Small Cap Report (10 May) - HGV, QPP, ASH, OCDO, KENZ, CTO

Friday, May 10 2013 by

Pre 8 a.m. comments

Communications group Hasgrove (LON:HGV) looks an unusual situation. They seem to have sold off their largest subsidiary, and now have surplus cash of £12.5m as at 10 May 2013. They intend returning £10.25m of this cash to shareholders via a tender offer at 82p (the shares are currently 78p), and then De-List.

As the market cap is only £18m, this means shareholders should get over half their money out, but I don't suppose they'll be thrilled with the de-listing, and the shares are likely to fall today as a result. I believe companies should only ever de-List as a last resort, when there really are no other options. Otherwise they are breaking what I regard as an implied contract with shareholders - i.e. when we buy shares in a Listed company, we are doing so on the basis that we will in future always have the facility to trade those shares on the stock market. To remove that facility totally changes the situation. Most investors don't want to hold shares in private companies, and of course if you hold them via spread bets or CFDs then you are forced to close, as you cannot hold unlisted shares via those instruments.


The Quindell Portfolio (LON:QPP) saga continues with a clarification statement last night that raises as many questions as it answers. They have not provided a proper explanation of their derivatives contracts entered into, other than to play them down as not being material. But they do admit to engaging in an "equity swap" (whatever that is!) as part of a fund-raising last year. This appears to have involved guaranteeing the losses of a new investor, in order to get a Placing away.

This is clearly outrageous behaviour, and might even be illegal? You cannot secretly guarantee that a new investor cannot suffer any losses if the share price falls! Since to do so would be favouring one shareholder over others, something that is totally against at least the spirit of company law.

It just confirms my suspicions that this is a company with a really bad smell around it. Hence a total bargepole situation as far as I'm concerned. I would expect more nasties to come out of the woodwork here in due course.


Post 8 a.m.…

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Ashley House plc is engaged in the supply of design, construction management and consultancy, primarily working with providers of health and social care on infrastructure developments from project inception to completion of construction and beyond. The Company's segments include Extra Care and Health. The Company is engaged in extra care housing and health property partner services, which allows to work with providers and commissioners in various sectors. The Company's solutions include GPSpace, LivingSpace, WellbeingSpace, EstateSpace, EnergySpace and VisitorSpace. The Company's GPSpace offers various projects, such as GP practices, pharmacies, opticians, various services and alternative therapies. LivingSpace is a solution for older people and those with learning, physical or sensory difficulties and mental health needs. WellbeingSpace enables the promotion of a community's health and social needs through various combinations, such as health centers and pharmacies. more »

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  Is LON:HGV fundamentally strong or weak? Find out More »

29 Comments on this Article show/hide all

dangersimpson 10th May '13 10 of 29

Hi Paul,

Re: Goldman note on Ocado (LON:OCDO) - I note that Goldman were joint bookrunner for Ocado (LON:OCDO) 's last placing and stabilisation manager for their flotation - may help explain their positive view on the company.

The problem with all the obviously overpriced shares (ASOS (LON:ASC), Ocado (LON:OCDO), £CPR) is that they have pretty extensive existing shorts outstanding on them making them prone to short squeezes and too expensive to get the borrow. It's a shame there are not readily available significantly OTM long term put options available because one could take a long term view with limited risk and without being stopped out.

Re: Kentz (LON:KENZ) - Cashflow is a concern as a lot of their profit is getting sucked into working capital. Before taking a big position you may wish to make sure you are happy with the company's explanation for this.

CEV gives a much better analysis of this than me here:


Danger (Long Kentz (LON:KENZ), Ocado (LON:OCDO) no position)

Book: Excellent Investing: How to Build a Winning Portfolio
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Chrisfarrell21 10th May '13 11 of 29

Hi Paul and all,

There was a late released trading update this morning (11:30am) from Zytronic (£ZYT), the material part of which reads:

" a consequence the result for the year will be very significantly behind market expectations, with year to date profitability more than halved."

It's hit the share price pretty hard at 31% down currently. The statement ends with:

"The company continues to be cash generative and is in a strong financial position with cash of £4.6 million and borrowings of £1.8 million as at 31 March 2013 and is still in a position of having several very interesting projects with the potential to materially improve future performance."

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grumpy5 10th May '13 12 of 29

Re Ocado, the other reason for treating anything Goldmans say about it with a bucket of salt is that several of the founders are ex-GS! IMHO GS are the most obviously prejudiced research house, whose analysts consistently talk their traders' book.

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fek47 10th May '13 13 of 29

In reply to post #73167

I'm pretty displeased with the profit warning this morning from Zytronic (LON:ZYT).

