Small Cap Value Report (4 Jun 2015) - PRES, SSY, VNET, VP.

4th Jun '15 by Paul Scott

33 comments 21657 reads

Good morning!

A close shave for me this morning, with two profit warnings, but luckily I managed to dodge both of them (having ditched both shares from my portfolio a few weeks ago). Although the challenge for today is to resist the temptation to catch the falling knives, as that is usually (but not always) a mistake.

Pressure Technologies (LON:PRES)

Share price: 191p (down 29% today)
No. shares: 14.4m
Market Cap: £27.5m

Profit warning - I am not surprised that this engineering group, which is heavily reliant on the oil & gas sector, has put out another profit warning. Indeed worrying about this prospect was what drove me to sell out on the last bounce up 2-3 weeks ago. With constant bad news from the sector, it was difficult to imagine how this company would be immune.

The trouble is, that there are a lot of trend-following market participants at the moment, who look for favourable chart patterns, buy shares which exhibit them, so their buying results in a share rising, which itself pulls in more momentum buyers. This is problematic, because (especially in small caps), the chart patterns can often be completely divorced from the fundamentals of the company, as has been the case here.

Anyway, PRES notes a further deterioration in market conditions, and the upshot is a significant profit warning for both this year (ending 27 Sep 2015) and next year:

Outlook - it's difficult to draw any conclusions from this, other than feeling generally soothed if one is a long-term holder, that things should improve at some unknown point in the future:

Valuation - this is almost impossible, due to inadequate information. EPS forecasts for this year have already come down from about 50p to 31.2p. That's now gone out of the window as well. It sounds like the company will at least remain profitable, but with business slowing down, next year could see a further deterioration (as the early part of this year was positive, but probably won't be next year).

There are no indications on a possible range of profit outcomes for this year (why not? Surely the company could have said we expect profit to be between £x and £y, which is best practice when issuing a profit warning, and at least demonstrates that management have control over…

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AlanJenkins2

4th Jun '15

I used to hold shares in an Australian engineering company called Forge Group.I still own the shares,but the company went bust due to the onerous cost of fulfilling a contract it should never have made.This has made me extremely wary of bad contracts.I sold my shares in Scysys this morning.

Rusty2

Sorry its the StockRank I thought people were familiar with it on here as I've seen a many times.

Splode

Ed called a high Q&V&M stock a "Super Stock" (good, cheap, improving) and a high Q&V but low M stock a "Contrarian" (classic value). But after a major profit warning Q presumably drops and so, depending on what happens to V, the stock could become either a "Value Trap" or "Sucker Stock".

http://www.stockopedia.com/content/towards-a-taxonomy-of-stock-market-winners-94939/

Damian Cannon

Hi Paul,

Actually I think that you've hit the nail on the head with regard to broker forecasts and a change in direction/momentum here. If a clear reversal occurs in the forecasts (which seems unlikely without a good reason) then this plus a big drop in Stock Rank does start to sound like a clear warning.

I take your point about not merely reacting to share price changes and I must admit that I felt a bit reluctant to post my thoughts above for this reason - I don't want to be trading for no reason or just in response to market noise. But the broker forecast suggestion makes me feel a lot happier with this idea of when to sell.

Cheers, Damian

Yes it is difficult herbie47. I think that taking the broker forecast momentum into account, as Paul mentions, may well help here. OTOH both Vislink (LON:VLK) and Staffline (LON:STAF) saw the forecasts being pegged back before then recovering so what do I know!

Cheers, Damian

Camtab

PRES has been an interesting investment so far(?!?*) I picked some up at 2.50 and in hind sight should have offloaded at £3.30. BUT found myself asking this morning if this is a share that I would want to buy back in to. So to be the devil's advocate...... I have to say i used 20p as my eps estimate. Looking forward this would have them on around 9.5 times at £1.90. The share price has come down from £7.50 in only a year, which as Paul previously said seemed quite a hit before the last profits warning. There is a lot of bad news in this share price. Given it may move lower in the short term, but recognising a respected management team, reasonably solid balance sheet and interesting market. Given we may have to increase defence spending thank you Mr Putin. Also the environmental business is potentially very interesting. Difficult to put numbers on what it is currently worth as management guidance is poor but I would wager (note the word) that should the general market fall this share will out perform. If the market maintains its current madness it will under perform in the short term. But with general news in the economy continuing to improve and the with investment increasing following the last General election at some point I expect there to be a rebound in the profits. A few phone calls can make a lot of difference in this sector. I averaged down at £1.89. Good luck to all, whether bull or bear.

