Small Cap Value Report (30 Jun 2014) - GTC, PTCM, ZTF, PLA

30th Jun '14 by Paul Scott

20 comments 22856 reads

Good morning! Friday's SCVR wasn't one of my best, so feeling a little guilty, I set aside a couple of hours to write a bonus article over the weekend - namely Part 2 of my series of articles reporting on the London Value Investor Conference in May 2014. So here it is - an article covering a speech from Charles Heenan of Kennox.

I've also set up a dedicated website for my Brighton investor group, following last week's successful evening, so anyone interested might like to peruse & bookmark the link. Good old WordPress - it makes setting up new websites such a pleasure, and it's remarkably easy too.

I don't know where to start with this morning's announcements, there are loads of them, so it's going to be a busy morning! The Aldi Colombian is kicking in (coffee!!), so let's crack on!

Getech (LON:GTC)

This is an odd situation - the company warned on profits a couple of times, most recently on 10 Jun 2014. However the very next day, it announced a major $2m contract win, together with an indication that further contract wins were in the pipeline.

Management credibility is returning rapidly in my view, as today they have announced a further $600k contract win, all of which is being recognised in the current financial year (ending 31 Jul 2014). So I am coming round to the view that this company is fundamentally sound, but that they just have an inherently lumpy sales profile (small company, but large contracts with uncertain timing). There's nothing they can do about that, so shareholders will just have to either get used to volatility in the newsflow, and hence share price, or sell up and move on.

I like buying sound companies after a series of temporary disappointments, as especially in a generally rather pricey market, that can be the best way to get bargains. The difficulty is sorting out good companies with temporary problems, from bad companies that are in decline.

These shares look potentially good value in my opinion, although we won't really have the full picture until results for the year ending 31 Jul 2014 are released. I hope the company improves on the 3-months it took to report the figures last time. I note that they issued "Final Results" last year on 29 Oct 2013, which presumably means they…

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shanklin100

30th Jun '14

I am still not too certain about GTC but with two recent contract wins I have bought the 10k that was available at 45.75p. I am still concerned at what the FY results may bring but if they go on winning contracts the market may well be prepared to look past them. At least there is a cash buffer which should enable them survive a weak 6 months trading.

Will consider adding more on further contract wins.

FREng

Paul

Your positive comments on Porta Communications (LON:PTCM) are particularly interesting, since the Stockopedia traffic lights and rankings make it look bargepole. Is there more behind your optimism than just the director buys?

It's not clear from your article whether or not you have a position in this stock.

Ramridge

Hi Paul -
Re GTC. A company that issues several profit warnings and closely follows with news of major contract wins hardly adds to its management's credibility.

muckshifter

Have to disagree with you about Friday's SCVR Paul! It was pithy and to the point, but it also gave great comfort to those (many?) of us who occasionally do whatever we do in the mornings, with alcohol still coursing through our veins from an enjoyable evening the night before.
No penance needed.
Regards.

Gostevie

Hi Paul,

Very impressed with the BIG website, and the events look like great fun. I'm a Londoner but will definitely try to make it to the September one. Presumably there are budget hotels in the vicinity that won't be fully booked at that time of year.

Regards,

Steve

Beginner

I have to agree with muckshifter I am afraid! Perhaps it is the repressed, garret-dwelling artist in you, who needs the occasional inspiration from drink. Try the absynth Paul!

Re Getech (LON:GTC) , I noticed an awful lot of director sales over the years and no buys. They consistently sell in the high 50s or low 60s, so that may be the measure of the company. Reading their last statements the implications are that the good news was all already factored in.

mgallear

An impressive piece of analysis by Paul Scott on insider trades.. I will give PTCM a good look.

I suspect that most small deals are really dividend reinvestment and are not meant to trick investors at all as most directors do not realise that there trades are followed. (I have a cut off figure and just ignore trades below this figure.)

Transfers in and awards can wrongly be described as buys or sells. There is a big difference of opinion as to what some of these trades are by different sites recording them.

Remember that insider dealing is illegal even if declared so do not expect the directors to be too obvious.

Some authorities think you should ignore buys by a new chairman who often make a large purchase at the start of their term. Buys and sells by financial directors are considered more important than by other directors as they are better placed to see what the company is doing and as ordinary working managers are unlikely to make grand political gestures. (The rich can be just as greedy as the poor.)

My little system tends to ignore buys in small companies, as they tend to be small in magnitude. Check to see if they are bigger than ever before or a number of directors have bought in quick succession.

