Small Cap Value Report (30 Dec 2015) - MIRA

Good morning!

It's very quiet today, as you would expect for this time of year. Although it's always worth keeping your eyes peeled for opportunities, as prices can spike up or down a lot in thin markets like this. I find it's quite good to keep a little cash on the sidelines, so that you can nip in and grab the odd bargain on days like today.

I see that controversial cash shell, Concha (LON:CHA) has bounced nicely in the last few days - presumably on expectations that another spectacular ramp can be engineered in 2016?

Ocado (LON:OCDO) has taken a bath in recent days. I increased my short position on that one yesterday, after reading an article that the Amazon Pantry service is being greatly expanded, following successful trials. So that's another strong competitor joining the already ultra-competitive and low margin grocery delivery market. The £1.9bn market cap makes no sense whatsoever, for a business that is only marginally profitable, yet hugely capex hungry - the worst of both worlds. I'm not meant to talk about shorts here, so let's move on.

I think we're likely to see a mass extinction of junior resource stocks in 2016, as few now have any reason to exist. I'm wary of bottom fishing for apparent bargains, as the remaining cash doesn't usually end up going back to shareholders. It's either effectively stolen by bent Directors charging consultancy fees to the company, consumed in advisers fees, or the Directors just find some other venture to reverse into the cash shell - to keep the gravy train rolling.

There is just one set of result out today, which falls within my remit, so let's have a quick look at that, even though it's a company which doesn't really interest me.

Mirada (LON:MIRA)

Share price: 6.1p (up 32% today)
No. shares: 139.1m
Market cap: £8.5m

Interim results to 30 Sep 2015 - this company describes itself as "the AIM quoted leading audiovisual content interaction specialist" - which means close to nothing to me. I think it's basically a software company, for set top TV boxes, or something along those lines anyway.

I did dabble in these shares a while back, but decided there was too much uncertainty, and too many missed targets, so sold out at about double the current price, thankfully.

Turnover is up slightly, but still only £2.3m.

Loss before tax slightly improved, from £887k H1 LY, to £812k H1 this year.

Balance sheet - this looks stretched, and for me, loss-making companies should never have debt, but this one does. Key points;

Net assets of £8.2m falls to -£2.1m NTAV once you write off all intangibles.

The current ratio is very weak, at 0.77

Net debt of £3.4m is alarming, given that the company is still loss-making.

Cashflow - note that there was a £755k amortisation charge in H1, but that a larger amount, £1,259k was capitalised freshly into intangibles. Therefore the loss would have been about £0.5m worse if all such costs had been expensed.

Cash burn - is considerable still, and the company is being propped up with additional borrowing - so in my view this looks a distressed situation - i.e. dependent on the continued co-operation of lender(s).

Fundraising - note that the company raised £1.5m before expenses, in a Placing of 25m shares at 6p after the interim period end, in Oct 2015, so that will have improved the financial situation somewhat. Although I would be very surprised if that is the last Placing the company does. So more dilution, possibly at a lower price, if things don't go to plan, looks likely.

Outlook - you can't really value this share on the historic figures, as it essentially has an unproven business model. So it's all about expectations of what it can do in future, and there always seems to be upbeat narrative from this company, with big orders around the corner, then delays, then more hope, etc.

Today the company says;

The Company is confident that full year revenues will be in line with market expectations, due to the high degree of visibility of revenues until the year-end, mostly from professional services for Televisa. Subscriber-based license fees should start to flow in the new financial year, giving the Board confidence of reaching positive free cash flow over the year starting 1 April 2016.

Some good stuff in there for the bulls, and if things pan out as indicated, then maybe the shares could recover some lost ground?

My opinion - the company hasn't made any significant profit in the past, so to my mind it effectively has an unproven business model. That's fraught with risk - as so many AIM-listed jam tomorrow companies fail to deliver on expectations.

Therefore this one's not for me, I'm trying to avoid getting sucked into any more jam tomorrow shares, as they nearly always go wrong, but good luck to people who have backed this company, I hope it proves an exception to the rule for this type of company.

A fellow writer here on Stockopedia, Roland Head, has published an excellent review of his articles this year, here - well worth a read. I think it emphasises that avoiding big losses is one of the best ways to improve your portfolio performance - that's been a key emphasis of mine this year too. Hence my general aversion to story stocks (jam tomorrow stuff), as that tends to be where the heavy losses arise.

Also, value shares seem to have been quite bad performers this year - the market has done a good job in anticipating wobbly business models. So I feel that seeking out low PER stocks can be an error, as that might well be giving you a list of the companies with the biggest problems simmering away below the surface? The trouble is, companies which are performing well are now so expensive. So we're caught between the devil & the deep blue sea right now.