Small Cap Value Report (25 Apr 2016) - SIV, OUT, ZZZ, COG

Good morning!

Further to Friday's report on Chapel Down (OFEX:CDGP) I tracked down my nearest stockist (Waitrose), and we had a family Scrabble and English wine tasting evening last night. The overall verdict (FWIW) was that we thought the Flint & Bacchus white wines were pleasant, but not something we'd go out of our way to buy. Not a bargain at £10 per bottle either. Although the 33% shareholder discount (if you prove ownership of 2,000+ shares) would bring it down to a more acceptable price.

However, the Chapel Down champagne was delicious, and to my unsophisticated taste seemed just as good as most mainstream French champagnes. So a very real contender, at £20 per bottle.

We also sampled the Chapel Down beer, Curious Brew, which was excellent, I thought.

Part of the problem seems to be that they are hidden in the "Rest of World" section of Waitrose, with no prominence, and very little stock on display. So I would say Chapel Down's main challenge is to promote its wines better, and persuade retailers to display them more prominently & with greater shelf space allocation.

Anyway, on to today, and I see at least 3 bad situations, looking at the top fallers table.

ST Ives (LON:SIV)

Share price: 124p (down 45% today)
No. shares: 142.1m shares
Market cap: £176.2m

Trading update (profit warning) - the share price is down a brutal 45% today, so that immediately indicates that this is a serious profit warning. A regular profit warning usually sees a share price down 30%, and a mild profit warning is more like 10% down.

The company describes its activities as marketing services, which seem to be based mainly around print. So mailshots, and similar things, I imagine.

The group has a 31 Jul 2016 year end. For the first 8 months of this year, things seem to have gone alright:

Trading overall in the eight months ended 1 April 2016 has continued to be broadly in line with management expectations, with Group revenue running approximately 5% ahead of the equivalent period last year.  

Unfortunately though, storm clouds are gathering:

However, the outlook for the final quarter, and for the following financial year, has deteriorated.

...as noted within our half-year results, the current global economic uncertainty is leading to greater caution in the allocation of marketing budgets. Recently, and within the digital segment in particular, we have observed an increase in this level of uncertainty and caution within our client base which has led to the cancellation and deferral of a number of significant projects. We consider this to be a short term issue although it will impact trading for the remainder of the financial year and into the following year. We are implementing targeted cost saving measures where appropriate but will not do so if this results in long term damage to the business.

The big question in my mind, is whether this slowdown is something company-specific, or due to broader macroeconomic factors? The company of course blames macro factors, as companies always do, but that may not necessarily be true. Competitors may be eating their lunch, who knows?

So I'll be keeping my eyes peeled for what other marketing companies are saying about current trading, to determine whether there is a general slowdown happening. Although it's not a sector where I currently hold any positions, so doesn't interest me that much.

Challenging conditions in the UK grocery retail sector has hurt one of St Ives' divisions, the "Marketing Activation" segment, whatever that is.

Conclusion from the company:

Despite a strong performance overall in the year to date, the combination of factors outlined above lead the Board to conclude that the Group's underlying profit before tax for the current financial year is likely to be materially below management's current expectations.  Whilst it is too early to judge with accuracy at this stage, it is expected that these factors will impact the outturn for the next financial year also.

I'm perplexed by this. So the group has performed well for 8 months, but seems to now have hit a brick wall, such that its performance for the 12 months will be "materially below". That seems to imply that the last 4 months of the year (Apr-Jul 2016) are set to be very bad.

My opinion - I can see why the shares are down 45% today. This announcement puts a serious question mark over what visibility the company has over its future earnings?

Worse still, the company hasn't quantified anything. Does "materially below" mean 10% below, or 50% below, or (more likely) somewhere in between. So how on earth can we value the shares? With the information given, and its vagueness, valuation is now impossible!

All we can do now, is wait for revised broker notes to come out, as the brokers will have been given a more accurate steer by the company. This is totally unacceptable. What the company should have done, is to tell the market specifically what profit it now envisages being likely for y/e 31 Jul 2016. If it's not able to give a precise figure, then a range will suffice. Plenty of companies do this, and everyone should.

Where there's uncertainty, the market assumes the worst, and sells off the shares brutally, as it has done with SIV this morning. The company, and its advisers, are to blame for this. They could, and should have given proper guidance today, as to what profit they anticipate achieving. Instead we got a lot of vague text, and no guidance at all. Absolutely hopeless.

Broker forecasts - I've just seen one broker update, which reduces EPS forecast for 2015/16 from 21.0p to 16.8p. More worryingly, this broker is forecasting that y/e net debt will be c.£85m, up considerably from its previous estimate of £67m.

