Small Cap Value Report (16 Sep 2015) - ANP, VLK, EPWN, ALK

Good morning!

A fairly brief report today, as  I'm meeting a friend for lunch, to swap small cap investment ideas, then I'm off to ShareSoc's company seminar at FinnCap's offices, which should be interesting - I'm particularly looking forward to meeting management from Somero Enterprises Inc (LON:SOM) , an interesting company which I hold shares in.

Anpario (LON:ANP)

Share price: 332p
No. shares: 21.8m
Market cap: £72.4m

Interim results to 30 Jun 2015 - every time I look at the figures for this company, I'm rather underwhelmed by the pace of growth, considering that the shares are on quite a high rating, These interims follow that same pattern. A small disposal has reduced turnover, but improved the gross margin, as its low margin activities drop out of the group accounts.

It looks as if about 1m share options have been exercised, as there's a mismatch between basic & diluted EPS in H1 this year, and H1 last year. So there is now less potential dilution, which is a good thing. So diluted EPS rose from 6.37p in H1 2014 to 7.31p this time, H1 of 2015. Note there was an H2 seasonal bias to profits last year, with diluted EPS for the whole of 2014 coming in at 14.76p.

So what EPS is the company likely to do this year?

Outlook - a little irritating that no mention of performance against market expectations is given. Although I assume that must mean the company is trading in line. Today the Chairman says;

“The second half has started well and we are confident of maintaining the momentum of the first six months’ performance. Our strong balance sheet, backed by the cash generative nature of the business leaves Anpario well positioned to finance further organic growth and also able to consider selective investments or earnings enhancing acquisitions as they arise.”

Valuation - assuming that the company hits broker consensus for 2015, of 15.4p this year, and 17.5p next year, then at 332p per share, the PER drops out at 21.6 for 2015, and 19.0 for 2016.

Balance Sheet - this remains fantastic, very strong indeed. There is no debt, and cash of £7.9m, a material amount, being about 10.9% of the market cap, or just over 36p per share, so the Enterprise Value (Market Cap minus net cash, or plus net debt) is 296p per share, and this reduces the cash neutral PER to 19.2 times 2015 forecast EPS, and 16.9 times 2016 EPS forecast.

My opinion - personally I will only pay a PER of 20 or more for a company that is growing turnover and profits at a barn-storming pace, which Anpario really isn't. As such it looks too expensive to me.

Given the surplus cash, surely management could be a bit more generous than paying just a 1.87% forecast yield? It all hinges on what you think the company's long term prospects are - holders must presumably think the company can continue growing, and maybe accelerate its growth? It's difficult to see much upside from the current price without the company stepping up a gear, in my view.

Looking at the chart, I'd have said the price a year ago looks about right, but today's price is too high for me. Although it's certainly not the only small cap that looks expensive at the moment - most of the market is fully, or over-priced in my opinion, which doesn't leave investors with any margin of safety for when things go wrong.

Vislink (LON:VLK)

Share price: 47.5p (down 12% today)
No. shares: 122.6m
Market cap: £58.2m

Interim results to 30 Jun 2015 - only a brief look at these figures, as I've become disillusioned with management greed - feathering their own nests with excessive remuneration and the latest wheeze - a so-called Value Creation Plan. So I will not be investing in this share again under its current management.

Results today look lacklustre - perhaps management should spend more time & effort actually running the business, rather than dreaming up ever more complex ways to extract money from the company for themselves?

Revenue is down nearly 2% to £26.6m for H1.

The loss before tax is £881k, but this is massaged up to an adjusted profit of £2.2m by excluding the amortisation of acquired intangibles (fair enough) of £1.2m, and a large £1.7m in non-recurring costs. Trouble is, the company always seems to come up with non-recurring restructuring costs, and for all I know they could be dumping anything into that figure - how do I know the restructuring costs really are non-recurring? The fact that they recur every year doesn't exactly fill me with confidence that these actually are non-recurring! If a business is permanently restructuring, then surely those costs should be seen as normal?

Given that I don't trust management here, then I'm more inclined to be sceptical about the figures.

Balance Sheet - this looks alright. It's dominated by intangibles, but even writing those off, then the position is still okay. So no issues here. Although the company is on the acquisition trail, so my worry is that over time the balance sheet strength may dissipate into ever-larger intangible assets.

Outlook - this sounds encouraging, pointing towards an improved H2;

We have an improved product range for the hardware market and have seen an increase in underlying broadcast orders. Vislink Communication Systems now has a significantly reduced cost base and is more efficient in accessing new product opportunities, and this is expected to contribute towards improved trading in the second half of 2015. Our improving order pipeline underpins this outlook.    

A large contract with the Home Office seems to have skewed the prior year comparatives.

My opinion - it seems to me that the acquisition of software company Pebble Beach may be masking a relatively poor performance by the rest of the group. So overall, I'm not convinced by this company. It always seems to have good potential, but where are the profits? Where's the organic growth?

