Small Cap Value Report (Tue 30 May 2017) - FXI, KNOS, BLTG, FJET

30th May '17 by Paul Scott

34 comments 15792 reads

Good morning, it's Paul here.

I was looking into the horrible case of Fusionex International (LON:FXI) over the weekend, after a friend flagged it to me. It joins the long list of overseas companies which listed on AIM, and ended up being disastrous for UK shareholders.

I cannot stress enough how investors can protect ourselves by having a default setting whereby we decline to invest in overseas companies on AIM. The reason being simple - because many or even most of them end up being disastrous investments. Exceptions can be made sometimes, particularly where the country risk is lower (e.g. USA, or W.European countries), but I'll cover that in more detail at the end of this article.

As with Globo, and the Chinese AIM frauds, the warning signs were not difficult to spot - they were obvious. As I researched Fusionex over the weekend, the red flags were blatantly obvious. So people who get caught on this type of disaster stock really need to drastically improve their stock selection procedure, whilst they've still got some money left.

We all lose money on some shares, it's a normal part of equity investing. However, returns greatly improve if you have a process which weeds out the obvious wrong 'uns before they blow up. One of my key aims here is to help investors focus on better quality stocks, and avoid the junk. Although in a roaring bull market like this, plenty of junk stocks are doing very well (for now) - so there are opportunities for shrewd traders, nipping in & out of junk stocks for a quick gain. Getting out before the music stops is the tricky bit!

Anyway, on to today's results & trading updates.

Kainos (LON:KNOS)

Share price: 229.25p (down 4.5% today)
No. shares: 118.0m
Market cap: £270.5m

Preliminary results - for the year ended 31 Mar 2017.

This company (HQ in Belfast) describes itself as;

...a leading UK-based provider of digital services and platforms

Whatever that means? Checking back on my previous notes, it seems to be an IT company that specialises in UK public sector work. This is quite topical, given recent hacking & blackmail on the NHS (and other) computer systems. It's achieved superb growth in the past, as you can…

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The Phoenix

30th May '17

Hi Paul cracking work as always any pointers you can give in using Stocko to spot red flags would be appreciated.

Michael Mortphew

I have also been wondering how the system really works. If UK companies and markets are supposed to be some of the better regulated ones it makes you wonder what some other exchanges are like. And it's not just dodgy foreign companies. TrakM8 had a placing at 333 p in late December 2015. I wonder who's sitting on those?

Does anybody know of any articles about what happens behind the scenes in the equity markets? I've seen the term 'accelerated book build' now and then and it seems that one can drum up a few million in no time at all, leaving little time for 'due diligence' and careful enquiry.

On a more general note, I find this forum extremely valuable and am impressed by the knowledge, expertise and constructive input of contributors here.

ricky65

Paul, I'd also be interested if you could explain in detail the red flags at Fusionex International (LON:FXI). I took a £200 punt on it a few months ago because I thought it might do well as it looked like a Big Data company similar to WANdisco (LON:WAND). What prevented me from putting any more than small punt money on it was it being foreign and the suspicious negative net cash flow. In hindsight that should been enough for me to give it a wide berth, even with punt money. It appears to be a very sophisticated fraud as the FXI website lists a lot of blue chip clients.

Kind regards

Ricky

Paul Scott

Hi everyone,

Sorry I didn't get round to responding to queries & comments.
I'm still unloading stuff from my car, from the last trip yesterday, so have been humping boxes around all afternoon, for about the 5th day on the trot! Moving house is such a nightmare, I seem to have accumulated so much clobber, it's ridiculous.

Anyway, the good news is that I finally have room to breathe - my new flat is much more spacious than the old one - my new sitting room is bigger than my previous entire flat lol! And I've got 2 nice roof terraces, so can step outside and bask in the sun, if it puts in an appearance. This should be conducive to better SCVRs hopefully! (once I'm settled in)

Regards, Paul.

Cisk

31st May '17

This is probably a 'strange' comment - but many of the companies people have discussed today have one thing in common - unusual company names! I personally stay well clear of any company with a daft /silly name; normally they try to allude to something sophisticated which is just code to try and fleece punters / investors like us.

As is usually the case in investing, simple is often the best.

gus 1065

On the subject of DYOR etc., with regards to Fusionex International (LON:FXI) it took me 3 mouse clicks to bring up a discussion thread - albeit from 2013 - that would have put me off investing in this company. Two sides to the debate between a clear advocate and a sceptic, but full credit to regular contributor "cig" who did some digging and raised some pretty basic questions that absent convincing answers would have put me off investing.

Plenty of fish in the investing sea to move along to if the contributor commentary, whether it's a pro like Paul or a regular amateur on Stocko, doesn't stack up. Plenty of rampers and de-rampers with their own agendas on many other bulletin boards and blogs but by and large Stocko seems remarkably free from these.

Gus.

Ramridge

Guys -
I think that Paul produced a handy list of red flags to look for, following the Quindell fraud or the Globo fraud that he successfully uncovered. I was into Globo and his constant warnings saved me bucket loads. This must have been on or before 2015.

Would be handy to re publish this , especially for the newbies. I don't think there is a search facility on Stocko to do this quickly. Anyone able to help?

Carcosa

Hi harvs19,

Wish I could say it was a reaction to the news related to the resignation of the Pizza Express CEO; but I was unaware of this at the time of my sale (and had I known I doubt it would have influenced mydecision anyway).

My reason was that i wanted to release some cash for another investment and looking around my portfolio this share price was not performing in the way I wanted over the last couple of years. I don't much like 'growth' stories, having come from a value investor background, as they tend to crash and burn at some time in the future. However that 'sometime in the future' can be anything from next week to 5 years down the line!

