Small Cap Value Report (7 Jun) - QPP, PLE, HRN, KCOM, TRT, FCCN

7th Jun '13 by Paul Scott

12 comments 18723 reads

Good morning. It looks like a fairly quiet day for news again today. I've been looking through the Quindell Portfolio (LON:QPP) Annual Report, which has been published on their website this morning, click here for the download. Hopefully after a closer look I might have a better idea of how they generate the enormous profits which seem to have sprung from nowhere (since none of the businesses they acquired generated any significant profits previously).

Results from Plethora Solutions Holdings (LON:PLE) have got to be one of the worst I've ever seen. My local Share Club have a holding in it, hence my looking at their accounts this morning. It placed a subsidiary into Administration in Feb 2013, and seems to be hanging on in the hope of partnering one of its remaining projects with a larger pharmaceutical group.

The Balance Sheet is completely insolvent, with only £231k in current assets, yet £6m of liabilities. From reading the notes, it turns out that this is yet another failed Jim Mellon venture, which he is propping up with loans. After the debacle at Speymill Deutsche, where shareholders were completely wiped out after being assured that everything was fine, I made a note never to go anywhere near anything involving Jim Mellon again.

The market cap at Plethora is £7m, which strikes me as pure fantasy, so I shall be recommending to my local Share Club that they take the money & run on this one.

Hornby (LON:HRN) announce their results for the year ended 31 Mar 2013. They have been having difficulties for a while now with their supply chain, with over-reliance on one Chinese supplier causing them major problems. So 2012/13 was a year affected by this issue, and resulted in turnover falling about 10% to £57.4m, and underlying profit falling to around breakeven.

Net debt reduced to only £2.1m, so there does not appear to be any immediate insolvency risk. The Balance Sheet looks OK, with £12m in net current assets and only £2m in long term liabilities. There is no dividend this year, but they indicate that in future the company will return to paying 50% of earnings in dividends.

At 75p per share the market cap is around £30m, but with…

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bobdouglas

7th Jun '13

Understand slight concerns about kcom committing itself to a very progressive dividend policy when still carrying a fair chunk of debt and a bit of pension liability. Alternative Networks reported their interims on Wednesday who operate in a similar sector and also have a similar progressive dividend policy - the difference being they have 15M of net cash. I also found it interesting to compare the two on Stockopedia reports.

Marky

Quindell - is it possible that the profits have sprung from all the contracts they have been announcing over the last year? I'm guessing the acquisitions they made enabled them to win these contracts? Hence enabling significant organic growth, since the acquisition price did not factor these in?

I particularly liked Wednesday's RNS - multiple contracts worth around £100m / year - excellent stuff.

ChangFai

Paul, was hoping for an update for your thoughts on Goldplat.

steamy001

Well Said Marky, even Paul must start to see some value in Quindell Portfolio (LON:QPP), the clients clearly do.

SevenPillars

When it comes to Quindell I would still like one of its supporters to explain to me what is the difference between what they are doing now and what The Innovation Group did when Rob Terry and his crew were running that company a decade or so ago? They do look like remarkably similar stories to me and the bottom line is it didn't work out well for TIG.

Below is a link to a TIG story from back then. To the right on that page is a list of articles relating to TIG around that time. I swear that if you were to replace the name TIG with Quindell, you wouldn't be able to tell the difference. See the article about the big IBM contract as an example.

http://citywire.co.uk/money/innovation-group-has-strong-start-to-year/a235004

http://citywire.co.uk/new-model-adviser/tigs-ibm-partnership-brings-in-biggest-deal-yet/a224272

This for me is one of the biggest obstacles to the Quindell story. The market seems to have a long memory of what did and didn't happen before.

Why isn't TIG a FTSE250 or 100 company today based on what Terry and co did for them back then? What happened to all those big recurring contracts i.e. IBM, that Terry brought to TIG during his growth by acquisition phase? Why is Quindell different? It is not my intention to do Quindell down, but I would like to know as we have a historical reference here that didn't work out. I want to know why Quindell supporters, other than the fact that they are financially heavily invested in the story, are so convinced that Terry can do for Quindell what he couldn't do with TIG?

(just for reference I will post this on the Quindell thread as well)

rmillaree

Hello Marky

Ref

The profits could come from anywhere to be honest - there is plenty of talk about them booking profits at the time of sale for future items and using their judgment as to when to recognise thisincome - there is a huge wad of accrued sales (over £40 million - this exceeds the profit for the year) - note there also is a hefty trade receivables figure so even when the accrued sales are invoiced it will be some time before they receive payment - looking at the aged items there is nearly £12 million of money owed in that is over 2 years old! - they have made a provision against this but their judgment is that they will still get £8 million of this 12 million old debt. Unhelpfully they don't break down aged receivables under one year (they seem to use 1 year where most companies would use 3 months or even 1 month) .