WARNING - Director buys are no guarantee of success so only consider buys that appear in your screens and you would consider buy them for other reasons – value, growth etc.

Looks like lots of people are thinking for themselves anyway!

marben100

Worth mentioning that Plastics Capital (LON:PLA) also reported preliminary results to 31st March today.

I still have a few shares in the company left, having bought originally at 30p in 2010 and topsliced heavily along the way.

The results are a bit of a curates egg:

Positives:

Modest revenue gains
Modest improvement to gross profits
Good adjusted profit increase
Strong operating cashflow, ahead of profits
Reduced net debt and substantially raised dividend (but after a small placing in 2013 justified by an acquisition)
Solid outlook and growth prospects

Negatives:

There are a lot of "adjustments" and the "exceptionals" figure is substantial
Unadjusted Profit has declined at the pre-tax and net levels
Cashflow doesn't look quite so healthy after heavy CAPEX, matching depreciation
Business is not firing on all cylinders, with some divisions performing better than others - but this could represent an opportunity for future improvement

I look forward to meeting the company and grilling executive chairman Faisal tomorrow.

Cheers,

Mark

Paul Scott

Hi FREng,

Porta Communications (LON:PTCM) is a growth company, a start-up in the last couple of years, so that type of company will almost always look horrendous on the Stockopedia traffic lights & rankings. Especially as in this case where there are no broker forecasts to work on for things like PER, EPS growth, etc.

So it's a different type of investing really. What I see in Porta is an experienced management team who have done it all before, and a series of people businesses (PR companies) being created rapidly, which don't require much capex, and where you can rapidly build turnover from using the contacts & experience of the people you employ.

Growth company investing is higher risk, but every now and then I spot an interesting opportunity, and Porta is one such case. Although as I mentioned in a report a few days ago, I feel that they exaggerated the true performance of the group in a trading update in Jan 2014, which was very misleading. The issue was that they classified "start up costs" as being the first two years' trading losses! Which is crazy. However that treatment appears to have stopped now, and much more conservative reporting is being done.

Decent sized Director buying is a good sign too, in my view, for the reasons given in today's article.

I normally avoid growth investments, where companies have no established track records of profits/divis, but every now and then something interesting comes along that looks credible to me, and Porta is one such case.

As always, please DYOR. It's not one that I've gone into too heavily, it's about 4% of the long term part of portfolio.

Regards, Paul.

Hi Ramridge,

"Re GTC. A company that issues several profit warnings and closely follows with news of major contract wins hardly adds to its management's credibility."

Yes and no, on this point. What the profit warning said, is that there were big contracts close to being signed, but that most of the turnover would fall into next year (the year commencing 1 Aug 2014). Hence they had to warn on the y/e 31 Jul 2014 regardless of what happened with the new contract wins. They are obliged to publish that information once they become aware of it.

So I think you're being unduly harsh on them. The key issue is that the big contacts HAVE been signed now. That's all that matters. Shareholders will just have to get used to this kind of volatility, it's inherent in the company's business model.

Regards, Paul.

Thanks, Paul. That's clear now.

FREng

Hi Mark,

We crossed in the post! I've just finished my write up of Plastics Capital (LON:PLA) and came up with a lot of similar points as you. Although I must say your bullet point formatting is much better than my reports. I might try out that style in future, to make these reports a bit more concise.

Regards, Paul.

Hi Paul. OK I take your point. But let's consider the opposite. Management issue a very bullish statement... big contracts are very likely to be signed this y/e... results are likely to exceed market expectations. and so on. A few days later they issue a profit warning. Would the market be so understanding and put it down to inherent volatility? Well methinks there would be quite a few juicy unprintable remarks made about management's credibility.

DarwenLad

Re:Porta Communications. One of my rules of thumb is never to invest in mining companies or banks, and the same goes for PR companies, like Porta, with rapid growth driven by acquisitions.

I have no sense of how astute Bob Morton is, but sense that the CEO’s share acquisition fits your view of someone trying to support the share price ahead of more paper-financed acquisitions. Porta’s shares have been trading at a sizeable discount to the 13p a share which was the placing price when the company raised £7m last March – increasing the number of shares in issue by a third.

Over the last couple of years Porta’s revenues have jumped from less than £1m to £24.4m and yet the company remains loss-making. At last week’s AGM the CEO stated that after five months of the current year, “the performance of the Group remains on track, making substantial progress towards our goal of delivering positive EBITDA after all costs for the full year.”

