Small Cap Value Report (11 Aug 2015) - CAMK, JPR, PPH, YOU

Good morning from overcast Bournemouth!

I've just had a delicious cooked breakfast in my posh B&B (called "The Living Room" - very nice), and am typing this on my smaller home PC, which I brought with me - perched on a small table in my room. That's the great thing about being an internet writer/blogger - you can work from more-or-less anywhere there's a WiFi signal.

Camkids (LON:CAMK)

Share price: on its way to zero, but currently 5.25p (down 20% today)
No. shares: 77.8m
Market cap: £4.1m

Trading update - this update missed my cut-off yesterday, which was a pity, as it can only be described as pure comedy gold. It's a genuinely funny announcement - I was crying with laughter as I read it.

As regulars will know, my stance here has been unequivocal - that AIM listed overseas shares should all be treated with `great suspicion (as there's usually something wrong with them), and that AIM listed Chinese shares are the worst - they are automatic bargepole jobs. You simply can't trust management, or the accounts with Chinese companies on AIM.

I've long thought (and commented here) that the main purpose of Chinese companies listing on AIM was to separate gullible British investors from their money. After all, creating a market (AIM) with no effective regulation, and then encouraging companies on the other side of the world to list on it, from a country which has a major cultural problem with fraud, wasn't really a terribly clever idea. Yet apparently the LSE still has salespeople in China, encouraging more Chinese companies to list on AIM!

The way AIM has been run is absolutely scandalous, and brings the whole financial sector into disrepute, in my view. Or rather, reinforces the disrepute which the financial sector had already brought upon itself. As things stand, AIM is a magnet for dodgy companies and promoters, aided and abetted by UK advisers who seem to have no moral compass - happy to promote anything, for a fee.

Cash - the vanishing act - the penultimate stage of China frauds on AIM, is to explain away all the fictitious cash on the balance sheet. Usually this is done by the company building a hugely expensive new factory, despite it not being needed, and then can't find workers for, so they have to write it off. Job done - cash has been disappeared.

However, in this case a novel way has been dreamed up to disappear the cash. The story goes that several distributors of Camkids shoes are under-performing. So Camkids has decided to buy back all their stock, donate some of it to charity, and also give them compensation payments!

The total cost of this will be RMB435m, which is slightly more than the company's entire cash pile reported in the last set of accounts. Bingo! The cash has been disappeared!

The final stage - we're probably only days away from the NOMAD resigning (which they should have done ages ago), and a new NOMAD probably won't be found, then the shares are likely to de-list. Shareholders will probably never hear from the company again, and the shares are a 100% loss.

My opinion - I hope that my strident warnings here that Chinese AIM stocks were dodgy has saved readers money. I've been proven correct. The worst thing you can do is to try to rummage through the Chinese AIM stocks to find the one that might be genuine. Why take the risk? it's almost impossible for Westerners to penetrate Chinese companies, and find out what's really going on.

It may be the case that larger ones, e.g. Hutchison China MediTech (LON:HCM) might be genuine - Mark Slater reckons the corporate governance at HCM is exemplary (better than many UK or USA companies, in his words), but I doubt if (m)any of the smallest AIM China stocks are genuine.

Non-Execs - the NEDs from Camkids came along to a Mello investor evening a couple of years ago, and there was no doubt in my mind that the NEDs were genuine. They were British/European businessmen of good standing, who effectively lent their CVs to dodgy Chinese companies, in return for a fee, to lend respectability and credibility to these dodgy outfits. However, at the time they seemed to genuinely believe (or at least hoped) that the companies were real, although it was obvious they themselves had some doubts.

We had a fascinating discussion with them, and one NED explained how he had gone to China to do his own DD on Camkids, which included going to their bank, and requesting a statement be printed at the branch, confirming the cash balance.

The glaringly obvious problem with British NEDs, is that they don't speak the language. So meetings were held by telephone usually, with a translator provided by the Chinese company itself (i.e. not independent!). So as long as the translator was in the pocket of the Chinese CEO, then pulling the wool over the NEDs eyes was easy.