The continual contract announcements look great - but can they really make amazing margins on this high volume contract work? If their product is the best why did they have to give away freebies eg to RAC where they handed out Warrants for £250 million shares to sign them up.

It's a dangerous game investing in companies booking profits now - invoicing months later and collecting cash years later. I see the potential here - im just not sure i believe the story. That's just my opinion though and i could easily be wrong being a doubter - until i see the company managing sales and booked profits through to cash being collected.

Paul Scott

Hi ChangFai,

I hadn't spotted the announcements yesterday from Goldplat (LON:GDP).
It's not a share I currently hold. This announcement yesterday morning seems to have clobbered the share price. It doesn't read very well, so it's not a situation I'm likely to revisit.

Interesting to note that the company bought back 1m of its own shares at 6.7775p each on 4 June.

Regards, Paul.

snickers

I read something a while ago about the generally poor quality of managers of mining projects, said people who would never make it running a manufacturer are regularly found in charge of mines. I got the feeling that GDP's managers - competently running their recovery plants - had thought so too and decided to have a go at mining with their spare cash: but failed at it themselves. If chastened by the experience and they can back out maybe they'll turn into the little cash machine they were supposed to be.

Beginner

Hi there, a Goldplatter here! I used the fall in price to top up, and will be holding. I still think this is good value as it stands. By force of circumstance the company is returning to its profitable core activity. Jolly good I say! I don't expect to get rich off this, but I do think this is a decent investment in the medium term. The 'material' shortfall in profits is reckoned to be about 10%, and the buy back at sub-7p was excellent. Some form of dividend could be covered from existing cash, though I would hope this was not the case. I have never met a mine manager, so cannot comment on that, but even with the impairment the figures do not look that bad in total. (But I am probably wrong!!!)

Hi SevenPillars,

I posted this on another site a while back:

"QUINDELL REMINDS ME OF INNOVATION GROUP"

From the Telegraph, August 2001: "In the 14 months since it floated, Innovation Group has made over 10 purchases. The largest was the £181.75m buy of rival Huon in May. In the three months ending June 30, the company unveiled pre-exceptional operating profit of £3.8m, up 619pc, and sales of £14.3m, up 607pc."

Huon was clearly a ridiculously large purchase given the small scale of Innovation's revenues and profits at the time, and Innovation was only able to make such a purchase because the technology bubble had driven its own share price far beyond what was reasonable.

Which seems to me to be the exact opposite of Quindell (forward P/E of about 3!)

Yes, the company's management have a strong link with Innovation. Yes, the company has made a string of acquisitions just like Innovation did (but on far, far better terms and with nowhere near as much risk attached).

But no, Quindell does not remind me of a tech bubble- fuelled Innovation Group. We should not blame Rob Terry for his bit-part in the tech bubble, and I am confident that he (and the wider investment community that allowed it to happen) will not repeat the process here.

shipoffrogs

In Quindell's accounts they state:

"we have a strict acquisition criteria and only typically (sic) pay five to seven times profit after tax".

Their reported profit after tax was £31.9m in 2012 and £4.2m in 2011.

The acquisitions in 2012 were:

25 January Ai £14.6m (consideration)
24 May IT Freedom £6.3m
21/31 Dec various legal £45.2m
Mar - Oct various £30.3m

So assuming they paid 6x profits after tax and post acquisition there was no change in profit after tax margins from the acquired companies their contributions would have been roughly

Ai £14.6/6x11/12 = £2.2m
IT Freedom £6.3/6x7/12 = £0.6m
Various legal £45.2/6x0/1 = £0.0m
Various £30.3/6x6/12 = £2.5m

Add in QPP's 2011 profit as being recurring = £4.0m

That totals £9.3m, leaving £22.6m (£31.9-£9.3m) arising from synergy/organic growth.

"Hopefully after a closer look I might have a better idea of how they generate the enormous profits which seem to have sprung from nowhere (since none of the businesses they acquired generated any significant profits previously)."

I think the answer lies in note 5 to the accounts, if you can understand it.

Small Cap Value Report (7 Jun) - QPP, PLE, HRN, KCOM, TRT, FCCN

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Paul Scott

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