On executive remuneration, there are several red flags. Not only is the (part-time) Executive Chairman over-paid, but also the suspicion is that he moved the company from the full list to AIM in order to push through a VCP scheme which hands the Directors about 15% of the market cap upside, above a particular hurdle. This is being done via a complex scheme to create an intermediate holding company with different "growth shares". It's just wrong. Directors are already paid handsomely, so to seek yet another payout (above salary, bonuses, and share options), is just absurd in my view.

The staggering thing, is that these Directors have been able to help themselves to a slice of the future upside in the shares without even seeking shareholder approval! I'm amazed that this is legal, but apparently it is. As I've commented before, in essence it looks like an elaborate form of theft to me. So there's no way I could buy shares in such a company whilst the Directors are essentially using it as a vehicle to plunder for their personal gain. Maybe we should get Jeremy Corbyn on the case?! In the meantime, David Stredder of ShareSoc is leading a campaign to fight the VCP proposals, on behalf of small shareholders - many of whom are vehemently against this greedy scheme.

The VCP, and other issues with Director remuneration (such as the Chairman getting the company to pay a personal tax liability, as disclosed in the last Annual Report) all fits a pattern of an out-of-control Chairman, who is using this company for his personal gain. That's not an investable proposition in my eyes.

If shareholders don't kick up a stink about VCPs, they will creep in all over the place, and before you know it, the managerial class will be creaming off even more unjustified upside for themselves. VCPs are designed to make it look as if management and shareholder interests are aligned. However, they actually introduce incentives for management to take risks with the company - doing unwise acquisitions, using borrowed money, etc, all to chase arbitrary targets (which are usually set at a level they think they can beat) and get a large personal reward. However, the company they leave behind will then have too much debt, a ropey balance sheet filled with goodwill, and could even need bailing out by shareholders when the next recession hits - which is pretty much exactly what happened at Anite, when Vislink's current Chairman was in charge of that.

Epwin (LON:EPWN)

Share price: 130p (down 4.8% today)
No. shares: 135.0m
Market cap: £175.5m

Interim results to 30 Jun 2015 - a quick skim through the figures & outlook comments, and things look to be on track here. So it's surprising that the shares are down almost 5% today - maybe there's something buried in the narrative that has spooked people?

The various measures of profitability are all up usefully against H1 last year - underlying operating profit of £8.0m on turnover of £124.1m.

Outlook - this sounds reassuring, and note the H2 seasonality to profits;

The Group will continue to seek out opportunities for operational improvements and appropriate acquisitions.  As in prior years, we anticipate that the cyclical nature of the Group's markets will mean the second half of the year will be stronger than the first half year and we remain confident that full year profits will be in line with expectations.

Valuation - broker consensus is 11.7p EPS for this year, so that's a PER of 11.1, which I'd say looks about right probably - although bear in mind that this type of company is cyclical, and current conditions are fairly good, so you wouldn't really want to pay a toppy PER for it at this stage in the cycle - a high multiple of peak earnings, is just an accident waiting to happen when the economy next goes into recession - arguably not for a while maybe, but it always happens eventually.

Dividends - the company is forecast to pay generous divis, but it's a fairly recent float, which increases the risk that something might go wrong. The yield should be about 5% based on broker forecasts.

Relationship with Entu - Epwin and Entu (UK) (LON:ENTU) are basically sister companies, which were in common ownership, but floated separately. Entu buys most of its products from Epwin, so their performance is linked. We shareholders in ENTU got a very nasty surprise recently, when the company warned on profits, because its solar division has bombed out (due to Govt policy change on feed-in tariffs) and is being shut down. However, there is no evidence that other parts of Entu (the main part being windows & doors, double glazing, conservatories, etc) are having any problems. So I am hoping that Entu shares should recover in due course.

As the two companies are so closely linked, this does put a bit of a question mark over Epwin, and for that reason I sold my Epwin shares a little while ago - if there are more problems brewing at Entu, and there is spillover to Epwin, then I don't want to get caught out twice by holding shares in both.

My opinion - I'm wary of this share. Hopefully it won't disappoint like its sister company Entu, but it's not a risk that I'm willing to take, so it's one to avoid in my opinion - even though the figures today actually look alright.

Alkane Energy (LON:ALK)

36p cash bid - excellent news for those of us holding this interesting little company, with an agreed cash takeover bid from Balfour Beaty today, at 36p. You could buy a few days ago for about 24p, so that's a quick and tasty 50% upside! More than acceptable I'd say.

Right, got to dash now. See you back here tomorrow, or at ShareSoc tonight!

Regards, Paul.

(of the companies mentioned today, Paul has long positions in ENTU, ALK, and no short positions.

A fund management company with which Paul is associated may also hold positions in companies referred to.

NB - as always, these reports are just Paul's personal opinions, and are never recommendations or advice)