That said I was more than a little surprised by some of the ‘big’ names on Porta’s share register – a small company with a market cap of £27m. Hargreave Hale has 11.6%, Fidelity 7.0% and Ruffer 6.6%. These are serious investors, so perhaps my scepticism is misplaced.

monzo

I share your scepticism of PR companies. Low barriers to entry and over reliance on a few key people, plus a general mistrust on their own spin. There are plenty of other opportunities to be found elsewhere.

jimbobjames2002

Hi Paul, long time reader; first time poster on your fantastic blog.

Just wondered if you have any thoughts on today's latest news on Seeing Machines:

http://www.proactiveinvestors.co.uk/companies/news/69926/seeing-machines-lays-out-two-year-road-map-69926.html

Thanks, James

Hi DarwenLad,

I appreciate that Porta Communications (LON:PTCM) will not be most peoples' cup of tea.
However, as you say, it has very shrewd mgt (Bob Morton is Chairman, and the CEO has a strong track record of building PR businesses). Also, to correct one point, they are growing mainly by start-ups, and only a small amount of acquisitions. So they shouldn't have a Balance Sheet stuffed with goodwill like most PR groups that pay too much for acquisitions.

Yes they might well issue some more shares, so they no doubt want to pump their own share price, which I think they did way too aggressively in late 2013 & early 2014. They seem to be toning it down somewhat now.

There has been impressive growth so far, and I've put out feelers in the sector, and am told that Porta's operations such as Newgate & Newgate Threadneedle are sensible operations, and have offices in quite a few countries already.

They've done a helluva lot already, in a short space of time, so I think this is a potentially interesting company.

Not for most investors, I fully accept that, but it's the type of situation where you're really backing a serious management team, who've have been there & done it before, in a sector that is not rocket science. They should therefore be able to do it again, and this is the right time in the business cycle to be growing a PR outfit too.

It's not one that I'm prepared to back heavily, but have put 4% of my long term part of my portfolio in it, on a sem-speculative basis.

Hi James,

Many thanks for your kind comment!

As regards Seeing Machines (LON:SEE), I thought the update today was useful, particularly setting out in order of importance which sectors they are addressing.
I like the company. It's speculative, but they have the cash to expand the company, and I've met the CEO & FD a couple of times, and think they are a very backable team.

The technology is excellent, proven to work & being rolled out in the mining sector. It could turn out to be standard in every road vehicle on the road in 10 years' time, who knows? There is rail & aviation too. Plus lots of opportunities in advertising displays (to track what people look at), consumer electronics, etc.

So it's speculative, but further along the development road than many other AIM companies. So I like it, and hold some, although again I don't normally take big positions in speculative companies, because it so often takes longer & costs more to commercialise new things than anyone expects.

Regards, Paul.

StrollingMolby

Seeing results come out this evening for Eco City Vehicles (LON:ECV) you'd be forgiven for thinking these are for a year-end of 31-Mar - but no, these are for the year to 31-Dec meaning ECV has taken the full 6 months permissible to issue results before the shares would have needed to be suspended tomorrow. In almost all circumstances, I would not trust any company that could not issue its (relatively simple) results within 3/4 months - to take six is unforgiveable and is normally covering something up and delaying its release.

In this instance the results tell the tale of static sales (known I would expect), with net debt increasing from £1m to £3.6m, attributable to the purchase of a rental fleet. I've not heard mention of a rental fleet previously, having not followed closely as I've not held for almost a year, but does this activity provide decent margins or is it intended to support the used fleet prices? It's a good job the £2.2m VAT windfall was received else the position would have been worse.

The need for additional funding is also mentioned which will weigh heavily on sentiment until it is completed at a hefty discount. Working capital is just £704k for 2013 so can the company support its expansion plans ahead of the fund raising?

For me, ECV remains uninvestable whilst it faces so many headwinds. I'll continue watching but suspect it may be some time before a tangible recovery is seen.

1st Jul '14

Had a look at PTCM to see why people are a bit suspicious and its Altman-Z score suggests it is likely to go bankrupt and the Beneish–M score suggests they maybe lying, so hardly a super safe Paul Scott share. Hardly cheap in the first place and went up like a rocket!

Small Cap Value Report (30 Jun 2014) - GTC, PTCM, ZTF, PLA

Getech (LON:GTC)

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Paul Scott

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