Share price: 59.5p
No. shares: 202.8m
Market Cap: £120.7m

My observation from a stormy AGM several years ago was that management had a very high opinion of themselves at this brownfield property development company, which was not justified from the company's results at the time. However, as you would expect in a housebuilding boom, things are improving dramatically now, with a lot of good newsflow lately. There's more good news today:

Funding JV - today's announcement is self-explanatory;

54a11b11a7053Screenshot_2014-12-29_at_09

This looks an interesting deal, whereby the two companies pool their expertise, and CPC Group provide 80% of the financial firepower, to secure development sites in London. Interesting also that they are looking to sell them on, once PP has been obtained, so booking profits more quickly and presumably recycling the capital.

The Candy brothers are usually associated with ultra-high end London developments, so it will be interesting to see how this pans out, but it looks positive for Inland anyway.

Starcom (LON:STAR)

Share price: 10.5p (up 75% today)
No. shares: 84.4m
Market Cap: £8.9m

A reader has asked me to take a look at this micro cap, which has put out news today that has triggered a 75% rise in share price, about a partnership with a large Porsche dealership in Germany, for the company's tracking devices.

Whilst it sounds a great endorsement of the product, putting my sceptical hat on, the announcement contains no financial details, and also note that it is only to offer the Starcom product as an optional extra - so who knows what the take-up will be? Also there have been vehicle tracking devices around for…

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FREng

29th Dec '14

I have no knowledge whatsoever about the policies of Better Capital, but Private Equity seems too often to load a company with debt and then withdraw as much as possible of their initial investment.

Deegee Eff

Perhaps the costs of redundancy should be treated differently. Why should small special purpose companies (eg private equity) be able to arrange their affairs so that in the event of bankruptcy they are not liable for the lay off costs,whilst other companies (eg Rentokill) presumably would have to meet this liability?

DarwenLad

Jon Moulton's defence of Better Capital's investment in City Link on BBC Radio 4's Today programme is well worth a listen:
http://www.bbc.co.uk/programmes/p02g26r5
Mr Moulton has been regularly feted by the media as some sort of investment wizard, yet a look at the performance of Better Capital , his absurdly named investment trust, indicates how far his star has fallen amongst the investment professionals. There was a period when Better Capital was trading at a handsome premium to its net asset value reflecting Mr Moulton's supposed investment skills. Now its two quoted vehicles are trading at discounts of between 19 and 23% - roughly three times their average discount over the last 12 months.
Mr Moulton has a 11.2% stake in Better Capital so he is clearly feeling the pain of his group's poor investment selection. What is more worrying is that supposedly sensible investment managers, such as Ruffer and Blackrock, which own 28.7% and 11% respectively, seemed to have been sucked into the belief in Mr Moulton's private equity prowess.

Ramridge

Re. City Link & Better Capital. In the UK's insurance sector, there exists a Policyholder Protection Scheme designed to protect policyholders and beneficiaries in case of the insolvency of an insurer, serving as a backstop against claims. The compensation scheme is funded by levies on all authorised insurance companies. Each firm's contribution is calculated proportionally on a tariff based on the size of their liabilities. This is all regulated and supervised by the FCA, Financial Conduct Authority.
It may not be perfect but it seems to me that this system is as fair as you can device in a free market economy. Why not extend it to other sectors?

Paul Scott

Good grief, have you seen the price action at Starcom (LON:STAR) this afternoon?! It finished the day up 258% at 21.5p!!
Some really amazing speculative moves in micro caps at the moment. But they usually come back down to earth with a bump after a while.

Flackwell - re your comment on my comments on City Link - judging from your comments, it's obvious that you've just misunderstood the points I was making. What I was trying to say was that, yes it does indeed look awful that the taxpayer is picking up the tab for the redundancies at CityLink. On the other hand, if you factor in the fact that Better Capital saved it from almost certain insolvency several years ago, and tried to turn it around with fresh investment, then seen as a whole that rescue must have resulted in a considerable net contribution into Treasury coffers from the company continuing to trade for a couple more years, and pay a lot in PAYE/NICs, etc, compared with if it had gone bust a couple of years ago.

I'm not defending the methods of PE at all, but it's difficult to criticise when Better Capital actually made a stoic attempt to save the company & turn it around. It didn't work, so the company has gone bust. That's capitalism. The people move on, and get jobs elsewhere. We have to accept the failure of inefficient companies, as part & parcel (geddit. Too soon?) of a successful economy, where people and capital are allocated to the most efficient companies.

It's a pity that the general public simply don't understand that crucial aspect of economics, and it makes me angry that politicians exploit such ignorance in order to play electoral games.

Regards, Paul.

cig

30th Dec '14

Most other sectors don't have insurance-like long liabilities, customers just buy the product/service from a competitor and don't loose anything from a bankruptcy, other than having to spend a bit of time finding a new supplier. If they have a pre-paid pending order that isn't delivered, they'll usually get reimbursed by the administrator as they are on the very top of the creditors list so there will usually be enough for them.

