Small Cap Value Report (26 Sep 2016) - SAL

Good morning!

It's a typical Monday morning - make a coffee, delete last night's Tweets, then brace myself for whatever horrors the RNS has in store. Today, the main headache comes from Spaceandpeople (LON:SAL) unfortunately, so I'll dissect that one first, below.

Incidentally, apologies for Friday's report failing to get off the ground. This was due to a complete lack of interesting announcements. A secondary reason was that my largest personal long position, in TWTR shares, delighted me by zooming up 20% on preliminary takeover approaches said to be from both Salesforce and Google. Other companies are also said to be interested. So I had to abandon my post here, and focus on that - whether to cash in, or buy more?

I ended up buying Call Options, which can be a nice way to play large cap takeover situations - limited, and precise downside (if it goes wrong, they expire worthless), but potentially exciting upside if a bid does occur.

There's an interesting section in the book, The Big Short about this. One hedge fund made a small fortune by spotting situations where call options were mispriced, in binary type situations (i.e. a takeover bid will either happen, or won't). As with most things in investing, easier said than done. Maybe they just got lucky?

Spaceandpeople (LON:SAL)

Share price: 28.5p (down 28% today)
No. shares: 19.5m
Market cap: £5.6m

(at the time of writing I hold a long position in this share, unfortunately)

Interim results, 6m to 30 Jun 2016 - the market cap here is now so small, it's well below my usual cut-off of £10m. However, as it's a share that I covered extensively in the past, it makes sense to update on the latest disappointment. I think an honest appraisal of mistakes is actually more important than crowing about the winners. Everyone makes investing mistakes, it's unavoidable.

Interim results here don't look great, but they're not a disaster either. The company makes its profit over the Xmas period, so interims are not particularly important. Key figures;

• H1 loss before tax (continuing ops) of £174k (down from £62k profit in H1 2015)
• £552k one-off hit from closing down S&P+ (we already knew about this)

This doesn't seem to justify a 28% drop in share price. So I'm wondering whether it's time to buy some more?

Outlook comments are concerning though, and I think this is what has hit the share price today;

In common with many retail related businesses, trading across the Group in the period since the half year end has been more subdued than we had anticipated.

We will need to perform strongly over the remainder of the year in order to meet our expectations. We have a good team led by experienced managers who are all focused on delivering our objectives.

As a result of the one off costs of closing S&P+ and the need to invest further in the growth of the MPK programme next year, for the first time since being admitted to AIM in 2005, we do not intend to propose a dividend during the 2016 financial period. This is intended to be a one year pause with dividends recommencing during the 2017 financial period.

I was chatting to a friend about this share only last week. We agreed that it had been very disappointing, but at least it pays nice divis. Well not any more - no divis this year. The company does say that it intends to resume paying divis in 2017 though. Whether that actually happens or not, only time will tell. If finances are getting a bit stretched, then pausing divis is the right thing to do, so I can live with that - although it's obviously bad news.

Also, the outlook comments suggest that there's a heightened risk of the company missing forecast for this year - that's in the price now.

There's a worrying comment about the German promotions business too;

The German promotions division is currently negotiating a contract extension beyond 2016 with its key client. While this negotiation has been going on we have encountered a block on long term promotions being accepted. Hopefully once the contract is agreed we will be able to transact this business which is important to our second half year income.

Sounds ominous, and another seed for a future profit warning perhaps?

My opinion - well obviously I've got this one completely wrong. Multiple problems have resulted in profits dwindling in the last few years. However, taking into account the H2 weighting to trading, it should still be profitable this year - I reckon around £500k is probably the sort of level for the full year.

Also, there have been several good contract wins of late (e.g. Network Rail), and the new kiosk design is performing well, and is higher margin than before. So it's not a total catastrophe.

The market cap is now so tiny, it is tempting to buy some more. However, the outlook comments sound too wobbly for my liking. I think this probably has another profit warning in it, which could present a decent buying opportunity at perhaps sub-20p later this year, or early next year.

Although I wouldn't blame people for throwing in the towel on this one, and just ditching them, and moving on. There is an argument for clearing the decks and focusing on more successful investments.

Work-in-progress - this article will be updated from time to time this afternoon.