Small Cap Value Report (29 Nov) - SEE, VLK, SDY, HVN

29th Nov '13 by Paul Scott

24 comments 25285 reads

Good morning! As usual I'll look first at announcements from my watch list, as they have a news flag that automatically and promptly pops up against each company name on my monitor (I use MoneyAM, as it's only £23.99 per month for unlimited live prices, including Level 2). By the time I've digested them, my other news services have cranked into life.

As we're in a bull market (for the time being), I'm including some slightly more speculative stocks into my portfolio, but nothing blue sky. However, I've become a bit more flexible on my parameters for GARP (growth at reasonable price). This allowed in a very interesting Australian company into my portfolio a few months ago, called Seeing Machines (LON:SEE) . They are AIM Listed, and it's a technology company that specialises in visual computing systems that track faces and eyes in real time. This has application across many sectors, especially focussed on detecting driver fatigue, where the technology is the market leader under an exclusive deal with Caterpillar in the mining sector. As the cost of production falls, then other sectors will open up, especially road transport, but also consumer electronics. It's really exciting stuff, with multiple opportunities, and best of all the company recently moved into profit. So it's a proper product, that is already selling, not a fancy idea.

They have announced a substantial fundraising at 5p per share today, to rise £16m before expenses. That involves the issue of 300m Placing shares (in two tranches, to allow for an EGM to authorise the dilution), and a further 20m shares in an Offer to existing shareholders, although the Offer shares seems to be directed only at professional or sophisticated Australian shareholders, and unspecified existing UK shareholders. So it's not clear whether all existing UK shareholders will be able to participate or not, this needs to be clarified I think. The Offer shares are also subject to scaleback, if over-subscribed.

The Market Makers have pre-emptively marked the share price down sharply to 5.5p Bid, 6.0p Offer (from last night's close of about 7.35p, to prevent people flipping stock for an instant profit (I doubt anyone will bother for just 10%, but might well have done for 30-40%!).

Although it should be noted that the share price has only recently risen above 5p (in mid-October), and above 6p…

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kevanp

29th Nov '13

Morning Paul

Re Seeing Machines (LON:SEE), you wrote: "So it's not clear whether all existing UK shareholders will be able to participate or not, this needs to be clarified I think."

I've read the RNS on Investegate (I note it hasn't yet been published on SEE's own website!). The paragraph headed Overseas Offer states that all UK shareholders on the register on 28 November will be invited to participate. Here's the relevant section in full:

The Company proposes to invite existing shareholders with registered addresses in the United Kingdom and certain other jurisdictions (excluding Australia) to subscribe for new Ordinary Shares ("Overseas Offer"). A circular and application form relating to the Overseas Offer will be sent to existing shareholders with registered addresses in the United Kingdom and certain other jurisdictions (excluding Australia) into which the Company may lawfully extend the offer without the publication of a prospectus. Those shareholders entered on the register at 18:00 (London time) on 28 November 2013 (the "Record Date") will be entitled to participate in the Overseas Offer. Such qualifying shareholders will be able to apply for any number of new Ordinary Shares at 5 pence per new Ordinary Share but, if the aggregate amount raised under the Australian Offer and Overseas Offer exceeds £1 million, shareholders will be scaled back at the directors' discretion. The circular and application form for the Overseas Offer, including an expected timetable, will be sent to all qualifying shareholders in due course and will also be available at www.seeingmachines.com.

Best

Kevan

Paul Scott

Hi Kevan,

Re Seeing Machines (LON:SEE) - It doesn't actually specifically say all UK shareholders will be able to participate in the Offer, we're assuming that they mean all, because they haven't qualified it in any way. Which is probably a reasonable assumption to make, but it still leaves a slight question mark in my mind.

Regards, Paul.

True, the word 'all' is not used. But though I'm no lawyer, I am a pedant, and the phrases "existing shareholders with registered addresses in the United Kingdom" and "Those shareholders entered on the register at 18:00 (London time) on 28 November 2013 will be entitled to participate in the Overseas Offer" are pretty unequivocal!

Anyway, we shall see.

