Small Cap Value Report (25 Jul) - IPEL, VNET, HIBU, SSY, HRN, GBO

Good morning! The first company I've been looking at this morning is Impellam (LON:IPEL 397p pre-opening price), a staffing group operating mainly in the UK and USA. It has announced interim results for the 26 weeks ended 28 Jun 2013 this morning. The shares, at 397p, appear to be very cheap against forecast EPS of 66p for this year (that's a forecast PER of just 6). However, it looks as if they are going to miss forecasts, as the interim numbers only came in at 20.1p, slightly down on last year's H1 (2012: 20.9p).

The strange thing is that last year they also disclosed H1 adjusted basic EPS of 27.6p, whereas I cannot see any mention of adjusted EPS this time. Broker forecasts are usually caclculated on adjusted EPS, so this makes it difficult to assess performance here against full year forecasts.

I don't think we can assume that adjusted EPS will be similar to last year, because there was a £3m restructuring charge last year, and there isn't this year. So it looks to me as if the company is trying to gloss over the fact that adjusted EPS has actually fallen quite sharply against last year.

That's not good. I don't like companies who include adjusted EPS when it flatters their performance, but then stop disclosing it when it becomes inconvenient in highlighting poor performance, which appears to be the case here.

The outlook is mixed, with it being positive in the core UK & USA markets, but weakness in their other two divisions (Medacs Healthcare and Carlisle Support Services) is expected to continue holding back EPS. Therefore it looks as if this is effectively a profits warning, and they don't look likely to hit full year EPS forecasts.

They've moved from a net cash to a net debt position of £24.3m at 30 Jun 2013, partly due to working capital changes, and the payment of a 35p special dividend in Apr 2013.

Overall, I'm not at all impressed with the presentation of the figures, which combined with the poor performance from two of their divisions, means I'm taking this one off my watch list for the time being.

Note that the shares have fallen almost 10% this morning. Here is the 12 month chart, compared with the Small Caps Index (note how amazingly strong that has been - this really is a roaring bull market for small caps, for the moment anyway):

 

 

 

 

Following an interesting presentation and Q&A with the Chairman of Vianet (LON:VNET 71.5p) on Monday of this week, the company published it's response to the Government's consultation on a proposed new Statutory Code to regulate the tied pub sector. Vianet's response document is on it's website here.

It's important to remember that beer flow monitoring is not the key issue here. The Government's consultation document is mainly about trying to make the brewery Tie arrangements fairer for the tenants. Most reasonable people would agree that the large PubCos do seem to screw tenants into the ground, to a point where many cannot earn a reasonable living. This is because they are not only charged a heavy premium for the drinks, but are also charged high rents. Arguably this is ripping the heart out of rural communities, as village pubs close down.

On the other hand, one could argue that tenants enter into these leases of their own free will, on an arms length basis, and that the breweries are entitled to seek the most effective tenants for their Pubs, in order to maximise the return from their assets. So it's a tricky one, where I can see both sides.

Beer flow monitoring is only mentioned as an aside in the document, which also states that the Government is not trying to alter the fundamental model of the brewery tie, but is just trying to take a bit of pressure off the tenants, at the expense of the Pubcos. So my opinion is that flow monitoring equipment is extremely unlikely to be banned, even if some sort of Statutory Code does go ahead. That in itself is unlikely, as the Pubcos are already lobbying to suggest that this might force the closure of many Pubs, hence causing bad unintended consequences. I suspect therefore that the Statutory Code might end up in the too difficult to do in practice tray, and that the Tories will probably pull Vince Cable back into line on this, because the last thing they want is Pubcos closing uneconomic pubs.

Getting rid of beer flow monitoring equipment is an open invitation for pub tenants to buy illicit beer supplies on the black market for cash, thereby avoiding VAT, Corporation Tax on the profit, etc, to the Treasury's cost. I cannot see how the Treasury would allow this to happen, even if a few Lib Dem MPs perceive this as a vote winner.

Looking at the chart, and the fundamentals, I could foresee Vianet recovering perhaps 40-50% from it's current 71.5p if the regulatory threat falls away, although the timescales on that are 3-6 months, and it could drag on longer, who knows?

As you can see from the 12 month chart below, to get back in line with the small caps index, Vianet would need to double from here. So an interesting contrarian situation perhaps?

