Small Cap Value Report (9 Aug) - OPE, DQE, AEC

Good morning! A very quiet day today for news. The FTSE 100 futures are indicating a positive open, up 32 points to 6,551. As has been well publicised, this has been the first week where AIM shares have been allowed in ISAs. So far this week the FTSE Aim 100 (FTSE:AIM1) is up 0.84% (from 3,350 on 2 Aug to 3,378 on 8 Aug), when over the comparable period the FTSE 100 Index (FTSE:UKX) has been down 1.77% (from 6,648 to 6,530), so that's a relative out-performance of 2.6% in the last week for the largest AIM stocks.

Interestingly though, FTSE Small Cap Index XIT (FTSE:SMXX) was also up almost as much, up 0.68% (a relative out-performance of 2.45%), which suggests that this has been a general small caps move up, not just for AIM shares. Subjectively, things have seemed much more positive than that to me, in the last few weeks, but especially this week. Quite a few of my small cap holdings have been on fire lately, zooming up considerably. In fact, if you look at my Blog page where I jot down ideas for further research, there have been some remarkable performers in there, and very few mistakes (Silverdell being the only serious one). I know it's a bull market though, and everyone looks terribly clever when a rising tide is lifting all boats, so things do need to be seen in that context.

I've top-sliced a couple of my holdings, but am running with the rest, as I see good upside in things now that the market is pricing in a sustainable economic recovery.

 

 

As regards company results, the first one I've had a quick look at is bus maker Optare (LON:OPE). The figures look dreadful, with a £5.5m loss on £76m turnover for the year ended 31 Mar 2013.

It fails my Balance Sheet review, because net assets are negative by £4.7m, and stripping out intangibles, net tangible assets gets even worse, at negative £12.1m. The whole thing is propped up by bank debt of £18.7m, and that is itself supported by a guarantee from the largest shareholder, an Indian company called Ashok Leyland, which owns 75.1% of Optare.

Therefore it's completely uninvestable - not only is Optare effectively insolvent if it were put on a stand-alone basis, but it also has a totally dominant controlling shareholder. With a £6.9 market cap, there's absolutely no point in it having a Stock Market Listing, in my opinion, and I wouldn't go near these shares for the reasons given.

 

 

 

 

Indian film company DQ Entertainment (LON:DQE) issues its Q1 financial results for the three months to 30 Jun 2013.

I don't normally comment on overseas companies Listed on AIM, because they usually have something wrong with them. DQE certainly ticks that box. Their problem specifically is that they seem incapable of collecting in very much cash. So they keep reporting profits, which just pile up on the Balance Sheet in debtors, to an extent that has become ridiculous.

So it's barely worth even looking at the P&L, the only thing that matters is whether they are turning the debtors into cash. Rather unhelpfully, the Q1 results do not include a Balance Sheet at all, so all we have to go on is this comment from the company:

 

We have given a special focus to strengthening our balance sheet by putting an extraordinary effort into the collection of receivables from our clients and partners, which will further help in improving our working capital position.

I remain cautiously optimistic that we will end the fiscal year in a satisfactory position as planned. We are very resolute in creating value for our shareholders and employees through long term sustainability of the business model adopted by us and to face the new economic challenges globally with even better results.

 

So basically, just a lot of meaningless waffle.

I don't see how it is possible to invest in this company unless & until they substantially reduced debtors. At the last Bal Sheet date of 31 Mar 2013, Debtors stood at INR 2,379m, which is more than a year's turnover (of INR 2,294m). That's just a ludicrous situation, that makes you think that it's possibly not only their film output which is a work of fiction.

 

 

 

 

Things seem to be getting rather messy at private education group AEC Education (LON:AEC). I looked at their most recent accounts, and was initially enrhused by the turnaround story, and cash on the Balance Sheet. However, on closer inspection our old enemy Deferred Income was behind the cash balance - i.e. it related to deposits paid by clients up-front. All fine when you can keep that rolling, but their facility in Singapore has run into serious problems, and has had its regulatory authorisation suspended for six months. So that is likely to mean that the Deferred Income for that division will run down, depleting cash.

This can only really be viewed as a special situation now, where one would need to do deep research to understand. Their trading statement from last week showed a more promising performance from the UK, Ireland, and Cyprus. So the crux seems to be to what extent can they ring-fence the problems in Singapore - i.e. could they just walk away from the problems if they become too serious, or does Singapore have the potential to pull down the whole group?

It looks very messy, but with a £1.6m market cap, if the problems can be fixed, then these shares could potentially be worth several times that. Has to be regarded as extremely high risk though, but I'm mentioning it because some readers like micro cap special situations, and are expert in researching them, so for those specialists only, this could be worth looking into in my view.

 

 

 

I've trawled through the list of announcements a couple of times now, and can't find anything else worthy of note, so will sign off now for the day & the week.

Hope you all have a super weekend!

Regards, Paul.

(Paul has no long or short positions in any companies mentioned today)