Small Cap Value Report (24 Sep 2014) - JDG, RGS, SSY, MMX

Good morning!

Judges Scientific (LON:JDG)

Share price: 1297p
No. shares: 6.0m
Market Cap: £77.8m

These shares had been recovering from the shock profit warning in Jul 2014, but today they have lurched down again by 240p (15%) to 1297p this morning - roughly the previous low in July. So results must have disappointed, let's take a look.

Interim results - for the six months to 30 Jun 2014 are out today. The group's strategy is to grow through repeated acquisitions, buying private companies cheaply. This is kept rolling by having highly rated shares, thus the acquisitions are earnings enhancing, and only a relatively small number of shares need to be issued from time to time because the cashflow from the acquired companies, combined with a modest amount of bank debt, has funded most of the acquisitions. It's a clever business model, and has been executed brilliantly by CEO, David Cicurel.

The rating got far too high in the 2013/early 2014 bull market, and these shares have now almost halved since the peak.

The interim figures look OK to me, so I'm a little perplexed as to why the share price has dropped so sharply today. Adjusted EPS came in at 50.3p for the half year, up 22%. Although the growth seems to have all come from an acquisition, with no organic growth.

Outlook - the order book seems to be the reason investors are concerned;

Organic order intake during the six-month period decreased 4.8% compared to the first half of 2013; total order intake (including Scientifica) was 11% below the level required to meet the Group's sales budget without consuming its order book. The second quarter showed a moderate but insufficient improvement compared to the first. The order book at 30 June 2014 represented 7.8 weeks of sales, compared to 10.6 weeks at 30 June 2013.

Trading at the start of the second half has continued to be difficult. Weekly order intake in the third quarter has broadly mirrored the activity seen in the first half.

Broker forecasts - WH Ireland has trimmed its full year EPS forecast from 86.4p to 80.3p, but given that the group achieved 50.3p in H1, that seems a fairly pessimistic view for H2 (of only about 30p EPS). I suppose if you assume that is the new level of earnings, at about 30p EPS per half year, then that suggests a drop to only 60p EPS next year perhaps?

Valuation - based on the 1297p share price at the time of writing, and revised 80.3p EPS forecast for this year, the PER is 16.2, which looks rather high to me, considering the company has a weak order book and some long term debt (although that was largely offset by cash on the year end date).

EDIT: I've just noticed that WH Ireland say they might be being overly-prudent in lowering their estimates from 86.4p to 80.3p. So if the company does achieve 86.4p EPS for the year, then the shares would be on a PER of 15.0 times - still rather pricey really.

My opinion - this company is difficult to value now, as the outlook is somewhat uncertain. If it can do some more canny acquisitions, and resume organic growth too, then the shares could turn out to be cheap. However, given the uncertain outlook, and weak order book, I'd say that risk:reward looks finely balanced at the moment.

So there are probably better bargains available elsewhere, based on what information we currently have available here. I wouldn't want to pay more than 10-11 times forecast earnings, given that the trend has been for those forecasts to be reduced. That implies a price of 800-900p per share, well below the current level even after today's drop. So I'll continue to watch from the sidelines.

I think it's best to play it safe on valuations, generally and particularly at the moment as fear has once again resurfaced in the last few days. A lot of smaller cap stocks are being hit quite hard at the moment - so people are turning cautious again.

Regenersis (LON:RGS)

Share price: 221p
No. shares: 79.0m
Market Cap: £174.6m

This share was really slammed yesterday, just look at the chart;

The shares have continued falling again today, down another 20p to 221p at the time of writing.

There is a webinar for investors are 1pm today, the sign up link is here. Should be interesting.

I've had my doubts about this company for a while. It looked fully priced to me, and management seemed overly keen to promote the share price, and the main business activities seem low margin & of questionable quality.

Results for the year ended 30 Jun 2014 were published yesterday, and must admit I'm finding them impenetrable - there are just far too many moving parts! I'd have to spend hours unpicking the figures, to properly understand them.

So I'm trying to resist the temptation to go bottom fishing with these shares. We'll see what management say in their webinar. No doubt the figures will be presented in such a way that they look alright, with various adjustments, etc.