There's no doubt that NEDs who have acted for dodgy overseas companies on AIM, and all the advisers that floated, and worked for these companies, have brought shame on themselves. They have effectively participated, even if they can claim ignorance, in elaborate schemes to defraud British investors. In my book that should be career-ending for all these people. Wise people didn't get involved with dodgy Chinese companies, so the people who did need to explain why? At the very least it shows extremely poor judgment, and lack of common sense, in my view.

Anyway, it's almost certainly all over for Camkids now. I think it will be de-listed fairly soon, so the shares are worth nothing.

Johnston Press (LON:JPR)

Share price: 110p (unchanged)
No. shares: 105.9m
Market cap: £116.5m

Interims, 26 wks to 4 Jul 2015 - this is another share that I've long maintained is probably worth nothing, but for different reasons. The business (newspapers) is in structural, almost certainly terminal, decline. However, in the meantime the business is highly profitable, making a remarkably strong operating profit margin of 20.9%. It really is astonishing to find businesses like this one, and Trinity Mirror (LON:TNI) which are in a sector that is in terminal decline, but are still so profitable.

The big issue here is that the company has so much debt, and a pension deficit, that the remaining cashflows that the business generates in its dying years, is possibly going to be inadequate to meet these liabilities in full. Creditors rank ahead of shareholders of course. So if I'm right, then there could be very little, if anything, left over for shareholders. There is some freehold property, so as the newspapers gradually disappear, then it might morph into a property company perhaps?

Interest costs - the refinancing a little while ago has been beneficial in greatly reducing interest costs.

Net debt - despite this, net debt remains stubbornly high at £183.3m.

8.625% Bonds - as I mentioned in my report of 14 Jul 2015, the listed Bonds in JPR look a far better investment proposition than the shares. Bond holders are being paid a healthy return on their investment, in the 8.625% interest payments, and when the bonds come up for repayment, in 2019, the holders will be first in line for cash from any new refinancing.

As we saw at Afren (LON:AFR) when a company gets into financial trouble, it's the bond holders who call the shots. whilst shareholders are diluted away to very little, and then end up losing the lot, if things deteriorate to a point where the bondholders pull the plug.

So why speculate on the shares here, when you get no dividend, when instead you can have a safer position, higher up the pecking order, by owning bonds instead, and get paid 8.625% p.a. interest too? The bonds are currently trading at about 95, so that would make the yield approx. 9.07%, if my calculations are right (I'm a bit rusty on bonds!).

PPHE Hotel (LON:PPH)

Trading update - this reads positive, with the key part saying;

Trading in the first six months of the year has been ahead of the company's expectations...

The outlook for H2 is also positive;

Trading in the second half of the year is also expected to be ahead of the Board's previous expectations due to the strong performance of our hotels in The Netherlands, Germany and Hungary, the ongoing strength of the pound sterling against the Euro and the delay of planned refurbishment works, originally scheduled to be carried out on a number of hotels in 2015, to take place during the course of 2016.

My opinion - I looked at this share when they were about 300p, but rejected it due to balance sheet weakness, and high levels of debt. On reflection that was a mistake, as the shares are now 640p!

It looks good value on a PER basis (about 11), but rising interest rates could curb future profitability - so it's important to check what the arrangements are for the company's debt - i.e. are they safeguarded by fixed rates, or caps, etc?

The economic cycle looks to be favourable for hotels, so it's probably a good sector to be investing in for the next few years.

YouGov (LON:YOU)

Trading update - reassuring news today;

YouGov's trading for the year ended 31 July 2015 is in line with the Board's expectations.

Net cash - the company reports healthy net cash of £9m at 31 Jul 2015.

My opinion - I remain of the view that this share is over-valued several times over. This is because the accounting capitalises so many (what I regard as) operating costs onto the balance sheet. When you reverse that, it hardly makes any profit. See my report on the interims here on 23 Mar 2015 for more details. So great care is needed with this share, in my view - i.e. I'm avoiding it completely.

That's me done for today, am off for a stroll along Bou'mth beach.

See you tomorrow!

Regards, Paul.

(of the companies mentioned today, Paul has no long or short positions.

A fund management company with which Paul is associated may hold positions in companies mentioned.

NB. These reports are purely Paul's personal opinions. They are NEVER advice, nor recommendations).