It was my understanding that management were supposed to warn as soon as it becomes apparent that profits are on track to be more than 10% below consensus estimates, but the Zytronic (LON:ZYT) Directors have instead waited to drop the bombshell that profits will be ~50% below?

Very poor shareholder communication imo....will now be going along to the presentation on 21 May to have a cathartic shout at them!


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it_trader 10th May '13 14 of 29

Capital Drilling are intrinsically linked to Centamin (LON:CEY) unfortunately as the majority of their revenue comes from them. Both are great undervalued companies but the Egypt court case for Centamin over mining rights is a heavy burden.

A bad RNS for Centamin indicating their court case is not as cut and dry as first thought and gold prices being down today are the root causes.

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darlocst 10th May '13 15 of 29

From memory Capital Drilling (LON:CAPD) gets approx 20%-25% of revenue from Centamin (LON:CEY), its certainly not the majority of their revenue and of course in the medium term drilling rigs are relocatable. IMS is due middle of this month, at current levels a lot of the potential bad news is priced in imo. Beans4tea has done some good posts on CAPD & its sector over on MF in the past few months.

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Paul Scott 10th May '13 16 of 29

In reply to post #73169

Hi Francis (and Chris, who mentioned the same thing earlier in the thread),

Yes indeed, very disappointing news from Zytronic (LON:ZYT). I don't hold any shares in it, because as I mentioned in the conclusion to my article from Dec 2012, although I liked the company, I didn't see much upside on the share price (around 318p then) based on previous forecasts.

Now that they've announced that they're going to miss those forecasts by seemingly quite a long way, then really all bets are off. They've screwed up their previously excellent 5-year track record of EPS growth, which is a real pity.

The big question is whether sales have just been lumpy due to the nature of client projects (and therefore could recover), or whether they are losing contracts to competitors?

I'm not tempted to buy any yet, because the outlook has completely changed, from positive to uncertain/negative. Pity, but there we go - these things happen.

Regards, Paul.

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V4Value 10th May '13 17 of 29

Re Ocado, I recommend downloading and looking at the short disclosures on the new FCA web-site. There is a LOT of short interest. Personally, I wouldn't bet against a hedge fund. I've read Einhorn's book and the analysis was incredible.

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Monty9 10th May '13 18 of 29

Paul, Equity Swap is normally a synonym for Equity CFD. It should be economically the same as a straight equity share transaction except there is no SDRT on the buy leg. However protecting the investor against downside sounds more like a written put option. No mention of a premium suppose? I agree very bargepoley.

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Paul Scott 10th May '13 19 of 29

In reply to post #73193

Hi Monty,
There's an interesting post on the advfn bulletin board, post 6323 (amongst hundreds of total garbage posts - the QPP board there really is Muppet Central!) where a knowledgeable poster, CockneyRebel, quotes Killicks as saying that the 97m share Placing at 17.5p was not in fact a straightforward Placing. Rather it was a equity financing facility whereby QPP issues 1/12th of the Placing shares each month, in return for the current market value of those shares at the time they are issued. Hence why the monies appear as a Debtor. Of course as the share price has dropped by two thirds, then they will need to take a P&L hit for circa £8m by my calculations, if the share price remains low.

This also explains why the CEO has been so desperate to talk up the share price! None of this was disclosed at the time, so really the company's previous announcements about the fund-raising appear to have misled the market. It's also badly back-fired.

I don't see how the CEO's positions is tenable any more. He's played fast & loose, and it's going badly wrong.

Also consider that there are numerous vendors of businesses to Quindell who were paid in shares, who have lock-ins expiring in the coming year, and who are likely to be seriously annoyed at the collapse in value of the shares. This is likely to be a constant stream of sellers. Meanwhile, there is only one Institutions on the >3% list at QPP (Investec, with 4.4%), and after all the recent shenanigans I doubt whether any fund managers will take the career risk of buying into the company now.

The interesting thing is whether the P&L figures are real. If they are, then the business could be very good value - it's on a forecast PER of just 3.3. But for me, the forecasts simply don't make sense. They've taken a load of fairly humdrum insurance-related companies, combined them rapidly, and all of a sudden we're supposed to believe that this is generating spectacular profits. To be blunt, I simply don't believe the numbers.

But time will tell.

Regards, Paul.

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dangersimpson 11th May '13 20 of 29

In reply to post #73192


Re: Short Interest - when it was first published I used to download the spreadsheet and analyse in excel. However Castellain Capital has done the hard work for us here:

So I don't bother with my own analysis and just look here now.

With Ocado (LON:OCDO) et al. I really don't want to bet against the hedge funds, I'd really like to be short with them but can't be at a reasonable risk/reward level because the existing large short positions means that the borrow is expensive and there's a high chance of a short squeeze at some point.