I see that a holding related to the Chairman banked £17.5m from selling 5.8m shares at 300p in Jan 2014 - usually a very bad sign in my view. However, on the positive side the company successfully got away a £100m Placing at 345p in Mar 2014, to fund a big acquisition. So there might be an attraction to buying the shares now at a 36% discount to the Placing price?

I'm on the fence with Regenersis. Markets are a bit wobbly at the moment, so I've taken my foot off the gas, and am not really looking for any new positions unless they're real bargains.

Balance Sheet - despite raising £100m in a Placing this year, RGS only had net tangible assets of £20.1m at 30 Jun 2014.

My opinion - the main problem I have when looking at RGS is that the accounts are just far too complicated. This is because they've been growing by acquisition, operate in multiple countries, it's just impossible to get a grip on how the company is actually performing.

Investor evenings - London

There are two coming up which look potentially interesting;

ED Investor Forum - Thu 25 Sep 2014

Companies presenting: Benchmark Holdings (LON:BMK), Staffline (LON:STAF), Manx Telecom (LON:MANX)

Sign-up link click here. I'll try to get along to this one, but have a mega-busy day tomorrow.

.

Shares Investor Evening - 30 Sep 2014

Companies presenting: Conviviality Retail (LON:CVR), Park (LON:PKG), Rosslyn Data Technologies (LON:RDT)

Sign up link: click here.

SCISYS (LON:SSY)

Share price: 93p
No. shares: 29.0m
Market Cap: £27.0m

This is a niche software group, which I hold in my long term portfolio. It's not the most exciting share around, but it's modestly valued, and is deeply embedded in a number of impressive organisations, such as the European Space Programme, broadcasters, and other mostly public sector bodies.

There is also some impressive private sector work going on, such as designing a bespoke CRM system for a major European car manufacturer. So I like various aspects of this business - that there are recurring or repeat business opportunities, and that the company controlling the IT has a lot of leverage in any organisation. Also they don't have bad debts due to the nature of the client base.

I had lunch with the Directors a little while ago, and like their plans to gradually increase margins.

Interim results today look good to me. The company delivered growth in adjusted profit of 15%, with adj. EPS in H1 up to 4.3p. There tends to be a bit of an H2 bias, so we should be looking at perhaps 9-10p EPS for the full year. As such, the shares are good value at 93p, that a PER of only about 9-10.

Net debt is negligible at £1.8m, and I seem to recall there are some freehold property assets well in excess of that, so I just treat it as debt/cash neutral for valuation purposes.

Dividend - as I mentioned to the Directors, this is my main complaint - that they are so stingy with the dividends! The company should pay out much more than a 1.7% yield, which is over 5 times covered.

Outlook - sounds positive;

"I am pleased to report this favourable set of results for the half year ending 30 June. During the six month period the divisions have delivered solid performances consistent with their business plans. The business restructuring undertaken last year shows tangible outcomes. The Board continues to believe that results for the full year will be in line with its expectations."

My opinion - I think this is a nice steady stock, that I will happily hold for maybe 5+ years. I think it should deliver steady growth, and the occasional upward re-rating. I think the new CEO is focusing on the right things, and hope to see the company grow. The shares are illiquid, so it's not one to try to trade. Just a long term buy & hold in my view.

I see that Stockopedia likes it too, with a StockRank of 89, and it also appears on their "Neglected Firms Screen", so I shall check that out & see what else is on it.

Minds + Machines (LON:MMX) - Interim results look lamentable from this seller of fancy domain names. Just £68k revenue in H1, and a loss of £4.2m before they booked a £7.1m profit on some domain name auctions. Thus the overall operating profit of £2.9m doesn't look at all sustainable.

I think this stock is an accident waiting to happen. Their business model of flogging domain names looks woefully out of date - a throwback to the 1990s. Nobody cares about domain names these days - you just google everything to find websites.

No doubt StopLossSue will turn up shortly to berate me for my lack of in depth research on this one, like she usually does! I just can't see the point in taking a giant leap of faith to think that a successful business can be created out of thin air here. I might have a flutter at a sub-£ 10 m market cap, but this thing is currently valued at £92m! (at 11.2p per share). This type of share is just pure gambling in my view.

Risk:reward looks diabolical, so it's going on my bargepole list.

Signing off for today.

Regards, Paul.

(of the companies mentioned today, Paul has long positions in RGS and SSY, and no short positions).