Small Cap Value Report (9 Jul) - HYDG, NPT, XPP, BILN, OPM

9th Jul '13 by Paul Scott

13 comments 14589 reads

Good morning. Recruitment group Hydrogen (LON:HYDG) has been hovering near the top of my watch list for a while now, so I read their trading update today with interest. However, it doesn't really tell me much of interest. It keeps referring to "Net Fee Income", but this is just another word for gross profit. It doesn't tell me anything about overall profitability, or how the group is performing against market expectations - yet those are the key things one needs to be told in a trading update! Reading between the lines it sounds as if their profitability is probably flat or slightly down, but there's an element of guesswork in that. There shouldn't be, the RNS should be a lot more specific, so a thumbs down to whoever wrote that one - a half year trading update has to refer to profitability vs market expectations, or it's virtually useless.

There's quite a lot of green on the growth & value graphics on the StockReport for Hydrogen, in particular the PER and dividend yield look attractive, which is often a good starting point, providing net debt is not too high.

At the last reported Balance Sheet, of 31 Dec 2012, net debt was £2.8m. That looks to be fairly typical, since the full year P&L interest charge was £167k, so if we assume a typical interest rate of say 5%, then that equates to an average debt figure throughout the year of £3.3m, which is near enough to the £2.8m year end net debt figure.

Broker forecast consensus is for a slight rise in normalised EPS this year (ending 31 Dec 2013) to 9.7p, so assuming they are on track for that (pity the RNS today didn't specifically say so though), then the PER is a fairly attractive 9.4.

You might be wondering why the table above right shows a forward PER of 8.3 then? Well, the Stockopedia system rather cleverly works out a blended 12 month forecast as from today, so it uses part of the 2013 forecast, and part of the 2014 forecast, so that all companies with different year ends are comparable at any point in time. Clever, eh?!

So on the face of it, Hydrogen looks potentially good value,…

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fek47

9th Jul '13

Morning Paul

I spent some time yesterday researching Harvey Nash (LON:HVN) but didn't quite get round to buying. Which would you consider to be the better GARP share between Harvey Nash (LON:HVN) and Hydrogen (LON:HYDG) ?

Gostevie

Morning Paul,

Very interesting piece on the spread betting. Many thanks. Do you have any views you'd like to share on the use of spread bets v CFDs for the private investor?

Steve

StrollingMolby

fek47 - see what the useful 'Compare Stocks' tool reveals when looking at Hydrogen (LON:HYDG) and Harvey Nash (LON:HVN) side-by-side:

http://www.stockopedia.com/compare/?tickers=LON:HYDG,LON:HVN

Hydrogen (LON:HYDG) is showing higher growth and dividend yield, and low PEG - though you pay more for it on the PE (9.6 v 7.8). Harvey Nash (LON:HVN) has a better Piotroski score though.

it_trader

Excellent mention of spreadbetting Paul, the dangers and pitfalls, although some of it may fall on deaf ears as it's just too easy to get started. I do wonder sometimes why it's so easy to start a spread bet account, but getting a credit card or loan you often have to jump through several hoops.

I've only been spread betting a short while, and pretty much only doing it for tax reasons and the use of the excellent platform and charting facilities they provide. I'm not even venturing using any leverage at all currently.

If anybody is interested, and I echo all of Paul's comments and top 10 rules above, I'd recommend the following site which was invaluable for me as I started: http://www.spread-betting.com

I've looked at XPP before and the power supplies industry. My conclusion was that it was a very competitive/price based industry where XPP's only real moat was it's margin and lower cost base.

I concluded that although it will grow, it would be a slow minimal return that money may be invested elsewhere. I suppose the divi helps.

Paul Scott

Hi Gostevie,

I can't see the point in PIs using CFDs, because they are subject to Capital Gains Tax, whereas Spread Bets are not. CFDs were invented as a means of avoiding Stamp Duty, which is why they are used by the Spread Betting companies themselves to hedge client spread bets.

The only instance where a CFD mightbe useful to me, is if I had a Spread Bet that I expected to lose money on, but couldn't get out of, i.e. it was large & illiquid. In that case converting it into a CFD would at least make the loss tax deductible against other profits, which you cannot do with SB losses.

Cheers, Paul.

cig

Essentially CFDs and spreadbets are different packaging of the same thing. The main difference are tax treatment (a double-edged sword, as losses can't be offset against tax and most spreadbetters are loss making, so paradoxically HMRC collects more total tax thanks to the tax-free status of spreadbets!) and sometimes you may make bets with a free currency hedge for foreign stocks/indices, because the CFD will usually be expressed in the stocks' listing currency (same as owning the stock) while the spread bet sometimes is just a point bet on the nominal prices (without the forex impact). Again, cuts both ways.

Also beware of CFDs or spreadbets that charge you interest on your own money (e.g. does an unleveraged position charge interest?).

I would have thought spreadbetting companies would hedge directly both their CFD and spreadbet products, and get stamp duty exemption under market maker rules. I don't quite get the rationale to use (someone else's?) CFDs to do their hedging unless they're a really small shop with no exchange membership.

