Small Cap Value Report (13 Mar 2015) - AFR, DTG

Good afternoon. Apologies again for being late today - I've not done very well this week, have I? Still, all reports have been completed in the afternoons or evenings, so I added some more comments on Cambridge Cognition Holdings (LON:COG) and Essenden (LON:ESS) to yesterday's report last night. Here is the link for yesterday's complete report.

Afren (LON:AFR)

Trading update & refinancing - I can't give a view on this share here, as I currently hold a short position in it, although my intention is to close that position soon, once my price target is hit (not far off now). However, for information I've prepared a summary of how the refinancing will work, which anyone interested can read on Google Drive, if you can read my handwriting! Hopefully people will find that useful info, whether you are long or short in these shares.

Also the company has prepared a useful presentation on its website, click here to download that, or the link is on the company's home page here (right hand column)

By my calculations today's restructuring deal is likely to lead to a 14-fold increase in the number of shares in issue from 1.1bn to about 15bn. So very nasty dilution for existing holders - this has been on the cards for a while, hence the collapse in share price.

Afren shareholders have certainly received a very painful education in how debt for equity swaps work, when a company is unable to meet the repayments or interest on its debt.

I worked in the insolvency department of a big firm of accountants in the 1990-92 economic downturn, so am quite familiar with this stuff. The key point in general, is that equity ranks behind creditors when things go wrong. So unless equity holders are prepared to refinance the company to a point where it can once again pay its creditors, then the situation can easily spiral out of control, with equity worth nothing potentially, once the company becomes formally insolvent. The assets are just then sold to satisfy the creditors, with shareholders getting nothing.

Afren has avoided insolvency by doing a deal with its creditors (the bond holders) which has ended up giving them the overwhelming majority of equity in the refinanced company. And it still has a mountain of debt too - so Afren is certainly not out of the woods yet, but it's immediate cash crisis has been dealt with. Shareholders have no choice but to approve the deal, in practice. A refusal to approve this deal would lead to a complete wipeout for shareholders.

Dart (LON:DTG)

Share price: 365p
No. shares: 146.9m
Market Cap: £536.2m

Trading statement - this has clearly delighted the market, with shares up 18% today. This seems a rather euphoric reaction, considering the company is only saying it will match last year's numbers (although it was expected to see a decline in profits);

Valuation - Stockopedia shows current broker consensus forecast at 21.4p, but that now looks to be revised up to about 24.0p perhaps (since they did 24.3p last year). At 365p that drops out at a PER of 15.2, which is starting to look a little toppy for an airline in my view. easyJet (LON:EZJ) is on a PER of 12.4, for example, and pays a much better divi than Dart.

My opinion - if I held these shares, I'd probably be tempted to bank some gains on today's big move up.