Small Cap Value Report (20 Apr 2016) - TIDE, BWNG, SVCA

Good morning!

ShareSoc Brighton

I am delighted to see that ShareSoc has decided to revive the Brighton investor evenings, which myself and a friend started in 2014. It's so much work to organise events such as this, that we didn't have time to organise any in 2015.

So I'm thrilled to see that ShareSoc has taken up the mantle, and has organised an investor evening (with optional meal) for 10 May 2016. The idea is to make this a regular monthly event, which would be fantastic, as the previous ones in 2014 were so enjoyable. The same venue, 2 mins from Brighton station, is being used - so very easy to get to, even from London.

The problem is that people only register at the last minute, by which time the organisers are tearing their hair out, because we had to give a minimum attendance guarantee to the restaurant. So far, registrations for the Brighton event in May 2016 are so low that the event just won't go ahead unless more people register now.

Therefore, in order to get this event off the ground in the early stages, please can I urge everyone who would like to see this become a regular event, please support the first one by booking now. Here is the link. The first event is key, because if it flops, then there won't be any future ones. Therefore, even if you're not interested in the company presenting, a show of support is vitally needed to get things off the ground.

I will be going to all the future ones, but unfortunately am away on holiday on 10 May, so can't personally make the first one. These events are such a good way to network with fellow investors, as everyone has a common interest. Networking with other like-minded investors has definitely improved my knowledge & performance over the years. Plus of course it's great fun to knock back a few pints of Peroni, and have a good laugh & exchange anecdotes with other investors.

Stockopedia Webinar

The boss is doing a webinar tomorrow at 12:30 - to register please click on the blue link above (for anyone not aware, all text which appears in blue, is a clickable link).

The focus is on international shares. I already use the USA & Europe service here, and have to say that it's wonderful to see everything in the standard format that I'm now so familiar with. Very good for quickly checking out stock ideas, particularly on American larger caps, where I often dabble.

As Stockopedia is rapidly becoming global, it will be interesting to see how the StockRank system works with international stocks. StockRanks is rightly becoming increasingly popular as its strong performance record builds. I'm happy to plug things that are good - which is why you might have noticed I waited to see the results of the StockRanks system before starting to mention it in my reports. It does work, over a portfolio of stocks, as the data now proves.

Personally I still like to have some human input in the stock picking, as I can spot frauds and other red flags, whereas computers at the moment can't - because computers assume that the data is always true, which of course it isn't sometimes.

So for me StockRanks is a terrific way to whittle things down to a shortlist for me to then weed out further. I use it all the time for stock ideas, and to confirm my existing stock picks. Certainly if I pick a stock which has a low (say 40 or below) StockRank, then I use it as a circuit-breaker, and I don't press the Buy button until I've further checked & deepened all my research on the company.

I also try to ensure that only say 1 in 10 of the stocks in my portfolio are low StockRank shares. This again should help prevent too many blunders on blue sky stuff. StockRanks are a great tool to have as part of your investing approach, in my view.

Crimson Tide (LON:TIDE)

Share price: 3.22p (down 5.3% today)
No. shares: 445.5m
Market cap: £14.3m

Results y/e 31 Dec 2015 - I can't understand why such a small company takes so long to report its figures - not a positive sign. Small companies should be able to get figures out in weeks, not months.

Revenue has risen from £1.2m in 2014, to £1.4m in 2015.

Profit before tax has doubled, from £84k in 2014, to £168k in 2015.

Balance sheet - looks OK to me.

Note that a Lombard finance facility is being used to fund tablets for customers to use. This sounds fine to me, since the customer subscription revenues match the loan repayments.

Outlook comments - the company sounds upbeat:

The outlook for Crimson Tide looks more positive than ever before.  There is a much greater understanding in the market of the significant benefits that mobilising the workforce can realise and an increasing urgency to utilise technology to achieve these aims.  Crimson Tide's mpro5 solution, offered on a subscription basis and therefore avoiding the need for capital expenditure, is ideally placed to satisfy this growing demand.  Our reputation continues to be enhanced by the contracts we are winning and the results we are delivering for our customers.  The Board remains extremely positive that the growth and success of the Company will continue.

That's all great, but pretty general stuff.

My opinion - based on the historic figures, and some future growth, I would value this company at perhaps £2-4m.

The market cap is actually £14.3m. So clearly investors/punters are factoring in considerable future potential. To a certain extent I can see why - the product is high margin, therefore additional contracts should have an operationally geared impact on the bottom line.

Also the product itself looks to be of the moment - there's no doubt that moving mobile employees from a paper-based reporting & control system, to doing it electronically by tablet or smartphone, is a great way to improve efficiency. This company has won some impressive customers.

Another positive is that this company is not burning cash, and already profitable. So the risk of dilution from placings is probably quite low. The last time the company did an equity fundraising seems to have been c.2011, judging from the average shares in issue line of the StockReport - I always check this to see how trigger-happy management are re issuing new equity:

Here you can see that the no.shares in issue has remained static for the last 4 years - a good sign.

Overall though, I think it's far too great a stretch to justify a mkt cap of £14.3m. Halve that (as a minimum), and I might be prepared to have a punt on it.

