Small Cap Value Report (11 Mar 2016) - SGI, TPOP, CMBN

Good afternoon!

Something funny has happened with the formatting of today's article. Please bear with me, as I try to resolve this problem.

I'm walking wounded today, after a most convivial time was had last night - every 3 months I get together with my best investing friends, and we have a fascinating afternoon swapping share ideas & experiences, followed by a lovely meal, accompanied with copious wine. Not good on a school night. So I'm in the mood for a good rant, and won't be taking any prisoners.

Stanley Gibbons (LON:SGI)

Share price: 22.5p (down 39.6% today)
No. shares: 47.1m
Market cap: £ 10.6m (pre-dilution)

Funding update - delays in fundraisings are ALWAYS bad news. ALWAYS. It means they're struggling to raise fresh money, and the buyers will usually demand a deep discount. I've been involved in distressed fundraisings before, and the way they work is that the key Institutions just name their price. Existing holders get shafted.

SGI has been such a well-publicised train wreck, that there's really no excuse for PIs holding this share, other than obstinacy, or sheer stupidity.

As with any small cap, Institutions are high & dry, with (usually) inadequate liquidity to get out of a significant shareholding, but we small private investors have the wonderful advantage of being able to sell up at any point. So it stuns me that people refuse to admit to their mistakes, and continue holding a share that is very obviously in the process of collapsing in value.

Nobody likes a smart-arse, but I couldn't have been more stark in my warnings about this share here on 13 Jan 2016 when things were so bad that SGI went on the Bargepole List at 59.5p, again here on 23 Feb 2016 at 43.5p, and most recently here on 4 Mar 2016 when I speculated that a discounted fundraising as low as 20-25p was probably imminent.

It's even worse than that! There is so little appetite for a fundraising, that today the company announces that the emergency fundraising (to bail out the bank, again) will be at just 10p! That values the existing equity (47.1m shares) at just £4.7m. That's probably £4.7m too much. Personally I would only have put in fresh money for a pre-pack Administration.

Further to the announcement made on 4 March 2016, the Group confirms that it is very close to concluding the terms of an equity fundraising of approximately £13 million by the issue of new ordinary shares at a price of 10p. A further announcement will be made in due course.

To raise £13m at 10p per share means that 130m new shares will need to be issued. So that's massive dilution for hapless existing shareholders. This represents an enlargement of the existing issued equity from 47.1m shares, to 177.1m shares, so existing shareholders will only hold 26.6% of the enlarged equity. Costs will be high, probably about £1m at a guess.

On 4 Mar 2016 the company used this vague form of words regarding pre-emption rights;

As previously announced, the Board intends that the fundraising will be executed in a manner that recognises the pre-emption rights of existing shareholders insofar as is possible.

What does that mean? Weasel words in my opinion.

The share price has fallen today to 22p, I'm amazed it is at a premium to the 10p fundraising. I expect that discount to narrow further, as people putting fresh money into the fundraising will  flip the stock for an instant profit, if they've got any sense (that's another question).

What happens next? No doubt there will be a gigantic inventories write-down, as reality dawns that tiny pieces of paper are really not worth millions of pounds, once the fools that buy them stop bidding up the prices against each other.

Sometimes people lose money on shares through entirely unforeseen circumstances. People who have lost money here were just plain stupid. So absolutely zero sympathy from me.

The Peoples Operator (TPOP)

Share price: 34.4p (down 15% today)
No. shares: 77.1m
Market cap: £ 26.5m

From one pile of junk to another. I remember when this share was being floated, I read the prospectus and was almost rolling around on the floor laughing. Ridiculous is not the word. The valuation was even more ridiculous. They had to discount it from the initial ludicrous valuation to get the fundraising away, but even then it was blindingly obvious that this share would collapse, it was only a matter of time.

I've repeatedly tried to short it, but sadly there is no borrow on the share.

I have no idea why it's falling in value today, other than that it's a terrible company with little to no chance of commercial success. When will people learn?

Cambian (CMBN)

Share price: 69.75p (down 15% today)
No. shares: 184.2m
Market cap: £ 128.5m

Temporary waiver of banking covenants - I had a good rummage through this company's accounts here on 9 Feb 2016, when its share plunged on a profit warning and clear indications of financial distress (it was very close to breaching banking covenants).

Today's update indicates that things have got a little worse (quelle surprise!) and that the banking covenants will indeed be breached, but the bank has given a temporary waiver until 26 Apr 2016;

The Board now believes that it is likely that, in light of the ongoing finalisation of costs and the completion of its audit in respect of the financial year ended 31 December 2015, results for the year will be slightly lower than previous guidance. As a result, it is likely that Cambian will not be in compliance with its financial covenants for the period ended 31 December 2015.

Cambian has however agreed a temporary waiver with its lending banks to cover this possibility and to facilitate the continuing discussions with them, which are aimed at agreeing amendments to the existing facility, including resetting covenant levels.  Cambian hopes to conclude these discussions before 26 April 2016, which is the expected date of the preliminary announcement of Cambian's results for the financial year ended 31 December 2015. Accordingly, it has been agreed that the waiver will expire on that date.

This is an interesting situation, as Cambian actually has quite a strong balance sheet, stuffed full of freeholds. Banks like lending against freeholds. Although the special purpose properties which it owns are difficult to value, and ultimately the valuations depend on what profits can be earned from each site - something that can change dramatically if  public sector clients refuse to agree price rises - look at what happened to Southern Cross Healthcare a few years ago - it went bust when LAs refused to countenance fee increases.

I think it's likely that Cambian will survive, but the banks may force the company to do an equity fundraising, which as we've seen with SGI today, can be a massive discount if providers of fresh financing decide to screw existing holders - which is the commercially sensible thing to do.

Again, I can't see any reason to get involved here. I might take a fresh look at it once the company has properly sorted out its financing, and in all likelihood the shares might be cheaper then.

Shares in this type of company nearly always go wrong. Absolutely minefield for investors, so again, why get involved?