Small Cap Report (20 Mar) - INL, TFW, OPTS, JPR

Pre 8 a.m. comments

It's Budget day today, so hopefully we might see some measures to stimulate small cap investing. The removal of Stamp Duty on AIM shares (or indeed all shares) would be a positive measure, and removal of the restriction from putting AIM shares in ISAs could also be in the pipeline. I won't be doing any in-depth coverage of the Budget here, since you can get chapter & verse on it easily elsewhere.

Cyprus also continues to be a major worry, since their Government has rejected the appalling bail-out deal which involved direct theft of depositor bank balances by the Government, a measure which is precisely the opposite of what is needed when investors have fragile confidence in the banking system generally, to loosely quote Alastair Darling - who I have a lot of time for, since he usually talks sense, and very unusually for a politician, is generally fairly truthful and direct in what he says, in my opinion. Incidentally, Darling's memoirs of the financial crisis, "Back from the Brink", is a must-read for people interested in finance.

I remain long of Gold, and am surprised it has not risen more, given that the irreversible Euro project may be about to lose its first member. How much longer then, will it be before the populace of Greece and Spain demand a Euro exit too? You can't keep enforcing austerity and 6% p.a. (compounded) GDP contraction on people, as has been the case with Greece. Eventually they snap, and a revolution of some kind occurs, which I believe is the most likely outcome for Greece, and maybe Spain.

 

Turning to company results, Inland Homes (LON:INL) announces half yearly results to 31 Dec 2012. Inland has a very poor track record in my view, originally raising and investing money at the top of the market just before the credit crunch, almost going bust, then failing to generate much shareholder value since, whilst Directors have lined their own pockets with salaries that are completely disconnected with their poor performance. The FD in particular is (inexplicably) paid more than most AIM CEOs.

That said, figures today look encouraging, with net asset value having risen a bit to 28.24p per share, and there is also over 5p (post tax) off balance sheet net asset value relating to one project at Drayton Garden Village. Inland is a brownfield regeneration property company, which is increasingly building houses itself now too (which makes sense) in the South East. Given the shortage of housing, and rude health of the major housebuilders (which have all put out buoyant statements lately), then I cannot see any justification for INL shares trading at a discount to underlying NAV. Therefore at the 24-26p range where they have been trading, these are probably about 10p undervalued.

Please note that I am a shareholder in INL. It looks like they are going to open usefully up.

INL has low gearing, and their great difficulty in raising finance is a good explanation for why our economy has not recovered properly yet - the Banks are still starving companies of the funding needed to kick-start an economic recovery, and it takes time to find ways around that. INL has raised funding through zero coupon bonds, which roll up the interest so it's payable at the end, matching their cashflows.

It is pleasing to see that INL say they are planning a "substantially increased dividend" this year. I should think so too, as the derisory dividend last year caused uproar, since it totalled less than the discretionary bonuses that Directors decided to pay themselves! What was worse, is that they couldn't see anything wrong in this, but only admitted to having communicated badly as to the reasons for paying Director bonuses.

I shall be so glad to eventually sell these shares, as the attitude of the Directors is one of the worst I've ever come across. Notwithstanding that, the shares are cheap, and I'm going to hold out for a price that reflects the inherent value in the company, which is probably in the mid-30's pence per share.

Hopefully one of the larger housbuilders might bid for Inland?

 

Post 8 a.m. comments

Wow, a 20% rise on INL this morning. Thanks Mr Market, I've just sold almost all my Inland shares at 31p, so am very happy with that.

I see there is more good news from Lo-Q (LON:LOQ), with a contract win announced. Valuation is now ... what does valuation matter when you have momentum?!!

Stockopedia have just emailed me to say that they've added Indices to their charting package, at my request. This is one of the best things about this website - they are incredibly responsive to user feedback - if you raise a green ticket for a sesible suggestion, using the "help & feedback" button on the right of every screen, they usually respond within minutes, and if they like the suggestion you made, they say, OK we'll do that! So let's have a chart of Inland Homes compared with the relevant small cap index:

 

This comparison chart really shows how strong the move up in small caps has been since last summer, and whilst we all think we're genius stock pickers right now, bear in mind that a rising tide lifts (almost) all boats, and as Buffett once said, it's only when the tide goes out that you see who is not wearing a bathing costume! Hence why I'm selling things that become fully valued, and de-gearing by top-slicing other things where appropriate. There will be a market correction, sooner or later, and this market is feeling quite frenzied to me. These rises have gone on too long, and have been too indiscriminate.

