Small Cap Value Report (Thu 23 Feb 2017) - TTR, TET, TSTL, PURP, PEB

23rd Feb '17 by Paul Scott

58 comments 23934 reads

Good morning!

In case you missed it yesterday, Graham kindly emailed me some new sections on financial sector companies (which he covers, but I don't). So yesterday's report now includes sections on Lighthouse (LON:LGT) and NCC (LON:NCC) . If you wish, you can revisit yesterday's report here.

On to today's results & trading updates.

32Red (LON:TTR) - takeover bid - this looks a done deal, as management has agreed a bid of 196p cash + 4p dividend. Since management owns 43.3% of the company, and has agreement from holders of a further 27.8%, then it's a done deal.

The premium is only 16.3% to yesterday's closing price, which doesn't sound good. However, the share price had been trending upwards beforehand. Possibly driven by insider dealing? Or it could just have been because of the fairly good trading update on 1 Feb 2017 - which does coincide with the price starting to move up, so it looks alright.

Prior to the most recent trading update, the share price was around 130p, so an exit at 200p (including an imminent divi) looks a decent outcome.

Where management have big personal shareholdings, this acts as a bulwark against opportunistic, under-priced bids. So in this case I think holders have to accept that management must have secured the best possible price, given that they own 43.3% of the company.

Online gambling companies don't tend to attract big ratings, because the customer churn is pretty nasty. So they have to constantly spend heavily on marketing to recruit new players. That's the reason I rarely invest in this sector. Plus there are regulatory risks too, due to the addictive nature of gambling, and that it is essentially all about fleecing stupid people - by providing them with games where the odds are against them. Poker sites being the exception, where considerable skill is involved, to become a good & profitable player.

Anyway, there we go, we'll be waving a tearful goodbye to TTR in due course. Well done to holders of this stock.

Treatt (LON:TET)

Share price: 314p (up 20.8% today)
No. shares: 51.8m
Market cap: £162.7m

(at the time of writing, I hold a long position in this share)

Trading update - this seems to be an unscheduled update, as…

Unlock with Email

Unlock with Google

Already have an account?
Login here

matusiak1

23rd Feb '17

Hi Paul, not directly related to a specific company, more a general question... i'm interested in your views on stop losses as part of an investment strategy. Do you use them personally? If so, do you set automatic ones or are you disciplined enough to stick to non-automatic? Thanks, Josh

jonno

I attended the Tristel investor presentation this afternoon. Excellent interims and an articulate and considered presentation from the equally excellent management team of Paul Swinney and Liz Dixon. I fully expect the company to achieve approval for the sale of its proprietary chlorine dioxide disinfectants into the American market in the next two years, which will provide a significant boost for Tristel and the share price.

As a long term shareholder you would be hard pressed to find a company that is more user friendly to and considerate of retail investors. From reading the various reviews this is a characteristic that appears to be equally applicable to Treatt.

Paul Scott

24th Feb '17

Hi Josh,

I don't use stop losses on individual shares.
The only occasion where I might use a stop loss, is for say an Index trade or something like that.

Some people like stop losses, and that's fine. There's no single way of doing things that is right. Whatever works for you.

For me, if the share price moves (say) 20% against me, then that is a trigger for me to look very carefully again at why I invested, and just re-assess everything. In reality, I do that every day, for every position - it's just something I do continuously.

Personally, I'd rather be in control, and making every buy & sell decision rationally.
I don't want arbitrary sell decisions taken with reference to whatever price I happened to buy at.
Once I've bought, the buy price actually becomes irrelevant. The only thing that matters is whether the stock is worth more or less than the current market price. My sunk cost doesn't matter at all. I don't even record my cost price on my portfolio spreadsheet, as it's irrelevant.

I think stop losses are good for blue sky stocks. If you've bought some rubbish on a lot of hype, then putting in a (say) 25% stop loss is probably a good idea.

Horses for courses though. As my mentor said to me a while back - "just keep doing more of whatever works best for you". I think that's great advice.

Regards, Paul.

Hi jonno,

I'd be a bit careful with that.

It wasn't long ago that TSTL management horribly messed up with poor communications, and a grubby share options scheme which backfired, causing a firestorm of private investor anger.

So they're perhaps not quite as marvellous as you might think.

That said, management seem to have steadied the horses pretty well since then. The figures today look good, and in the long run that's what matters.

For me, it's fully priced now. So, I don't see much immediate upside, unless someone bids for it.
This has been a great "buy the dips" stock though, when it has a periodic wobble.

Regards, Paul.

smatthews1

"Several have dealt with PURP agents (so-called local property experts), and found them to be clueless. The trouble is that they don't actually have local knowledge, because they're covering such vast patches"

I think this is true with a lot of estate agents whether they have local knowledge or not, I find it fascinating how quickly estate agents can give you a figure, with similar plots and different agents the asking price can vary immensely.

some valuations go completely out the window, especially in areas like London which is a bubble waiting to burst in my opinion.

