Small Cap Value Report (5 Aug 2015) - QPP, TERN, LTC, FTC

5th Aug '15 by Paul Scott

19 comments 18253 reads

Good morning!

Spread bets

I was discussing how to manage the risk of excessive gearing in spread betting accounts last night with some friends on Twitter. This is a subject dear to my heart, as I made terrible mistakes with gearing in 2007-8, with disastrous consequences. So I very much learned my lessons the hard way, which is why I like to warn other people about the dangers of gearing, and indeed manage my own gearing very carefully now.

My talk at Mello Peterborough a little while ago on this subject was well received, and as part of that talk, I created a simple spreadsheet which is very useful in monitoring & controlling the gearing used in spread bet accounts. A friend commented last night that he uses my spreadsheet, and finds it very useful in managing his own spread bet account, so this has prompted me to provide the link again here, in case anyone else would also like to use my spreadsheet. Just save the file yourself under a new name & delete the example data, then put in your own data. If anyone needs any help using it, just let me know.

NB. I am certainly NOT encouraging the use of spread betting - it's very dangerous if the gearing is abused, and the vast majority of punters with spread bet accounts lose most or all of their money. So best to avoid, unless you really know what you're doing. However, with sensible control of the gearing (or don't use any - it's not obligatory!), there's no reason why spread bets cannot be used within a portfolio of small caps, as a tax-free wrapper.

Tern (LON:TERN)

Share price: 13.7p (down 11% today)
No. shares: 45.4m
Market cap: £6.2m

Interim results to 30 Jun 2015 - normally I wouldn't report on something this small, but I noted that the shares in this company recently tripled, from 5p to about 15p, and I've previously done some research on it, so it's worth commenting on.

The company is basically a tiny cash shell, which has invested very small amounts in technology companies. There has been only £707k invested, and it held a further £336k in cash (but mostly offset by £280k of debt), so really tiny stuff. Net assets are £863k, so at £6.2m this is already trading at a large premium to net assets.

So the…

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Cockerhoop

5th Aug '15

Saw TERN present at Mello Peterborough. I was under-whelmed to say the least.

stepone

How are they managing to return the 100p tax free ?

TheWatchmaker

Paul, Thank you for the list of Red Flags - a useful reference to avoid ploughing money into stocks exhibiting these, or at least to be wary and limit the amount risked.
Cheers
Geoff

cycle

Paul, thanks for the link to the spread betting spreadsheet. I'm looking into spread betting at the moment to enable me to hedge against market downturns and so I'm very interested in your comments. I had hoped to get to your talk at Mello Peterborough but was unable to due to pre-existing commitments. Do you have any notes from the presentation or articles you've written about sensible precautions beyond using limited gearing and the usual diversification?

janebolacha

Paul, you're right about all the red flags at Quindell but what was astonishing was that the obviously dodgy fundamentals of the financial statements and business presentations were actually very easy to uncover. I remember that three or four hours of internet searches were sufficient to tell me that the whole hearing loss claims Eldorado was complete rubbish. Yet the vast majority of people on bulletin boards just didn't want to know and shouted down and violently and personally abused anyone taking a position which disturbed their delusions. Imo, they deserved to lose money for being so utterly stupid, even more so given what had gone on a few years previously at Innovation.

cig

I don't know if it was a "vast majority" of bulletin board participants. A relatively small number of deluded bulls venting their frustrations can be pretty visible. Lots of people would have looked at it, rejected it as an investment, and moved on quietly.

Chrisfarrell21

"From one ineffective regulator, to another - AIM Regulation (yes, there is one, amazingly!) have put out a short statement saying they are supportive of the FRC and the FCA's ongoing investigation. That's nice."

Brilliant.

Flackwell

The phrase 'after the horse has bolted' springs to mind

Imo, the auditors should be heavily fined, the partners who signed the accounts similarly fined and expelled from their institutes, ditto the house advisors, and AIM should employ a better regulator - bit late to come out with this

ericb

TERN is being ramped by one of ADVFN's notorious rampers and may well respond to a heady steam of consistent ramping over a long period. Beware.

Serious Fraud office confirms it is on the case:

"Quindell Plc (AIM: QPP.L) announces that this afternoon, the Serious Fraud Office informed the Company that it had opened an investigation, which the Company understands relates to past business and accounting practices at the Company. The Company will continue to cooperate with all relevant regulatory and law enforcement authorities.

In addition, the Company notes the announcement made by the Financial Reporting Council earlier today and welcomes its statement that, in light of the positive actions taken by the Directors in correcting the identified errors, amending accounting policies and providing their undertakings, the Committee is closing its review of the 2011 and 2012 report and accounts."

True - the review may be closed but be aware of the following (in the FRC's announcement)

The Committee notes that the directors and auditor have reported that it has NOT BEEN possible, so far, for them to determine that all material errors and omissions arising from historic transactions have been identified. The directors have provided the Committee with an undertaking to keep it informed and make such corrections as may be necessary.

Mark Carter

I guess the real question regarding Quindell (LON:QPP) is: what took them so long? People have been shouting about this company for a considerable time, yet it is only when it has been suspended do the authorities recognise there there may have been, possibly, perhaps, conceivably, some improprietory.