I would rather guess that the reason to create CFDs was to cater to the pro business who cannot benefit (I presume) from the spread bet tax rules, and for marketing purposes: despite being the same thing, CFD may look more serious to naive clients who see themselves as investors rather than gamblers.

I also don't understand your tax idea. If something has already made a loss it's too late to convert to CFDs, you'd get in at the low price at the time of conversion (not your entry price!) and get charged capital gains between that bottom price and the recovery price. I can't believe you could retroactively convert to a CFD taxed at the entry price: it'd be too easy, if you could do that why not then convert CFDs with a gain to spreadbets to erase the gain -- you can't pick the most tax advantageous form after you know the outcome, can you?

Bonitabeach

My maternal grandfather introduced me to horse racing with the following words "The only way to make money out of betting on horses is to become a bookmaker". I have never forgotten those words which is why I don't spread bet but do invest in IG Holdings.

Hi Bonitabeach,

If you manage the risk correctly, there's no reason why Spread Betting should be any different from buying physical shares. Nobody forces anyone to use the gearing that's available, and the tax-free status of Spread Bets means we should actually make MORE money on SBs than from buying actual shares.

The trouble is, hardly anyone actually manages the risks correctly in real life with SBs, but it is possible.

The use of the word "Bet" seems to be a red rag to a bull, and people throw their normal caution out of the window, but again there is no actual reason why this should be the case. If you run a SB a/c conservatively, with little use of gearing, then a successful investor should also be successful with that SB a/c. The trick is to stick to your knitting, and not diversify in hedges (i.e. gambles!) on other stuff.

It can be done, but it's bloody difficult.

Cheers, Paul.

Hi Cig,

Nah, you've veered off on a complete tangent there, and didn't really follow what I was saying!

I didn't say anything about back-dating the prices on SBs or CFDs, obviously you can't do that!

I just pointed out that from my point of view, I can only think of one situation where a CFD would be better than a Spread Bet, and that is where I already have a large existing Spread Bet, on an extremely illiquid share, where something has gone badly wrong, and (say) the shares have already dropped from 100p to 30p, and I strongly suspect they are heading to zero.

Now obviously in that situation, I would ideally want to sell. But if my Spread Bet is for 2% of the whole company, and every time I try to sell a few, the share price drops another 10%, and the Bid dries up completely because we're in a major financial crisis, then my only option is to sit tight with the Spread Bet.

In this situation, it could be a benefit to ask the SB provider to convert the SB into a CFD, because FROM THIS POINT, the loss from 30p down to 0p would be tax deductible on a CFD, but wouldn't if I remained in a SB.

The drop from 100p to 30p is NOT tax deductible, because it was on a Spread Bet during that time.

I've never done the above, but was racking my brains to think of any situation where a CFD would be better for a PI than a Spread Bet, and that's the only one I could think of!

Cheers, Paul.

Thanks Paul, it makes sense now! It is a pretty niche situation indeed, you have a powerful imagination :-).

Hi Cig,

Glad that's clarified! As you say, it's a fairly unusual situation where a CFD might be better than a Spread Bet for a private individual. However, the situation I set out above was exactly where I found myself in 2007-8, with a number of Spread Bets that were far too large to close (being in almost completely illiquid micro caps where the Bid almost completely dried up). I didn't have the presence of mind to convert them onto a CFD, which would have saved me the tax, but never mind.

A good example was Voller Energy, which had fallen to about 32p just before financial crisis. It was a blue sky idea of some clown who thought he could commercialise fuel cells, but I got sucked in by the hype.
After a while, I strongly suspected it was a crock, and would end up in failure, but I had something like 1m shares on a Spread Bet (so £10,000 a point!). Every time we tried to sell, we could only get 10,000 shares away, and the MMs all ran for cover, taking the price down about 10%. This created a considerably bigger margin call than it solved - the figures were roughly raising £3,200 in underlying by selling 10,000 shares at 32p, so saving me £800 in deposit (at 25%) on the Spread Bet, but reducing the share price to about 29p, which created a paper loss of £9,900 * 3 points = £29,700 on the remaining Spread Bet!

So of course we had to stop selling, and whilst that stabilised the share price for a while, other people sold too, and the share price came down eventually to about a penny, and I lost £310k on the Bet in the end. Total disaster, which was one of several dreadful situations that cumulatively was how I got into such a mess in 2007-8.

So some horrible lessons, learned very much the hard way, which is why I now know what NOT to do with Spread Betting accounts! You don't tend to forget lessons like that in a hurry.

Of course if the SB company cannot get the underlying stock away from their hedge, then they won't close your Bet. These days though they will just dump them for whatever price they can get, so illiquid stocks are just a disaster waiting to happen.
Also remember that a small cap which might be fairly liquid now, could easily dry up completely in a savage bear market. Hence why it's so important to observe the rules in my Top 10 list in the original post.

Cheers! Paul.

Small Cap Value Report (9 Jul) - HYDG, NPT, XPP, BILN, OPM

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Paul Scott

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