Small Cap Value Report (3 Dec 2014) - CCT, API, WHI, TUNG

Good morning! A quick whizz through this morning's trading updates & results, as I have to dash off to Reading for an investor lunch.

Character (LON:CCT)

The share price of this toys company is up 9% to 245p this morning, so the market clearly likes their results for the unusual year end of 31 Aug 2014. So do I, the results look excellent. Turnover is up 46% to £97.9m, and profitability has risen dramatically from £0.2m last year to £7.1m.

Looking at the historic performance, Character seems to perform inconsistently, with the occasional poor trading result.

I flagged this share here on 8 Sep 2014, noting that its shares look cheap at 214p.

They still do actually, even after this morning's share price rise. The PER at 245p per share is only about 9, and there's a reasonable dividend yield too, of about 3%.

Current trading is also strong, with the key pre-Xmas period described as "building ahead of our expectations".

Balance Sheet - is just about OK, with c.£4.5m in net debt not looking a problem, but the current ratio is not as strong as I would like, at just under 1.1 - not dangerously stretched, but not comfortable either.

My opinion - the company seems to be on a roll, and is still good value. Therefore I feel optimistic about this share. On the downside, the shares are illiquid, and the company's results can fluctuate a lot based on whether its products catch waves of interest from kids or not. That said, on a PER of 9, I would say the shares look too cheap.

Note also that it has a very strong StockRank of 98.

API (LON:API)

Interim results from this specialist foils business have not particularly impressed. Operating profit is down from £3.5m last time to £2.8m (pre-exceptional) for the six months to 30 Sep 2014.

Pension deficit - has increased by £2.4m to £15.8m. It's interesting to note that pension deficits generally are not melting away, as many expected, because sustained low interest rates has the effect of increasing pension fund liabilities. So this is probably an area that investors should take more seriously.

Also, deficits are rising despite buoyant equities, and bond markets. So what happens if & when those asset values decline, as they do from time to time? We could suddenly be looking at much bigger deficits across the board for companies with pension funds. Hence why it's probably best to avoid them wherever possible, or at least not have too many companies in one's portfolio which have significant pension funds.

As final salary pension schemes gradually die out, you do wonder what the impact on society will be in future. Well actually, it's pretty obvious - there will be armies of penniless pensioners dependent on State support. So very much a demographic time bomb, which makes you wonder how on earth Govt finances will stack up in future, with an older, and much poorer population, much of whom having no income arranged for retirement. Factor in a house price crash at some point as well, and things could get seriously ugly.

Outlook - the company refers to "tough trading" in H2 to date.

My opinion - I can't get excited about this company, although it is starting to look cheap. The trouble is, it's looked cheap before, and then the newsflow is negative, earnings estimates are reduced, and you realise that it wasn't actually cheap at all - the market has correctly anticipated that it would struggle to make any commercial progress.

Personally I'd rather pay a bit more for a business that is performing better.

The dividend yield is looking attractive, but given that the company didn't pay any divis for ten years, you do wonder whether the business has much dividend-paying capacity? Its capex requirements look quite high too - so I worry that this might be a capital-intensive business that doesn't generate much of a return? Bear in mind also that the company was up for sale for a long time, and there were no takers, so it's damaged goods in a way. Also it has big shareholders who seemed to want an exit, so that's not usually a happy situation.

WH Ireland (LON:WHI)

There's a mild profit warning today from this small broker. Although the outlook for 2015 sounds positive. The company has a sensible strategy in my view, and I'm certainly very happy with the service, as a client myself.

Tungsten (LON:TUNG)

Shares in this e-invoicing & invoice discounting company have been a roller-coaster of late. It's strange how they have dropped back so much, and not recovered recently - which makes you wonder if there is something wrong.

The company gives a market update today, which sounds as if things are going well, so the shares have bounced a bit this morning. I remain keen on this company, but it is highly speculative.

Got to dash, I'll catch up with the backlog this evening hopefully.

Regards, Paul.

(of the companies mentioned today, Paul has a long position in TUNG, and no short positions. A fund management firm with which Paul is associated may hold positions in companies mentioned).