Small Cap Value Report (3 Apr 2014) - SNTY, LZYE, MCB, IGP

3rd Apr '14 by Paul Scott

12 comments 16677 reads

Good morning!

Synety (LON:SNTY)

I attended an excellent meeting yesterday with the Chairman of Synety. As regulars here will know, this is my favourite bull market growth stock. Even the most disciplined of value investors should allow themselves a little excitement, and in my view this one could be a big winner if growth rates continue at the current very rapid rate (from a low base).

My comments here were highly critical of the company's recent Placing & Open Offer, because the discount was too large (and unnecessary) at 250p, a 20% discount, and existing shareholders were only allocated £0.5m of stock, in a 1 for 32 open offer. As an enthusiastic existing holder, I felt let down by this, as it diluted me at a highly attractive price for other people who got in on the Placing (unfortunately news of it didn't trickle down to me, despite me keeping my ear to the ground).

I didn't want to sour an otherwise very positive meeting, so waited until the end, and then asked if it was alright for me to raise some questions about the structure of the fundraising deal. I found the Chairman refreshingly open, and he tacitly accepted that the structure of the deal had upset a lot of people. Their problem was that when they started doing the fundraising, the share price was only a little over 250p, so it was a sensible price at the start of the process, but paradoxically the subsequent rise in share price was rather unhelpful.

I grilled the Chairman on why they had done such a tiny Open Offer (only 10% of the £5m total fundraising), and interestingly he indicated that tacking on the Open Offer onto a Placing incurred only very marginal additional fees. So the people who have been saying that companies save money by doing just Placings, are clearly wrong on that front. The main problem with the Open Offer is that the company had no idea what the take-up would be, hence if they had made the Open Offer larger, then there would have been a greater risk of the fundraising failing.

I found that amazing, as it's blindingly obvious to someone like me who is an active small cap market participant, that existing shareholders will not only mostly take up their entitlement in full, but…

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rmillaree

3rd Apr '14

Great Stuff Paul - Good that someone is sticking up for us Plebs and saying what needs to be said.
Surely companies can come up with some sensible course of action that is fair to all parties and gets the job done - as you say all the Brokers probably care about is their big fat fee and keeping their corporate mates in Champagne - (give me a bottle of dog any day)

Henry Walpole

Hi Paul

Re Synety (LON:SNTY) and 'I didn't want to sour an otherwise very positive meeting'. Are you able to give us any further detail on the meeting besides the points you have made about the Placing? i.e. what other questions you asked and any further insight on the company's plans?

Kind regards
Jon

Paul Scott

Hi Webpax,

It was over 1.5 hour meeting with Synety (LON:SNTY), and the Chairman talks very fast, so there was so much information imparted, I couldn't possibly do it justice here. We had a quick product demo, with the Chairman making a cloud telephone call through Synety, via Salesforce. It worked very well. Sales are now growing extremely rapidly, but from a low base. So they are really on a "land grab" to sign up clients whilst they effectively have no competition.

In my view it's one of the most exciting growth companies I've seen in a long time. I suggest you come along to the ShareSoc event on 8 May to hear more from the company.

Regards, Paul.

Many thanks Paul - yes I am already booked in to the ShareSoc event and looking forward to it.

NS23

Here's a daft question regarding Synety (LON:SNTY)

Forgive my ineptitude but i am still learning about the mechanics. Once the Placing and Open Offer is given the go ahead at the General Meeting on the 8th, and the new shares come into play on the 9th, what will happen to the SP? Will we see a sharp drop to near the placing price and a quick climb back up or will it stay at 300p (or whatever it is at cob the day before).

Basically I'm wondering if the placing creates a better entry price once those shares are available.