That said I don't think hedge funds are infallible since Einhorn's book also describes a world where hedge fund managers share ideas quite extensively so are open to herding. There are also the ego battles e.g. Ackman vs. Ichaan where taking sides and being proven right seem to be more important than superior uncorrelated risk-adjusted returns to the managers.

The one I'd really like to hear the hedge fund bear case for is Home Retail (LON:HOME) the fourth most shorted UK share. My feeling is that these are 'story shorts' who have a negative view on UK retail and are shorting Home Retail (LON:HOME) as one of the biggest UK retailers maybe based on what appears superficially to be a largeish P/E. However it was PP who first pointed out their fully owned storecard debtor book asset of £0.5b, when you combine this with their £0.4bn cash then their £1.2b market cap is really only an underlying EV of £0.3b which equals last year's OCF or 1.5x last year's £0.2b FCF. And this in a tough retail environment. I can't make the case that this is an amazing business but surely the UK's no.2 internet retailer deserves an EV/FCF rating greater then 1.5? Hence I'd love to know what the hedge funds' rationale really is. Because if they have it wrong with 12%+ stock outstanding then this really should be a big farm bet for me!



Book: Excellent Investing: How to Build a Winning Portfolio
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Crusty 11th May '13 21 of 29

Just a word on T Clarke. They are below the radar of most investors, being very small cap and unfashionable. However their excellent management and expertise, plus rock solid financials, make them the John Lewis of electrical installations for major projects. They don't accept contracts without reasonable margins, and are seeing weaker competitors go to the wall. A fair bet for medium term recovery in my book, and good covered divi in the meantime.


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Ramridge 11th May '13 22 of 29

In reply to post #73197

Paul -
There is an interesting discussion in today's (Saturday) Investor Interactive forum about the nature of the swap. Killik's statement appears to say that the price risk is borne by QPP. QPP issue 1/12 of the total placing in shares ever month and receive the "prevailing market price" for each share. This is not a swap in any sense of the term. But then I wonder what's in it for the counterparty - there is no commercial value in this deal. However if QPP have covered themselves by taking out a swap with a second counterparty to cover any loss (i.e. the price falling below 17.5p) then that would be swap and QPP would have paid a consideration for this in December. Anything from 4% to 10% I would guess. The trouble is that there is too much speculation and not enough facts. I have googled and cannot find Killik's statement that every forum board seems to quote from. Let's hope the sunday papers throw more light.

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clissold345 11th May '13 23 of 29

Re CAPD. There was a Q1 IMS on May 17, 2012 so we can hope for a Q1 2013 IMS in about a week. My guess is that the share price has fallen too far. We should find out soon!

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cig 13th May '13 24 of 29

In reply to post #73205

@Crusty, what do you think of T Clarke's pension situation? Not necessarily a show stopper but the deficit is sizeable and they're a bit unusual in having a live defined benefit scheme.

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Crusty 14th May '13 25 of 29

In reply to post #73268

cig, the T Clarke annual report showed an increased pension scheme deficit of £11.9m, but in common with many companies this reflects the peculiarly low discount rates. IMO they have it under control with employer contributions circa £0.8m per annum, and with any half-decent recovery it will fade in significance. The benefits of the scheme, in the shape of well motivated, loyal and skilled staff, probably contrasts with much of the construction industry these days.
Last years' results are at: and make interesting reading.

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steamy001 14th May '13 26 of 29


I know there is some mistrust in QPP but please bear with me, (Pardon the pun)
I have analysed QPP vs GWRE, Guidwire listed in NYSE


Either QPP is well undervalued ot Guidwire is very overvalued, give me you email address so I can send you the speadsheet.



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Paul Scott 14th May '13 28 of 29

In reply to post #73296


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cig 18th May '13 29 of 29

In reply to post #73295

@Crusty, I like that they're treating their employees well and the benefits are not exuberantly generous (half of career average for a notional 40 years there if I got it right) but it makes valuing a company hard (and that's true of every company with open ended pension commitments), because the actuarial valuations are close to useless (that 11m could turn into a 50m deficit or 50m surplus in 10 years...) and the pensioners effectively have an option on the company equity, so shareholders can be zapped even if the company is well run and profitable.

For closed DB schemes it's a bit easier because the problem is at least naturally shrinking with time. Ideally for an open DB scheme I'd like it to be run on a matched liability basis so that there's structurally no deficit or surplus possible and the business can be valued (and run!) net of pension issues. Of course unfortunately it would cost an arm and a leg to match liabilities (e.g. with 100% index linked gilts) at the moment, but the thing is if the market is even vaguely right about how it prices linkers, it will cost an arm and a leg anyway later on...

Still I decided to live dangerously and bought a stake :-)

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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