N Brown (LON:BWNG)

As this is a mid to large cap, it's outside the scope of these reports. However, I often comment on retailers, since that's my sector specialism.

Note that this large company has managed to publish results for 52 weeks ending 27 Feb 2016 in under 2 months. This is an £866m turnover business. So how come this company can report in less than 2 months, yet Crimson Tide above takes nearly 4 months to report, despite having turnover of only £1.4m!?

I know from my own days as an FD, that the stronger the financial controls, the faster you can report. So speed of reporting is an important indicator of what level of control the FD has over the business. Less control = greater likelihood of profit warnings, because too many financial reconciliations that should be done monthly are probably being left until the year end.

Back to N Brown - its 2015/16 results seem to be in line with expectations, at 24p EPS.

However, its outlook comments seem to have triggered a wobble in the share price (down 14% to 271p at the time of writing). This also seems to have caused a sector-wide wobble, with several other retailer shares also down today.

Therefore it's interesting to see what N Brown says. These 3 points are flagged:

Trading since the year end has been subdued, with sales lower year on year. This is the result of two factors. Firstly, the industry backdrop has been more challenging since January...

That sounds like a general problem for the whole sector - although not necessarily, as companies always blame weak demand on outside factors, and never admit that their own products are not up to scratch. The above comments relate to Mar & Apr to date.

Secondly, we adjusted our marketing approach this season, shifting from large TV campaigns to a more phased approach across the half, with increased investment in digital channels. This new approach delivers a better ROI on our marketing investment when viewed across the season as a whole. We expect, therefore, to see performance strengthen over the half.  

This is clearly something company-specific. So no read-across here for other retailers. Although there is read-across for shares in TV companies, as mounting evidence of marketing spend shifting from traditional methods, towards online, especially social media.

Next, the company talks about forex:

From a non-trading perspective, FX rates represent a significant challenge year on year. At the current $/£ exchange rate, and taking into account our hedging position, there is a c.£3m PBT headwind in FY17; this is included within the above Product gross margin guidance. More detail on the sensitivity of profits to movements in FX are on page 15...

This is indeed a sector-wide issue. A lot of purchases by UK non-food retailers are sourced from Asia, and invoiced in US dollars. So I believe that the forex tailwind of last year will indeed now become a headwind for this year. Specifically, it impacts margins. Although historically, retailers have tended to target a specific gross margin level which they need to achieve. Therefore selling prices are tweaked upwards to protect margins. This is something we should all keep an eye out for - are prices in the shops for clothing starting to creep up? I expect they will do, as forex hedges expire.

N Brown seems to have a company-specific problem with dead stock:

We have also decided to undertake a one-off exercise to clear legacy aged inventory this year, enabled by our new online clearance tools. This investment is also reflected in the product gross margin guidance we have provided today.

I'm surprised at this. A key purpose of audits is to identify & markdown dead stock. Although this may have already been done. If stock has been marked down to the lower of cost or net realisable value, then it would effectively be sold at a nil to low margin when it is actually disposed of.

My opinion - there is mounting evidence that clothing retailers are struggling. Maybe we have reached "peak stuff"? (as some commentators are suggesting). Forex is also undoubtedly a headwind for retailers, who import nearly everything, much of it invoiced in US dollars.

Although the above concerns have already been reflected in steep declines for many retailers's shares. So the question is how much of the above is already in the price, indeed have prices over-reacted?

The economic data suggests that conditions for consumers are benign, so for me this is more of a buying opportunity in the sector - very selectively, as always. I expect demand for clothing is likely to bounce back later this year. It's often good to buy when prices are low, because investors become fixated with the current news. Then prices zoom back up again when more positive news starts to come through. Are we going into a recession - no. Consumers have more disposable income than last year. Although some of it is being spent online, and on leisure activities.

Servoca (LON:SVCA)

Share price: 26p (up 15.6% today)
No. shares: 124.2m
Market cap: £32.3m

Trading update - on the face of it, this sounds positive:

As announced following the recent AGM, trading performance has shown excellent progress and results for the first six months will be significantly ahead of the corresponding period last year.

That sounds great, although bear in mind that broker forecast is already factoring in an increase in EPS from 1.77p last year, to 2.2p this year. So we already knew that results were going to be significantly ahead of last year.

Although the "excellent progress" comment above does suggest that a further improvement has been achieved.

At the AGM in Jan 2016 the company said this:

As referred to at the time of the preliminary results in December, the Board is pleased to report that the Education and Healthcare recruitment businesses continue to perform well and trading is comfortably in line with expectations.

To avoid confusion, I would have much preferred that today's update also compared performance with market expectations, and not against last year. So not a well constructed trading update today, I'm afraid. It's introduced confusion. It's much better when companies stick to reporting on performance against expectations, and report that consistently.

My opinion - earnings growth at this small staffing group has been excellent in the last few years. The company seems to be on a roll, so it would be worth digging deeper to find out what is driving that out-performance, and whether it's sustainable.

As usual, anyone who can flesh out the detail is very welcome to post in the comments section below.

That's it today - there's nothing else of interest in my section of the market, a very quiet day for news.

See you tomorrow!

Regards, Paul.

(usual disclaimers apply)