Small Cap Value Report (14 Sep 2016) - PCA, ACSO, SEPU

Good morning!

ShareSoc's investor evening in Brighton last night was terrific, thanks to everyone who came along and survived extraordinarily hot weather. The urgent need for constant hydration was met by an excellent draught Asahi.

I was the warm-up act, and did a run-through of my favourite small caps - just a recap of the previous month's reports, so nothing new. I'll put them on a spreadsheet later, so we can track how my "best of" perform over time.

Next was a presentation from Palace Capital (LON:PCA) . I've not come across this company before, and don't usually invest in property companies. However, this one certainly sounds interesting. Management seem very shrewd in spotting bargains. It put me in mind of Newriver Reit (LON:NRR) when we first met them at Mello a few years ago. Although NRR is a REIT, whereas PCA is not. PCA offers a 5.2% dividend yield, plus hopefully long term capital gains on its properties too.

A job for later is for me to crunch the numbers properly, and check out how the spoils are divided. You have to be careful with property companies to ensure that management are not taking a disproportionately large slice of the upside, in remuneration, options, etc..

In other news, the lady at my local sandwich shop here in Hove is "still trying to digest the news that Bake Off is moving to Channel 4". She seems devastated. I tried to soften the blow by pointing out that commercial breaks are very handy when you need to spend a penny. She gave me a withering look, and responded that she just presses pause for that. Overall though, she surmised that Mary Berry is far too ethical to leave the BBC. As for Mel & Sue, well...

Right, onto some shares news now.

accesso Technology (LON:ACSO)

Share price: 1527.5p (down 4.7% today)
No. shares: 22.2m
Market cap: £339.4m

Interim results, 6m to 30 Jun 2016 - H1 results from this company tend to be of limited interest, because it has a very heavy H2 seasonal weighting. Notwithstanding this, the uplift on H1 last year is very impressive;

Revenue up 23.7% to $39.7m (note that it reports in US dollars)

Adjusted operating profit up 212.5% to $5.0m - a lot of the increased revenue seems to have dropped through to the bottom line - which suggests to me that there might be an element of one-off licence wins in these figures perhaps?

EDIT: please note the comments below from Mark, and Carcosa, which suggest that revenue is about 90% recurring in nature. So it looks like licence wins are actually only a small element of revenue.

Good weather helped H1 results, however "unhelpful weather conditions in some key markets" has been experienced in Jul & Aug 2016.

Outlook comments sound alright;

...The Group's strong performance in the first half reflects the work done last year to prepare Accesso for a period of accelerating growth.

Although the first half of the year traditionally accounts for less than 40% of full year revenues and July and August have presented challenges with unhelpful weather conditions in some key markets, the early momentum gives the Board confidence that the Group is on track to meet its expectations for 2016."

Balance sheet - looks a bit thin to me. Although this is a know-how business, rather than one which requires a lot of capital.

NAV of $67.0m is dominated by intangibles, and NTAV turns negative at minus $7.9m. With such a large market cap now, I would have thought a small placing to strengthen the balance sheet would make a lot of sense. Fix the roof when the sun is shining, and all that.

My opinion - this really is a unique company, which dominates its niche globally, and has attractive recurring revenue streams from impressive clients.

The game-changing news was Accesso winning a contract to roll-out its systems to all of Merlin's sites. Readers who joined me in buying the shares at 617p will now be sitting on a tidy profit of 147%. I banked my profits when it had roughly doubled, an excellent result.

The price has now raced away to a very rich valuation, in common with lots of other growth shares. I'm struggling with the current valuation, which seems very aggressive now. Management took a lot of money off the table, by selling over 1.8m shares at 950p. So my feeling is that if the people who know the business best are banking some profits, then it's wise to follow suit.

So, a smashing company, but it's far too expensive now, in my view.

Sepura (LON:SEPU)

Share price: 19.75p (down 55% today)
No. shares: 370.1m
Market cap: £73.1m

Profit warning - oh dear, more pain for long-suffering Sepura shareholders. It must be really bad, for the shares to be down 55% today.

Order intake in recent months has been lower than the Board's expectations as a result of emerging delays in Device refresh opportunities in a number of key markets, primarily through budgetary pressures which are extending product lifecycles. At the same time, key contract awards in the Group's Systems business have also been subject to delay.

The latest sales pipeline and associated timing indicates that order intake for the full year will have a significant impact on the Group's FY17 revenues.

As a result the Board now anticipates adjusted EBITDA for the current financial year could be c. 60% lower than its previous expectations.

So clearly this is bad news. Very bad, given that it comes after a previous profit warning, and an equity fundraising of £65m at 35p per share in July.

It gets worse though - the banking covenants could be breached in Mar 2017;

The Group has sufficient liquidity for its forecast needs. The revised revenue expectations may require Sepura to discuss with its lenders a possible waiver of certain of its covenants from March 2017.

Cost-cutting is underway;

Further significant savings are being targeted to realign fundamentally the cost base as part of the continual drive for operational efficiencies across the Group.

My opinion - this share is a case study in the dangers of taking on too much debt. It's been a disaster for shareholders.

It seems to me that there's little visibility over profits, with the company relying on large, lumpy contract wins. A lot of the clients are public sector, which is always going to be subject to decision-making, and budgetary delays.

I imagine that shareholders are likely to take a dim view of this announcement, having bailed out Sepura's bank with the previous equity fundraising. Will there need to be another one perhaps? What price this time? 10p?

I never get involved in situations where bank covenants are under pressure, it's too risky.

Board update - a separate announcement today says that the CEO

...has received medical advice to take an immediate and extended period of absence, in order to recover fully from injuries sustained in an accident earlier in the year.