I haven't read the Vianet defence document yet, having scheduled that as a job for this weekend, so am interested in any feedback from readers here who have read it. Comments in the comments below please!

 

 

 

 

It's game over for shareholders in Hibu (LON:HIBU 0p), with the shares having been suspended and a letter from the Chairman stating that the shares are indeed now worthless. Frankly anyone who held the shares should not be investing at all. The shares should have been suspended at least six months ago, as it was blindingly obvious they had no value, because the debt pile was so huge and unrepayable.

I issued a blunt warning here to readers on 13 Feb 2013 as follows, so hopefully none of you got caught on this one:

 

You know that a management have no idea what to do, when they abandon an existing brand name and replace it with something new & completely meaningless. Such was the case with Yellow Pages, or Hibu (LON:HIBU) as it is now called.

It's been obvious for years that the equity was worth nothing, due to extreme levels of debt, and an underlying business in terminal decline due to the internet. However, they stated as much in an IMS yesterday, which talked about restructuring the debt. Buried within this announcement was a statement that little or no value will be attributed to the existing shares, i.e. they are worthless.

Despite this, some lunatics are still trading the shares, but I do want to emphasise to readers that HIBU shares are almost certainly worthless gambling chips, and the market cap of £8m is a nonsense. I just wanted to flag this up to readers, so you don't get sucked in.

 

 

I am perplexed as to how it was allowed for Hibu shares to continue being traded for six months after the company had publicly stated that they were effectively worthless?

 

 

 

 

SCISYS (LON:SSY 70p pre-opening price) have announced what looks like a contract extension, supplying electronics upgrades for the British Army's "Warrior" armoured vehicles. It's a £5.8m contract in total, although some has already been recognised in turnover, so it's not stated what amount is additional turnover or profit.

It's interesting that, whilst there is downward pressure on defence budgets generally, there will always be niches where spending is increasing. I've come close to buying shares in Scisys a couple of times, but have never quite pushed the button.

(Edit: a contact has just informed me that the Warrior contract is already included within forecasts for Scisys, so this looks to be more of a PR-driven announcement, rather than having any material impact on the figures!)

As you can see from the Stockopedia stats for Scisys above right, there's a lot of green, indicating attractive ratios for growth and value.

 

My chosen value pick in this sector is Cohort (LON:CHRT 157p), which in my opinion has slightly better value characteristics than Scisys, but as always DYOR.

 

 

 

 

Hornby (LON:HRN 82p) has issued an IMS today. I've revisited the numbers, and they are cautiously saying that (subject to a number of caveats) trading should be in line with expectations. That would deliver EPS of 3.5p for this year, according to broker consensus, so at 82p the shares would be on a PER of a hefty 23 times this year's forecast earnings.

So clearly the share price is not only anticipating an in line result this year, but improved performance in future, as they recover from serious supply difficulties in the past. I can see the place for a niche company like this, but remain uncomfortable with the price. If you have to pay up-front for a trading recovery, how does that make sense on a risk/reward basis? It's not for me at this price.

 

 

 

 

Globo (LON:GBO 42p) has issued a positive-sounding H1 trading update. "Strong growth momentum" of 51% year-on-year has been achieved in revenues, to E32m for continuing operations. They state that EBITDA and PBT will be "slightly ahead of market expectations".

Let's be clear, the EBITDA figures are totally meaningless, because Globo capitalise so many costs into intangibles. So to value the business on EBITDA is complete fantasy, as it is for most software companies. You're ignoring a large part of their overheads!

The Balance Sheet at Globo just doesn't look right to me at all. Far too much in debtors, and it therefore looks like potentially, an accident waiting to happen in my opinion. Very aggressive accounting techniques tend to come unstuck at some point, with big write-offs. Although those are presented as exceptional, and so it continues.

This type of business has products with very short lifespans too, so it's not something I would feel comfortable with at all, but good luck to people who ride the wave!

I set out in more detail what alarm bells ring for me with Globo's accounts here on 8 April. Maybe I'm being too harsh on them, but having made a lot of mistakes in the past by ignoring accounting signals that worry me, I just don't take any risks any more.

 

 

That's covered everything of interest to me this morning, so see you here again from 8 a.m. tomorrow.

Regards, Paul.

(of the companies mentioned today, Paul has long positions in VNET and CHRT, and no short positions)