I do really like this new angle of online estate agents, its a no brainer for anyone moving. I just need to get my head around the valuation and weigh up the competition.

Sean

gus 1065

Hi dgold.

No specific knowledge on 32Red (LON:TTR) but a couple of possibilities. Activity above the offer could be either speculators thinking the offer could yet be trumped with a higher offer (which would typically need to be 10% higher to free up the irrevocable commitments) or possibly anyone with a short position that is paying to borrow the stock to short and so needs to close out (assuming the bid goes ahead) to terminate these running costs. (I tried to check the open shorts on Short Tracker but 32Red (LON:TTR) doesn't appear to be one of the companies they cover). As a seller/market maker, why accept less than the bid level after your own costs?

Could also simply be the acquiring company upping their position through market purchases, in which case there should be an RNS on this in due course.

Best,

Gus.

dgold

Gus, thanks for your reply. I don't see though that there could be another improved offer as there are irrevocable commitments of more than 50% which stay in force even in the event of a higher offer. For the same reason I can't see why the bidder would want to pay more than the bid price to buy in the market. But your idea of shorters needing to close seems possible, I was also wondering whether there might be some tax advantage to the bidder to be receiving the 4p dividend as oppose to not receiving it and paying less for the shares - not sure why exactly but maybe.

iwright7

Paul,

Good write up on Treatt (LON:TET) and having looked at the additional information/links provided by the other respondents I took the plunge yesterday. My summary Treatt (LON:TET) buy in notes...

Unscheduled Trading Statement with +20% new customer sales increase (vs. +5%/annum over last 3 years). "Substantially exceed" has propelled share price up +20% on the day, but could still be cheap for its new growth. Operational gearing will kick in. Great quality Q90, QM 93, F7 and 52 Week High. Lord Lee's largest holding.

Specialist in fruit flavours for beverages (soft drinks, fruit tea and esp craft beers). Considerable potential in sugar drink reduction sales. Impressive CEO who was responsible for building US craft beer orientated business from scratch. New customer focused culture. 90% non-UK sales so currency gains. On a roll and updated broker forecast looks too modest.

Hi Paul

A fair point and well made. I was a shareholder at the time and wasn't best pleased by the 'options scenario'. Just goes to show how a good set of results and upbeat presentation can metaphorically banish past errors. I agree that the shares are at present fully valued but as you say it is the long run that counts and the potential in the USA, if and when it happens is significant.

I very much like the Company's strategy for increasing its global profile and understated and pragmatic management style. My best guess is that it will at some point be bid for, which given the potential may not necessarily be the best outcome for shareholders. We shall see.

All the best

Jonno

mendez

Could you comment on Trans Siberian Gold ? The low PE does not make sense too me in view of its very solid historical and forward looking revenue and profit figures.
J.L.Méndez

Hi Mendez,

Sorry, I don't cover the resources sector.

Regards, Paul.

GBGMC0

Thanks Paul, maybe not as good as I thought then

andyhorton

25th Feb '17

Hi Paul
Another good report - so helpful in making investment decisions to get alternative opinion. I'm kicking myself with Purplebricks right now and seriously thinking of getting back in on a slight fallback in price if it ever happens!
Another one caught my eye recently which you covered a good while ago when things were pretty bad is Fulcrum Utility (FCRM). It now seems that there has been a turnaround of fortunes, plenty of cash, PER around 23, no debt and EPS around 3 with a market cap of £105m. Progressive dividend policy now in place too, although modest at the moment. Cheers Andy

27th Feb '17

Thanks Paul, a useful and fair insight.

Josh

jonesj

I'm kicking myself for going too small with the Purplebricks position size. I bought some with the intention of researching it more before adding. Then the price just raced away.

Still, at least it's step by step progress from only value to being prepared to selectively pay up for attractive growth opportunities.

Martin5760

15th Mar '17

PURP announcement after close today - directors selling 8 million shares !

30th Mar '17

A further Treatt (LON:TET) Trading update this morning revealing H1 sales are now up +25% and that it expects to exceed its full year revised expectations of just over 1 month ago. Interim results should make be interesting reading on 9th May.

Following a strong performance across the Group in March 2017 and clear signs that the momentum described above, which is being delivered by our 2020 Strategic Plan, is continuing into the 2nd half of the current financial year, the Board now expect to exceed its revised expectations for the full financial year ending 30 September 2017.

Rusty2

Sounds good however debt is soaring, £3.6m higher up to £12m.

Herbie,

Treatt (LON:TET) is a £100M+/annum Citrus Oil etc manufacturing business so stock cost will rise to meet the demand for increased sales. An extra £3.6M borrowing with their modest net gearing is not a red flag for me. If TET can buy raw materials at the right price, hold stock and turn them into value-added flavour products I am all for it. Ian

Hi Ian,

Thanks for explaining that, Paul has also responded to my concerns, it seems the debt should reduce in the 2nd half so no need to worry.

Small Cap Value Report (Thu 23 Feb 2017) - TTR, TET, TSTL, PURP, PEB

Treatt (LON:TET)

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

58 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...