Yes its not clear cut as usual. Often I have found dips in sp to be good buying opportunities, such as (LON:AHT), (LON:STAF), (LON: SOLI) If I had seen (LON:SSY) below 50p this morning I probably would have bought some, many shares over reactive to profit warnings.

janebolacha

Today's commissioned commentary from Investor's Champion which presumably reflects Pressure Technologies (LON:PRES) management views, gives revised EPS forecasts for FY15 and FY16 some way below 20p:

"House Broker (Charles Stanley) estimates for the year ending September 2015 were previously for Group sales of £65.3m, normalised profit before tax of £5.8m and normalised earnings per share of 31.19p. For 2016 estimates were for sales of £73.0m, normalised profit before tax of 8.4m and normalised earnings per share of 45.62p.
These have now been dramatically cut, with 2015 normalised pre-tax profit now forecast at £2.7m on revenues of £57.8m and normalised eps at 14.36p. Estimates for 2016 are now for pre-tax profit of £3.2m on sales of £59.8m and eps of 17.38p. It’s fairly pointless looking any further out given the general uncertainty in the market.
The dividend is also likely to be cut with house broker forecasts now for a dividend of 8.4p in 2015 and 2016, representing a yield of just over 4% at the current share price.
The Group will also incur exceptional costs in 2015 specifically the £1.4m provision relating to KGTM and other costs relating to the recent acquisitions and reorganisation of the Group."

It's funny that you should say that herbie47 as I've tended to find that the share price drops, on a profit warning, tend to under-react compared to the long-term result - with each subsequent profit warning leading to a further leg down in price.

Then again I must just be invested in the wrong shares! Tricky business this investing lark.

Its funny you say that I have just seen your ZYT article. Yes maybe long term but like SSY today sp went down to 38p now its 56p.

How do you do the share name so it comes up blue with the link to the Stockopedia page?

Ha ha! Touche! Also the trick is to put a '£' sign before the ticker: Zytronic (LON:ZYT).

I see, thanks.

jraitt

AVO - Advanced Oncology
Confident Director bet announced today
"The Company announces that Michael Sinclair, Executive Chairman of the Company, had yesterday purchased an option over 30 million ordinary shares of 1 penny each in the Company ("Ordinary Shares") from Brahma AG at a cost of GBP300,000 ("Option"). The Option vests immediately, expires two years from today's date and has an exercise price of 10p per Ordinary Share".

Thank you Jane. Given the numbers you quote I take your point. How do you manage to access this information?

Here you go:

http://www.investorschampion.com/research/company/pressure-technologies#sthash.19xjuI9A.dpuf

Good site and very useful thank you Jane.

sjones33449

Paul you are quite quite remarkable the amount of work is breath taking ! Thanks so much for your honesty with Plus 500 I still hold a position with them and will lose whichever way it goes but thanks to your appraisal I know where I went wrong, as always any share that one buys carries a risk for the anticipated reward ! There is however a silver lining thanks to people like yourself and Ed who admit to their mistakes we as investors learn from our mistakes ,so thanks again I shall not look at overseas companies on the AIM again.
Regards Steve

Mark Carter

Are foreign companies still being floated on AIM, or is that pretty much now a dead idea?

Paul Scott

Mark,

There are still some foreign companies floated on AIM from time to time, amazingly.
Often they raise very little cash, but get the listing, advisers start promoting the share to gullible punters in the secondary market, thus creating the opportunity for insiders to sell.

So vigilance is still very much needed.

I only hold one overseas company that is listed on AIM, namely Somero Enterprises Inc (LON:SOM) as it has a 9-year track record over here, pays divis, and has clean accounts. Also it's American, which is a lot better than say a Chinese or Indian company, in terms of corporate governance.

Regards, Paul.

StrollingMolby

6th Jun '15

Indeed, many companies including those from overseas come to tap AIM investors in an initial fundraising. Here's the latest list from the LSE:

http://www.londonstockexchange.com/exchange/companies-and-advisors/aim/new-recent-issues/new-recent-issues-home.html

Small Cap Value Report (4 Jun 2015) - PRES, SSY, VNET, VP.

Pressure Technologies (LON:PRES)

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Paul Scott

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