Thanks as ever for your invaluable reports.

bicboy100

Paul,
Understand the rationale for the punt on SDY, but fundamentally it's an overvalued, capital intensive, low margin business ( all the things you usually avoid). Hence the overdone reaction may be to some extent justified. Certainly more of it than seemed correct first thing without looking at fundamentals. I haven't looked at these for some time (held successfully for many years when they were in their growth phase, buying up the small independents). But would worry where the forecasted big leap in eps is supposed to be coming from - if overseas that would be additional worry, and explain further the fall. Anyway had a look at it and decided it's not for me - good luck with it.

Lee

Paul,
Also meant to say well done and keep the reports coming - this has become the first thing I read of a morning now after checking my own RNSs

Lee.

Tamarix

Hi Paul
Re: Harvey Nash. I see you are quite positive on it - but why does it have an Altman-Z score of 1.86 (Danger of Bankruptcy)?

harry34

Excellent article as always Paul, thank you

I have invested in VLK because I think they are in a market with lots of sub-scale niche players that could be acquired for comparatively low amounts, (comparative to other sectors that is). I wonder if Trakm8 could be a target? They already do business together, and TRAK's strategy is to grow reoccurring revenues. Could be a good way for VLK to boost earnings, as well as gain exposure to new market segments? Anyway, it's an interesting journey they are on.

Hi Tamarix,

I find that plenty of fundamentally sound companies have Altman Z-scores in the "Danger" sector. So it's worth double-checking the Bal Sheet (which I do anyway), and net debt compared with earnings & cashflow.

Generally though the Z-score is only a red flag for me if the reading is in the "Distress" section. As you can see, the Z-score for Harvey Nash (LON:HVN) is well clear of the "distress" area shaded orangey/red:

SevenPillars

Paul

Interesting that you have had a flutter on Speedy Hire after today's announcement. I was wondering if you could tell us a little more about your approach to buying companies on falls like this which are often seen as a falling knife or maybe entering a longer term downward trend. The general advice tends to be to wait because once a share starts to fall it is difficult to predict when it is likely to stop, better to let the dust settle. Technically on the chart it can look ugly. Certainly Speedy Hire's chart today is ugly, although it looks like the long term support at about 50p, at least for now, held. Does the chart matter, or do you base your flutter purely on an assessment that the fundamentals will eventually come through?

Hi SevenPillars,

I don't really have anything more to add other than what was in the original article.
The accounting irregularities only affect 5% of SDY's business, so the 17% fall in price looks overdone. Anyway, I got cold feet about it when the price didn't rebound much, and the valuation didn't look good value even after the fall in price, so I ditched them at lunchtime for a small profit.

Probably shouldn't have mentioned a trading idea in this report, but it looked an interesting situation & was topical, so thought it would be interesting to see what other people thought too.

Regards, Paul.

DarwenLad

Agree with bicboy100'sview on SpeedyHire . The resignation of the ceo Steve Corcoran suggests that it might be more than a local hiccup. Corcoran has been with the business 25 years, and is one of the prime architects of its growth.

Ramridge

Re. Harvey Nash. Revenue up by 15% but op profit remaining flat is a worrying sign. I had a look at their last full accounts and they operate on razor thin margins. Recruitment business is a very competitive sector and it looks as if HVN are are buying business at the expense of profitability.

woodcutter

30th Nov '13

Seven Pillars

Price drops on the day can be decent trade opportunities if you can handle the potential risks. From a TA perspective if you follow candlestick patterns a good guide is if the sp opens on the day and rises to finish above the open (the candlestick is green) then this is usually a sign that the drop is overdone and the sp will rise over the coming weeks, even if it falls a little the following day. The key is to monitor the sp through the day. The longer the candlestick the stronger the case for buying.

On the other hand if the sp opens and continues to drop further, finishing below the opening sp (the candlestick is red) then this is usually a sign that the sp will fall further over the coming weeks, even if it slight recovers the following day.The longer the candlestick the stronger the case for selling.

As always with TA it doesn't always work but in my experience this strategy works more often than not.

I'm generally long term investor but if i'm taking a punt, as i believe paul is in this case, then this strategy can be pretty succesful.

Hi Ramridge,

I disagree with your points on Harvey Nash (LON:HVN) . You need to follow through the sequence of trading statements from them this year. They had a poor Q1 due to problems at their German subsidiary, which are being fixed. Performance has therefore improved with each statement this year, showing an improving trend.