You know, even if the regulators are lazy, they could probably just look at the ShareProphets website and walk away with a handful of candidates. All that is required is an ability to read. Proving it, and building a case for it, is a different matter, of course - but sheesh, can they not just pick up a few of the most biggest ones and start applying pressure?

Some of this stuff is so blatant that if the regulators can't spot them, then they are clearly incompetent. And they're not saying they're incompetent, are they?

FREng

Paul. Re Tern (LON:TERN)

Cybersecurity is a specialist area of mine, so I looked at the Cryptosoft website. In my opinion, the website is not "impressive" as it's content free. The video seems just to suggest that they have (or plan to have) a way of encrypting data in transit - which is easy if you can share an encryption key with all the remote data sources, (though likely to be too heavy on computing power and electrical power for many IoT devices).

There's nothing on their website that indicates that they have any unique capabilities, and their Twitter feed seems just to tweet links to published security stories.

There are lots of companies looking for ways to make money out of the Internet of Things and genuine concerns about cybersecurity. I can't see why Cryptosoft would do any better than Cyan Holdings (LON:CYAN) (which has a StockRank of zero) for example

Paul Scott

Hi FREng,

Thanks for your insights. I'm glad you pulled me up on my comment that Cryposoft's website looked impressive, because after having a rummage through their nicely designed (which is probably what I should have said) website, it dawned on me that it doesn't actually have any meaningful content - I also couldn't find information about their actual products, pricing, customer testimonials, etc.

Which reinforces my suspicions that Tern (LON:TERN) appears to be a bit of share price ramp at the moment, rather than a proper business.

Regards, Paul.

cyberbub

Paul, I mentioned Tern (LON:TERN) a couple of weeks ago here. I will agree with you that the transparency of the relationship between TERN and Cryptosoft leaves much to be desired, as does the corporate structure of Cryptosoft itself. I think Tern management have got an intention to feather their own nests from Cryptosoft... but that's not necessarily a bad thing if it means the same happens to PIs... :-)

In terms of products, there are some clear endorsements of Cryptosoft's offering, for example by being a partner on the market-leading IoT platform Thingworx: http://www.thingworx.com/partner_content/cryptosoft-limited/, as RNSed recently. So unlike some of the Chinese frauds, the company does at least exist! It has also brought some credible and seemingly well-regarded industry people into management - people who do exist! And if we are to believe their RNSes, they do have a product set up which is now fully SaaS-enabled and scalable, which means low costs and high margins. There is also a Proactive Investors video presentation about Cryptosoft today: http://www.thingworx.com/partner_content/cryptosoft-limited/

Of course we have no idea how much profit (if any) all this will mean! Ultimately the value of Cryptosoft will only become apparent when it is sold.

I have no illusions that Tern is anything other than a highly speculative share, and I have said so on the other BBs today. If it was at £50M I would be quite twitchy now, but at a market cap for Tern of barely £10M today (they have other investments too), I think the risk/reward is firmly to the upside, when Tern have stated that they intend to sell in a year or so, *after* expanding revenues substantially and potentially signing contracts with major Fortune 500 companies (with whom they are on record as saying they are in discussions).

However that's just my view, I have a holding in Tern and so may be biased! No advice intended. DYOR etc etc

I would welcome any comments from others, positive or negative.

Thanks for your comment FREng.

If you had the chance to look at the Tern (LON:TERN) RNS of 15/7/15, I would be grateful. What's your view on the product? In some ways it doesn't sound particularly revolutionary, but if the later RNS of 29/7 is accurate, it suggests that CS is the only data security product integrated into Thingworx, which would be impressive.

Thanks again for any comments.

Ramridge

6th Aug '15

Re. Tern (LON:TERN). This is an extract from their recent half year report :
"
Cryptosoft claims to be the only supplier with a peer reviewed, market proven software security
product, for IoT (‘Internet of Things’) and M2M (‘Machine to Machine’) applications that is
hardware, software and security system agnostic and which can support legacy and future
installations
"
This is an extremely bold statement given that IOT & M2M real applications are few currently(but growing). The kind of bold claims couched in jargon that I have seen in the past which suggests vapourware.

First reaction: very skeptical, a big red flag. But DYOR.

"claims to" is not very bold...

"Internet of Things" just describes embedded computers with a network interface using the IP protocol stack. Nothing that new as such, and there's a variety of solutions you can use. If there's something new is that cheap embedded chips have got powerful enough to run existing full stack software (because there are $2 chips as powerful as your windows 95 PC). So you can trivially falsify the "only supplier" with say a classic Linux-based solution which certainly matches the description. Most of the commercial embedded software players will be in that space too, it's just a natural extension of their existing business.

The thingworx endorsement doesn't say much, it could just be some other player in the vaporware galaxy. Is there any forums with engineers discussing the product being used in real projects?

It would be helpful if Cryptosoft showed the architectures and dataflows that they are supporting with encryption, and where they add value.

If they operate as SaaS and don't require any changes to workflows or any recoding of applications then if they have found a market niche, it may be hard to defend it against competitors.

Small Cap Value Report (5 Aug 2015) - QPP, TERN, LTC, FTC

Spread bets

Tern (LON:TERN)

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Paul Scott

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