 

Interim results published today from a company I have long admired, FW Thorpe (LON:TFW) are (for the first time in years) disappointing, with a 10% decrease in interim basic EPS to 33.1p. There seems to be an H2 weighting to earnings, so it looks like 75-80p EPS might be a realistic estimate for the full year to 30 Jun 2013. The shares have fallen 12% to a mid price of 1050p this morning. That may not look esepcially cheap at first glance, but the company has an amazing balance sheet, stuffed full of cash, although what use is dormant cash sitting there doing nothing, one might ask?

They have more than doubled the interim dividend to 10p, but the yield is not exciting. I would suggest they need to start paying out big dividends, maybe a large special dividend? Companies exist to benefit their various stakeholders, not to pointlessly hoard cash.

I would investigate further, but as usual the Market Makers have blocked me from trading the shares with an absolutely ludicrous spread. This is a company with 11.7m shares in issue, so the market cap is £123m, hardly small. Yet the quoted Bid/Offer spread is an absolutely crazy 10%! It's 1000p to sell, and 1100p to buy. Unsurprisingly, there are hardly any trades and nor are there likely to be.

When is the LSE going to wake up, and realise that Market Makers are killing the small cap market. They don't add liquidity, they strip it out, because they run neutral books, and quote absurdly wide spreads. This market needs to be opened up with a full electronic order book, open to all. Then liquidity would go through the roof, spreads would narrow dramatically, many more companies would List, and we'd have a much more healthy market. The solution is so obvious, and so simple - an order-driven electronic market in all stocks, right down to the micro caps, with Market Makers free to quote if they want to, or not, if they prefer not to. We don't need market makers anyway in this day and age. I will keep banging on about this until something is done!

I would like to look deeper into FW Thorpe (LON:TFW), but there's no point with a 10% spread, it's a waste of time even looking at it.

 

I have to be fairly brief this morning, as I'm off for an interesting lunch in the City, then going on to the Share Soc Tech seminar, which looks very interesting - it's another meet the management event, with 2 companies that particularly interest me, Escher Group (LON:ESCH) (postal service software, rapid growth), and dotDigital (LON:DOTD) (email software). Plus I am interested in hearing the story from the more blue sky company presenting, Deltex Medical (LON:DEMG). So no doubt I will see a lot of the usual suspects there! Thanks to ShareSoc for organising this event, and to FinnCap for hosting it.

 

There are so many results this morning, I can't possibly cover them, so am just having a quick look at the biggest percentage movers of the day.

Optos (LON:OPTS) is a retinal imaging company with a market cap of around £125m. They have dropped 14% today on an H1 profits warning. Interestingly though they state that full year expectations remain unchanged, but will be more H2 weighted than previously expected. This looks potentially interesting, as the historic summary financial information looks pretty good. Might be worth a further look.

 

I see that Real Good Food (LON:RGD) is up 13% on a tradig update, so it looks like my scepticism there was misplaced. Well doen to the bulls, although remember that it has a lot of debt, and tiny margins, so doesn't interest me for those reasons.

 

Finally, I had a look at results from Johnston Press (LON:JPR) yesterday, and have to say I think this share is worth nothing. It has so much debt, that almost all the profits are consumed just paying interest, and with revenues declining quite rapidly, it's very difficult to see how there will be anything left for equity holders in the long run, especially with a big pension deficit too.

Banks may be allowing zombie companies to continue trading, but that doesn't mean that the equity has any value, something that I feel many investors are failing to appreciate right now. It's really a very artificial situation overall, with many companies still trading which in previous Recessions would have been put into Admininstration due to excessive bank debt.

 

OK, gotta dash, see you same time tomorrow!

Regards, Paul.

(of the shares mentioned today, Paul has a small residual holding in INL, but as mentioned in the article today, sold the bulk of his shares this morning at 31p. Of the other companies mentioned, Paul has no long or short positions)