Small Cap Value Report (21 May 2015) - AVAP, TUNG

Good morning!

I had a terrific day yesterday at the London Value Investor Conference. There was some difficulty in getting there, due to emergency repairs required to faulty signals in the Haywards Heath area.

So unfortunately, I missed the Charles Brandes presentation, but did arrive five minutes before the bell was rung for lunch, so I was first in the queue for a delicious roasted salmon in tomato sauce, with mixed vegetables, and spinach, tomato, and mozarella. Smashing! The venue this year was the QE Centre, opposite Westminster Cathedral, which was a very good location. The only niggle was the squeaky chairs - so every time any of the several hundred value investors adjusted their bottom, a loud squeak was emitted by their chair.

Going to LVIC each year is almost like a pilgrimage for me, having my value battery charged up again with the core concepts which work best, after a year of being confused by background noise & other competing, but inferior ideologies, such as momentum, etc.

I've taken about 19 pages of A4 notes, so have at least two good articles currently gestating. In particular, the Neil Woodford session was interesting, although the interviewer liked the sound of his own voice a bit too much - isn't that annoying, when an interviewer has a great interviewee in front of them, that everyone is dying to hear from, but the interviewer won't shut up?!

Just a quick review of a couple of RNSs, as I stumbled back to Islington last night, so have to catch the train back to Hove shortly, and pick up the Jag from the repair shop - it will be nice to be mobile again. She developed a misfire, so new coils were required.

Avation (LON:AVAP)

Credit rating - this aircraft leasing company has recently issued bonds at a 7.5% coupon. I queried this with their CFO, querying why they were paying such an apparently high funding cost. He replied that the new bond financing is in lieu of equity, so it only funds the c.10-15% equity element of the purchase price for new aircraft, leaving the bulk of the cost to be financed through much cheaper bank lending, c.4-5%.

This company is expanding at a rapid pace, and is run by experienced management, who know the sector well, and the inherent pitfalls. So quite an interesting company, in my view. Although it's not one I would want to be holding when the next recession bites.

S&P has given their bonds a B rating, stable outlook. I don't know anything about bonds, so don't know whether that is good or bad. Any readers expert in this area, and willing to comment?

Tungsten (LON:TUNG)

Market update - the company updates the market today on its funding crisis:

My opinion - I can't believe what a dog's breakfast Edi Truell has made of this. He ramped it to high heaven last year, throwing around impressive-sounding claims about hundreds of billions, even trillions, but made the schoolboy error of not raising enough cash to execute the highly cash burning business model.

So it's now become a shorter's paradise, as the company has admitted it needs to raise fresh cash for operating purposes. The shares are in freefall, as you can see from the chart below.

I'm sure Truell will pull something out of the hat, but wonder what proportion of the solution will be owned by existing shareholders?

Interestingly, this share is a good example of how management making large share purchases immediately after bad news, is actually an increasingly bearish signal. They do it for all the wrong reasons - to try to signal confidence to the market, when things are going wrong. But actually it's just a PR stunt, as was clearly the case here when Truell went long 70k shares at 200.9p, rather appropriately, on April Fools' Day.

The shares are 78p at the time of writing, so 61% down in less than two months.

I am sorry for anyone who shared my misplaced enthusiasm for this share, although am relieved I recognised & admitted my mistake, and went bearish on it some time ago.

Am I tempted to catch this falling knife? In a word, no. Confidence in the company & management has been shattered, and it needs to raise fresh money, lots of it. That's not a good situation to get involved in, in my opinion.

... to be continued. I have to travel back to Hove now, and collect the car. So will update this article later this afternoon/evening, so pls check back later, if you feel so inclined.