On CPC/Inland, isn't there a risk the joint venture resells the land with planning permission to a Candy Bros development vehicle at a "friendly" discounted price? If you put 80% of the money in a thing, you may as well have it do what you want...

Maddox

INL: more questions than answers on this JV. What is the strategic rationale? What's the profit split? What will this deliver in future profitability?

You know what?! Just ignore everything I say! In fact do the opposite - you will have doubled your money by 4:30pm!!!

This is scary stuff. Makes me think we are maybe in 1999 again - near the top of a bull market?!!!

BE CAREFUL!!!!

Things are too expensive now. Stocks that should be on a PER of 12 are on a PER of 20. Forget it! Keep cash on the sidelines and buy on the dips, would be my thinking.

Flackwell

Ye gods - read the sentence

Although it does look very bad that the taxpayer is apparently picking up the bill for the redundancy payments, whilst Better Capital is able to apparently retrieve £20m (half its original investment) due to having security over assets.

So who do you think should pay?

Where does it say there's not enough for redundancy payments? A company being insolvent means it has more liabilities than assets, not that it has zero assets. Redundancy payments are pretty high in the pecking order, thus if there's anything left for investors, it probably means the redundancies will be paid in full.

Fangorn

31st Dec '14

Any reason the Small Cap report thread dated 30th December is closed to new posts?

I suggest you re-read the initial story, most notably

"the taxpayer is apparently picking up the bill for the redundancy payments"

Or perhaps read the press

But ultimately let's see the final outcome - be it your spin (unlikely) or whether the initial story pans out (most probable)

In the meantime Happy New Year

intuitive6191

Acording to reports, Better Capital structured its original investment of £40 million as a loan to City Link. This apparently makes it a secured creditor which ranks above employees. At the moment it is far too premature to guess how much Better Capital might recoup as this will probably depend on recent trading.

As City LInk was put into Administration on Christmas Eve ( when it had probably received year high cash inflow) and then subsequently failed deliver some of the items it had been paid for, it could be thought that the Company was put into Administration at the point when it had the maximum cash to distribute to secured creditiors (Better Capital).

I for one wont be too surprised if Better Capital recoup more than the £20 million,

In my opinion BC acted immorally - they must have planned the admin in advance and therefore took on sub-contractors for the peak December month only to leave them unpaid come Christmas Day

And if you don't think that's true then ask yourself why they were touting the business around for a new buyer - they knew they were in deep and yet they used the system to the maximum advantage - maximising revenues and then avoiding quarterly rent bills which fall due on Xmas Day

Problem is it didn't sounds too plausible as a story. It seems the crux of the problem is here, from The Independent's story:

"[Better Capital] stands at the front of the queue of creditors, even ahead of the 1,000 drivers who were put on self-employed contracts after the takeover."

So basically it seems people who won't get redundancy payments are those who are not due redundancy payments because they are set up as small businesses. It's a pretty subtle problem. Maybe they were tricked into that status, but what do you do? Ban self-employment? Have some government office approve self-employment contracts as people can't be trusted to make informed decisions? Some of this may well be a good thing, but can you imagine the flack (nanny state, red tape, etc) any government that introduced such measures would get?

Maybe they were tricked into that status

Most likely they were given no option. Its just the tip of the self employed iceberg which is now proping up the economy. It looks very good for the employment figures - until something like this happens and everyone realises that there is a hidden cost to such a policy.

The more I read about this it seems to be that Better Capital set the whole thing up to minmise their own business risk at the expense of the workforce and the tax payer.

peterg

1st Jan '15

Have some government office approve self-employment contracts as people can't be trusted to make informed decisions?

The trouble is with this sort of scam (which it is) is that informed decisions don't come into it.Presumably the decision was along the lines of - you want to keep your job? well, now you're self employed!

Presumably the decision was along the lines of - you want to keep your job? well, now you're self employed!

It sounds likely, but then for a market economy to function you need workers to refuse crap conditions, and say "no, I don't want to keep the job in those conditions." Individual cases are not going to be easy, but it does work to some extent in that there are people who are paid more than the minimum wage, which wouldn't be the case if workers had no bargaining power at all.

Arguably delivery driver may not be the best bargaining position (although there are a number of employers and alternative jobs one can do). It would be interesting to know if the measure increased staff turnover at Citylink and/or had an impact on productivity (e.g. if the more clued drivers leaving for better jobs or employers, or the people staying got demotivated enough to work less efficiently).

2nd Jan '15

Still immoral - the solution could be as simple as insisting owners invest equity and are barred from using loan capital (that ultimately is repayable to them - thus permitting bank finance for example)

Small Cap Value Report (29 Dec 2014) - INL, STAR

Inland Homes (LON:INL)

Starcom (LON:STAR)

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Paul Scott

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