Balance sheet - I've repeatedly pointed out before that SIV has a weak balance sheet, e.g. in my last report here on 6 Oct 2015. With trading now deteriorating, and an uncertain outlook, the weak balance sheet suddenly becomes much more of an issue. There's no downside protection, where a company has a weak, highly indebted balance sheet.

Dividends may possibly now be under threat, if performance continues to deteriorate. I would never rely on the dividend yield at any highly indebted company, because if bank covenants are under threat (as they might be here, next year), then the divi is usually cut, or passed altogether. A decent divi yield is only of sustainable value at soundly financed companies, in my view.

Overall - I'd be more inclined to go short, than go long. Although in practice, I'll do neither. There's no question of me wanting to catch this falling knife though, even if it drops another 45%. There are too many uncertainties now - both in terms of performance, and in terms of the financial stability of the group.

How much read-across there is to other companies, and sectors, I don't know.

Note from the chart below how the shares gapped down 30% at the open today. So a stop loss wouldn't have been much use at limiting your losses, other than to get you out fast, depending on how quickly your broker or Spread Bet company acted. Therefore, someone with a 20% non-guaranteed stop loss on SIV would have probably been closed out this morning for a 35-40% loss. Very painful, if that person was relying on a 20% stop loss to limit their losses.

I often wonder how the SB companies deal with closing positions in the same stock for multiple clients, in a situation like this. It could get very messy.

I'll be giving this share a wide berth. I've never liked the weak balance sheet, and now it's trading badly too, there's nothing to tempt me in, even at a 45% lower price.

Outsourcery (LON:OUT)

Share price: 6.4p (down 38% today)
No. shares: 55.6m
Market cap: £3.6m

Trading update - it's clear from the continued heavy losses in 2015 reported today, and that the company is out of cash, that the end is probably nigh.

The outlook sounds very weak - partner product launches have been delayed.

Cash is desperately needed:

The Company will require further funding for short term working capital purposes and is therefore investigating alternative solutions to its short term cash needs including fundraising, restructuring and the disposal of non-strategic business assets.  The Company is in an ongoing dialogue with its principal secured lender to agree certain consents required to allow for an appropriate solution to be implemented, which is expected to provide working capital for the ongoing unified communications business.

My opinion - it seems to me that things are hanging by a thread here. Therefore, I regard the existing equity as being worth nothing.

None of this should have been a surprise - I put this stock on the Bargepole List in Jul 2014, as it was glaringly obvious then that the company was going nowhere. The shares are down 76% since then, and it probably won't be too long until the remaining 24% joins the other 76%, leaving shareholders with zilch.

Snoozebox Holdings (LON:ZZZ)

Share price: 1.2p (down 26% today)
No. shares: 295.2m
Market cap: £3.5m

Director changes - This is another one which looks as if it's heading for the knacker's yard too, I'm afraid.

The CEO is leaving, with the Chairman taking over the reins, but only on a part-time Exec Chairman basis.

The dreaded strategic review is taking place:

Prior to receiving the CEO's resignation, the Board had begun a comprehensive review of the business.  The review is nearing completion and the initial findings will be published shortly.

I can tell them what they need to know right now. The business has failed. The overheads need to be eliminated completely. The good bits need to be sold off as a going concern, to the highest bidder.

There is a future for this type of operation, but not as a listed company with big ambitions - that just hasn't worked. Instead, the snoozebox units need to be operated on a shoestring, as small, private businesses.

Whether there will be any surplus remaining for shareholders, after debt has been cleared, depends on what proceeds can be secured from the sale of the assets.

Pity it hasn't worked, but there we go. Shareholders should not pour any more good money after bad, in my view. There comes a point where you just have to accept that something hasn't worked.

I have to dash, as am helping a private company with its year-end accounts preparation for 3 afternoons this week.

However, just one more brief comment:

Cambridge Cognition Holdings (LON:COG)

Results, y/e 31 Dec 2015 - ridiculously late accounts are out today. It's never good news when accounts are late.

The company remains loss-making unfortunately. Although it seems to be suffering some pain from moving to cloud-based software, so hardware sales are reducing.

A small Placing has been done today at 37p, to top up the coffers - with £1.25m. It's been looking a bit low on cash for a while.

Outlook comments today sound reasonably upbeat:

2016 has started well with a strong order book and improved sales pipeline. We also start the year with an enlarged commercial team in place unlike the prior year

My opinion - it's a company I know reasonably well, and have held before. I sold my shares a while back, because progress was frustratingly slow. In my view the company seems to be full of nice people, but lacking in real commercial drive.

That said, it has a very interesting niche, with high barriers to entry. Its technology & data is proven and has decades-worth of track record.

So there's definitely something interesting here, in my view. I might put it on my watch list, and pick up a few if the share price drifts down, which it tends to do in between newsflow.

That's it for today. See you tomorrow!

Regards, Paul.

(usual disclaimers apply - not advice, personal opinions only)