My summaries of each statement this year from Harvey Nash are here.

On the low margin thing, remember that the turnover figure for employment agencies is inflated, because it includes the wage of temporary employees that just pass through the P&L. So you should really ignore turnover, and focus on gross profit, which is effectively the real turnover figure for this type of business.

HVN should show much improved year-on-year figures from 2014, especially in the first half - remember that one year's underperformance is next year's easily beaten target, providing the underlying problems have been fixed! So that's why I think this is a good time to buy HVN - as their trading is improving, and they will shortly be up against weak comparative prior year numbers, so will be reporting strong uplifts vs prior year in early 2014. Also the valuation is reasonable.

Cheers, Paul.

lightningtiger

Hi Paul, thanks for your report on seeing machines which I bought a while ago. It seems even TEP is raising money to buy N Power, 1 new share for every 35 shares held. Hopefully both companies will benefit in the longer term from the fundraising.
Cheers from Lightningtiger

Hi Lightningtiger,

Good to hear you are also on board the good ship Seeing Machines (LON:SEE)

I've seen the company twice in recent months, and I think it's one of the more convincing & exciting growth stocks out there, still at a reasonable valuation. Although having said that, by the time full dilution has occurred from the Placing, the market cap will be a pretty lofty £57m (at 7p per share). That's a lot for a company that's just reached profitability.

Having said that, with the best growth companies, in a bull market, I think you just have to put worries about valuation aside (very difficult), because other people will take the shares higher. Trouble is, the most stretched growth company valuations are the ones which crash the hardest in a bear market. So quite a quandary. However, for the time being I think that SEE has such huge market opportunities, and is already commercialising the mining sector as market leader, that it's now just a roll-out of the technology really into other, much bigger markets. Therefore that can justify a hefty premium. I wouldn't be surprised to see the market cap here in the £100-200m range next year, if all goes well. There are plenty of small growth companies in that type of range which make modest profits (or even losses) currently - e.g. Lo-Q, Digital Barriers, WanDisco, etc.

Regards, Paul.

1st Dec '13

Hi Paul. I take your point but still mystified as to why the accounts show such low gross & op margins when the industry typically makes circa 35% on permanent staff and circa 20% on contract and temps. But your investment argument for improving financials against low comparatives is logical. Just a small nag in my mind. Around 55% of HVN revenue comes from mainland Europe. Whilst there are clear signs of recovery in the UK with increase in staff recruitment, growth in Europe in 2014 is forecast to be around zero.
Regards, Ram

Sully8786

Morning Paul,

Re Vislink (LON:VLK) , if we factor in 20% dilution taking the total shares to 136,680,000 and assuming they meet their target of £8mil profit then that means EPS of 17p??

Whilst I don't think the target is priced in at all and I'm sure that there is a plan in place I reckon that the shares 'll be battered if they miss....look at Petrofac (LON:PFC) for example.

I have a small position which gives me room to top up should the opportunity present in the future...for now cautious holder :)

Best,

Sully.

Hi Sully8786,

Your arithmetic has gone a bit wrong!
Vislink (LON:VLK) currently has 113.9m shares in issue, so the 20% maximum dilution would take that up to 136.7m, as you correctly state.

Next, take the £8m profit target, deduct Corp Tax of say 23%, so Earnings would be £6.2m.
Divide that by 136.7m shares and you get to 4.5p forecast EPS.

Put that on a PER of between 12-15, and you get a share price of 54-67p, so 19-47% upside on the current price.

Bear in mind the above figures include earnings from acquisitions with a total cost of about £15m - i.e. the company has existing surplus cash of say £5m, plus Memorial Production Partners LP (FRA:10M) from an equity fundraising above of 20% dilution, and that's before they have taken on any debt at all. So they should be able to bolt on a decent chunk of new profit (£3m+ perhaps) with a war chest of £15m.

Regards, Paul.

Thanks for putting me straight Paul, I thought I'd gone wrong somewhere :)

Not quite the upside I'd originally pencilled in! :)

Maybe one to tuck away though.

Best,

Sully.

Small Cap Value Report (29 Nov) - SEE, VLK, SDY, HVN

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Paul Scott

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