Edit: Forgot to say thanks...!

cig

That a small open offer is over subscribed does not though mean that you could raise the full amount with a larger one. The size of the open offer is an input to the decision when applying for shares: for instance I participated in the Seeing Machines (LON:SEE) one and I sized my allocation on both an estimate of the over-allocation (I subscribed for more than I really wanted, fully expecting not to get them, subject to the risk I would) and on the risk the price would drop as people do a quick churn (the smaller the offer the lower that risk). If they had been raising much more, I would have applied for less, or maybe not at all, as both risks would have been higher. With enough people behaving like that, the larger the offer the lower the total amount that is applied for. And if the market anticipates that, the mere announcement of a large open offer may itself depress the price, possibly to the point where the discount is too small to get any take up at all. So finding the sweet spot sounds supremely tricky.

Hi cig,

Those are fair points if a large open offer is on the cards. However, that is not the case with Synety (LON:SNTY). They raised £4.5m in the Placing, and just £0.5m in the Open Offer, so it was off the scale tiny. In my opinion they should have done something like £3m Placing, and £3m Open Offer. So that would have allowed a bit of room if there wasn't full take up.

Although at 250p the new shares were priced so attractively that it was blindingly obvious (to me anyway) that there would be heavy over-subscription.

In both the cases of SNTY and SEE, the Open Offer was far too small an element of the overall fundraising. The balance is not right. I understand the reasons why companies want to underpin a fundraising with a Placing, as it de-risks the whole exercise from their point of view. However, they must not freeze out existing holders with a token gesture of an open offer for a derisory amount of shares. Pre-emption rights do matter, and wherever possible should be respected in a meaningful way, not for a token amount of open offer shares.

I shall continue to rip apart any other companies & brokers that do ridiculously small open offers, as someone has to speak out against this bad practice.

Regards, Paul.

MichaelFBS

Wincanton "has tangible net assets of £400m negative" yes awful but how about Premier Foods (LON:PFD) ?

Paul

I don't suppose you feel like running an eye over Christie (LON:CTG) whose results came out last Monday? You commented on them last June. I actually think the RNS reads well but they are down heavily today and I have just not had time to look at the full accounts yet. It is a core holding of Lord John Lee who I have a lot of time for.

Thanks,

jonesj

Purpleski,
Will be interesting to see if John Lee writes anything about Christie, now he's started writing in the FT again. Think his next article my be due on Saturday,

Mark Simpson

Re: Christie (LON:CTG) I can only think that john lee has visited the company and has some specific reason for investing since his strategy is usually very conservative but looking at the raw numbers it looks more like a candidate to go bust...increasing debt, negative book value and consistently negative cashflow. Without some good info that suggests the business will generate significant positive cash flow in the near future this doesn't seem to me to be a business that one could invest in at any price.

I'm also surprised their banking covenants have allowed them to pay a dividend in the past since they've effectively paid it out of their bankers pockets.

I'd be interested if anyone knows why john lee thinks this is worth significantly more than the 30m EV? The raw numbers certainly don't suggest it is.

thomaschen

4th Apr '14

Hi Paul,
I have read almost all your report for a month now. I really like your research in company report, business model. I am not fully convinced with Synety's business, I didn't do much research into this company, here is just my view. Cloud call, cloud CRM system sounds very 'posh', in fact there should already have lots of players in this call centre, CRM system industry. though service might not totally the same as Synety. I do agree their have very good product and great idea. and I like their website, simple and rich in content. but a company being there for 5years now (my read from HL financial), with very low revenue. either problem with their sales or there is other product in the market which eat the market share. I do feel they are potential acquisition target by company like sales force or telecom. they are a good fit with Vodafone OneNet.

btw I am very new to the stock market. I would like to ask you question about Abcam and Amerisur Resources plc. Abcam I do like their business model, but their performance this year are disappointing. with 8% year on year compare to 28% last year. I already hold some at 424, planing to check if they can break the 360 to see if I need to buy more. Also on Amerisur I spent last night research this company, their performance are very good but stock not doing so well. on researching interim results, I am predicting full year results will be 190% to 230% year on year. what's your view on these two? Thanks

Small Cap Value Report (3 Apr 2014) - SNTY, LZYE, MCB, IGP

Synety (LON:SNTY)

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Paul Scott

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