Overall, as retail rollouts go, I think FUL is a reasonable share to own although not the best available and it was never considered a 'core' holding for me.

=====

I remember a good article by Paul (Or Ed?) relating to red flags as mentioned by Ramridge. Anyone have the link?

Dennis Ayling

Paul, looking forward to reading anything you write on Fusionex & other foreign AIM duds. I didn't hold FXI but did hold Rapidcloud (RCI), a smilar company. Maybe, as you suggest being sceptical about silly company names is a good starting point.

My own experience with Rapidcloud has been an education. Although the financials should have warned me off, I exchanged emails with the CEO / founder & found him affiable, PI friendly and convincing. There was also a British chairman which was encouraging. I then woke up one day & found out most of the board had gone along with the advisors & the listing.

I hope I have learnt something during the journey.

Dennis.

GeoffMM

https://docs.google.com/spreadsheets/d/1Tmi5-HKO5Vw70EFLymaaTzfNaBXCo4tkiM5IVKqBIx4/edit#gid=2

Paul' spreadsheet

Lion Tamer

One of Paul's old "red flag" summary posts is here:
http://www.stockopedia.com/content/small-cap-value-report-gbo-koov-107216/
I think there are more.

How do you find out what origin the company is from other than word of mouth ?

Trident

Unfortunately, there are many drivers for floating iffy foreign entities on AIM. The desire by the Stock Exchange to demonstrate that AIM is an international player against its competitor Stock Exchange platforms such as Nasdaq etc. The brokers and advisers (lawyers, accountants, financial PR etc) get paid for their due diligence, and then get paid ongoing fees for Nomad status.

So there are more drivers than there are negatives at the present, because loss of investor value doesn't show up in their various balance sheets. The fact that AIM is not just a market based on risk but is in danger of offering an open shop for foreign promotors to take advantage.

The reputational damage to AIM seems to be the least of anyone's worries.

Hi clarea,

If you look at the Stocko company page, the names of the directors might give you a clue (many overseas executive names with a couple of nominal Anglo Saxon NEDs) followed up by a look at the company's website (also linked directly from the Stocko company page) should point you in the right direction. If you can't find out/don't know the domicile of a company's principle business activity, is it really prudent to be investing in it?

Gus.

mikelevie

I've previously made a list of red flags based on various articles found on Stocko (including today's SCVR):
- AIM-listed & based abroad esp. Asia, Africa
- No earnings or divis which makes Growth & Value metrics impossible to calculate
- Lots of red in the stock's Growth & Value window
- High M-Score indicating dubious Earnings quality
- Risk of bankruptcy (Altman Score)
- Broker downgrades
- Declining 3m / 1yr price momentum
- Appears in James Montier’s Unholy Trinity Screen
- Low stock rank
- Low P-score indicating declining health trend
- Large pension deficit
- Validate any divi's against Free Cashflow per Share – if it’s negative then company funding divi’s from debt
- Director's shareholding >25%
- Large amount of cost capitalised into intangible assets, in order to create artificial profits

RedRon

I am surprised more people don't take some notice of the charts. Fusionex has been trading under it's 200 day MA since December last which is negative territory for a chartist Using Stan Weinstein's methods, it has been in Stage 4 since that date and was, therefore, a definite 'sell'. Yet the fundamentals on Stockopedia give the share a 67 stock rank, a quality rank of 84, a piotroski score of 6 and an altman rating of 7.7 with no net debt which is hardly a cautionary set of figures. I always check with the charts as they are much more in tune with the current situation and usually give good, timely warnings

1st Jun '17

Hi vik2001,

Franchise Brands (LON:FRAN) - I know this company of old, as a friend of mine set it up a few years ago.
The shares have done very well since listing. It looks very expensive on current broker forecast, but of course that might be because the forecasts are too conservative, I don't know.

I will review the figures when the company next reports.

Regards, Paul.

Hi Hedgecutter,

Eagle Eye Solutions (LON:EYE) - there was an interesting article about this company in SCSW recently.
As I mentioned back here in Nov 2016, I think the company looks interesting.

The valuation looks very expensive on the historic figures, but we're in a bull market, and people are prepared to pay up for growth companies with good future potential.

Overall, as a more speculative share idea, in current market conditions, I think this share has potential.

Regards, Paul.

Hedgecutter

The only other holding which would perhaps come into the same category would be Surgical Innovations (SUN), which I see as a turn-around company after a much needed change in management. If you have the time, perhaps you could comment, maybe after their next announcement.

Thanks again for your reply Paul and for your enlightening reports.
Nick

Many thanks Paul for your response.
I agree that EYE looks overvalued and the stock rank would certainly agree with you. I am certainly looking at the future potential, not historic valuation and, as such, recognise the risks involved. Most of my other investments are safe, debt-free, growth companies such as Somero, Zytronic and Headlam, plus the riskier, but very profitable for me so far, Paysafe. Hence, I have only taken a smallish punt on EYE on the basis that if it proves a flash in the pan it will have limited effect on my portfolio and if a multi-bagger, there would be little need to increase my holding.
I was surprised that the discounted share issue didn't result in a drop in the share price, in fact quite the opposite.
Time will tell.

The only other holding which would perhaps come into the same category would be Surgical Innovations (SUN), which I see as a turn-around company after a much needed change in management. If you have the time, perhaps you could comment, maybe after their next announcement.

Thanks again for your reply Paul and for your enlightening reports.
Nick

Small Cap Value Report (Tue 30 May 2017) - FXI, KNOS, BLTG, FJET

Kainos (LON:KNOS)

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Paul Scott

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