Small Cap Value Report (7 Nov) - DLC, PURI, ABDP, WIN

Good morning. Big news today for shareholders in CAD/CAM software group Delcam (LON:DLC). There is an agreed cash takeover bid at £20.75 per Delcam share, from an American outfit called Autodesk Development. No doubt Delcam shareholders will be moaning that it's only a 21% premium to last night's market price of £17.15 per share. In reality however, the market price was already stretched, so to get a 21% premium on an already high valuation is not bad going. The undertakings to accept the offer do however leave the door open to a higher competing bid, so the company is now very much in play.

Looking at valuation, Delcam reported 55.6p EPS last year, so this offer is a generous PER of 37.3. Not bad! 2013 forecast EPS rises to 61.7p, for a still very high PER of 33.6. So it looks an excellent deal for Delcam shareholders, and separately Renishaw has announced their acceptance, relating to their 19% shareholding in Delcam. It sounds like they are keen to trigger a bidding war, as their acceptance will be suspended if any other party announces a firm intention to bid for Delcam at £22.30 per share or more. So this could get interesting! Therefore it seems to me that sitting tight is probably the best thing to do in this particular case, but obviously that's for each individual shareholder to decide. The trouble is that Institutions usually drive these deals through, because disposing of their large holdings is so difficult, that a takeover bid is the only realistic way to do it. Hence they will usually grab a premium-priced offer, whereas many private shareholders would probably prefer for the company to remain independent.

So far there is 44.5% acceptance of the offer, so not a done deal yet, but going that way. A 75% vote is required from shareholders at a General Meeting to approve the takeover deal (which meeting should be held within 28 days), which if passed makes it a done deal.

 

 

 

 

I've mentioned PuriCore (LON:PURI) here before - it seems just the type of growth company that should be rising substantially in this type of bull market, but so far the share price movement has been pretty pedestrian. This is the company where a Director recently bought £450k in stock too - a very bullish signal in my opinion. I'm not keen on small Director buys, but nobody can argue with £450k in a small cap! I would say that's a pretty clear signal that he sees a good future for the company.

The reason I'm mentioning PuriCore today, is that they have announced a $3.5m 4-year deal with a "major US retailer" for their fresh produce hygienic sprays. It may not be a material contract on its own, but demonstrates that the company seems to be building momentum. There's also a comment from the company, saying;

 

Michael Ashton, Executive Chairman, said:

"This second major FloraFresh agreement demonstrates that US supermarket retailers are embracing the value of this product to improve both the quality of their floral offerings as well as their bottom line by reducing inventory waste and cleaning labour.

 

I'm talking my own book here, as I have held the shares for a few months now, but I am perplexed as to why this share is so overlooked by investors. It might be because they got into fairly serious financial difficulties, but that was all sorted out at the start of 2013. So the Balance Sheet is now fine, but that has not yet fed through into screening systems, which use the old Bal Sheet data from last year. Perhaps that change might trigger a re-rating in the spring of 2014, when the stronger 2013 Bal Sheet feeds into investor databases?

Anyway, I think it looks interesting, albeit somewhat speculative - this type of share is always a bit of a gamble on whether sales growth will take off or not. I'm happy to buy into things like this in a small way in a bull market, providing the market cap is small, it's not burning cash, and that the story is good, but overlooked by investors - i.e. I like to buy into growth stories before other investors have found them, and definitely not when the full bulletin board ramping operations are underway!

Always remember that when a bulletin board is in full mania mode, then that's usually at or near the end of the bull run in that stock. Not always, but it's a big warning sign anyway. Remember - busy, exciteable bulletin boards are a bad sign, as unsophisticated investors will have probably already taken the price too high. An empty bulletin board on a stock is wonderful - as it could mean you've found a bargain before the crowd!

 

 

  

A new share for me is Ab Dynamics (LON:ABDP), which was an IPO at 86p at a Placing price of 86p. It's been a tremendous success, sitting now at 185p, suggesting that they under-priced the IPO. Pity I missed this one, as it looks a good business. It reports final results for the year ended 31 Aug 2013 today, showing revenues up 37% to £12.2m, and operating profit up 22% to £2.2m. Not bad at all.

It has a decent Balance Sheet, with £6m in net cash, a strong working capital position, and immaterial long term creditors (just a bit of deferred tax). With 16.3m shares in issue, and at 185p today, the market cap is about £30.2m, which is perhaps up with events now? It looks an interesting company though, and worth looking into - if there's more growth to come, then it might be worth paying up? I'd need to do a lot more research though, and find out what they do (it's something in the automotive engineering area). Just thought I'd flag it up though, for readers to DYOR.

 

 

 

 

If you want to see a really awful Balance Sheet, then check out this morning's interim results from Wincanton (LON:WIN). Net assets are negative to the tune of £275.1m! Deduct their £110m intangible assets, and you're down to negative £385.1m!! In any previous Recession it would have been put into Receivership, in my opinion. This time it's all been distorted by Govt policy of encouraging Banks to allow zombie companies to continue trading. I think that is lulling some investors into a false sense of security.

So as you can probably guess, I wouldn't touch this share with a bargepole. It's inevitable that at some point they will need to repair their Balance Sheet with an equity fundraising. At the moment, financing costs are swallowing up about half operating profit. There hasn't been a dividend since 2011, and there's not likely to be in the foreseeable future, looking at these figures.

Note also that they say in today's results that the average net debt figure throughout the year so far has been £90m higher than the half year end reported figure. To be blunt, I think investors have taken leave of their senses taking this market cap up to over £150m. I'm struggling to get to a value much above nil for the equity, given the indebtedness & pension deficit.

There again, Thomas Cook (LON:TCG) extricated itself from a position that, on paper, was completely insolvent. So maybe this lot will too?

 

 

 

Right, I have to dash, as am off for an investor lunch.

See you tomorrow as usual, from 8 a.m.

Regards, Paul.

(of the companies mentioned today, Paul has a long position in PURI, and no short positions)