Small Cap Report (28 Feb) - BEG, ZYT, IPEL, SFR, INS, HAYT, FIF

Thursday, Feb 28 2013 by

Pre 8 a.m. comments

Begbies Traynor (LON:BEG) have issued a reassuring trading statement. It is the only pure play insolvency practitioner on the stock market. You might imagine that they are busy, given the depressed economic circumstances, but this is not the case. A combination of near-zero interest rates, and a reluctance from banks to recognise bad debts, together with political pressure on HMRC to give companies more time to pay rather than forcing them into insolvency, has made it an artificially quiet time for corporate insolvencies. BEG has therefore had several rounds of cost cutting (mainly reducing its staffing level), which has enabled it to maintain a healthy operating profit margin in the teens of percentages.

Their Q3 trading update today confirms that trading is in line with expectations, that net debt is "comfortably within the Group's banking facilities", and that full year expectations are unchanged, although dependent on trading in the important Q4, and supported by a lower cost base.


So that sounds pretty reassuring. I've been buying more BEG recently, because it's a share I like for the 6.2% dividend yield, and a PER of only 6.3 based on current forecasts. which are for 5.65 EPS for the year ending 30 April 2013. Furthermore, BEG should benefit from an improving economy, which is likely to see increased levels of corporate insolvencies, as banks finally pull the plug on the huge number of zombie companies which are only servicing the interest on their debt, but will never be able to repay the capital.

I also flag up the selling overhang from Caledonia Investments is now almost cleared - they reduced to below 3% this week, and hence the shares could well rebound when that selling pressure finishes.

The high level of debt at BEG does not concern me, as it is simply an unsecured bank facility to finance the extended debtor book which is inherent with insolvency work. I'm hoping to see BEG rise to 50-60p, once the seller is cleared, from the current 35p.


Zytronic (LON:ZYT) is a company I like, having met them last year. It is a maker of specialised touch-sensitive screens for ATM and vending nachines, and anything else which needs a touch sensitive screen. They specialise in larger, and unusual shaped screens.

ZYT have…

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Begbies Traynor Group plc is a business recovery and property services consultancy. The Company's segments include insolvency and restructuring, and property. It provides services from a network of the United Kingdom locations through two operating divisions: Begbies Traynor and Eddisons. Begbies Traynor is an independent business recovery practice that handles corporate appointments, serving the mid-market and smaller companies. It provides insolvency, restructuring and consultancy services to businesses, their professional advisors and financial institutions. Eddisons is a national firm of chartered surveyors, delivering transactional and advisory services to owners and occupiers of commercial property, investors and financial institutions. It provides professional services, such as business rescue options, advisory options, forensic accounting and investigations, corporate and commercial finance, personal insolvency solutions and services to banking, legal and accounting sectors. more »

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Zytronic plc is involved in developing and manufacturing of touch sensor products. The Company is also engaged in the development and manufacture of customized optical filters. Its geographical segments include Americas (excluding USA), USA, EMEA (excluding UK and Hungary), Hungary, UK, APAC (excluding South Korea) and South Korea. Its products incorporate an embedded array of metallic micro-sensing electrodes. Its technologies include projected capacitive technology (PCT) and multi-touch mutual projected capacitive technology (MPCT). PCT touch sensors can be constructed from one, two or three layers of laminated, toughened glass. Its sensing products offer touchscreen solution for applications, such as leisure, digital signage, retail, surfaces, banking and industrial applications. Its touch sensors are used in video jukeboxes and slot machines. The PCT touch sensors are used in a range of workplace applications, from medical diagnostic equipment to oil field machinery controls. more »

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Impellam Group plc is a holding company that provides strategic planning and management services to its portfolio of subsidiaries. It is engaged in the provision of staffing solutions, human capital management and outsourced people-related services in the United Kingdom, Ireland, North America, mainland Europe, Australasia, New Zealand, Singapore and the Middle East. It’s segments include Managed Services-UK, Europe and Australasia; Specialist Staffing-UK, Europe and Australasia; Managed Services-North America, and Specialist Staffing-North America. It operates various supply models within its Managed Service Programs (MSP), including Neutral vendor, Master vendor and Hybrid vendor. It also offers Recruitment Process Outsourcing, which refers to the outsourcing of permanent, temporary and contract recruitment. It offers staffing services for specialties, such as Healthcare, Legal, Engineering and technical, Construction, Catering, Driving, Office and Industrial. more »

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

12 Comments on this Article show/hide all

adam 28th Feb '13 1 of 12

the price of a rights issue is not relevant unless you don't take up your rights.
does not follow that the price the underwriters demanded to ensure not left holding the baby is relevant to post rights valuation. (with deleveraged b/s) no position.

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Asagi 28th Feb '13 2 of 12

As for Begbies Traynor (LON:BEG) I think you will find that the overhang (well, the Caledonia overhang) is cleared.

Over two million shares traded yesterday with no change in the share price. Obviously, we don't know how many shares below 3% they now have but I am working on the assumption that Caledonia will no longer play a significant role in the market for the shares.

Thanks to paulypilot for pushing his 'once the overhang is cleared' theory.

Asagi (long BEG)

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Paul Scott 28th Feb '13 3 of 12

In reply to post #71262

Morning Adam,

The deep discount is obviously necessary to effectively force people to take up the Rights. But my point is that the shares are over-valued on fundamentals to begin with. Therefore what I believe is likely to happen is that after the Rights Issue the price will probably not stay at around the 36p theoretical post-Rights price (see Edit below) , but could actually fall further. I've seen this happen before with deeply discounted rights issues. They get the issue away, but the premium on the newly issued shares eventually vanishes. That happened with QED a few years ago, so people who took up the deeply discounted Rights eventually ended up out of pocket.

My key point is that the existing shares are over-valued, and hence even with a de-geared balance sheet, the enlarged share capital will also be over-valued, and hence liable to another fall, once the Rights has been completed. It's just a back-door way of scrubbing off the excess valuation, whilst ensuring the underwriter doesn't get left holding the baby, as you rightly state.

Regards, Paul

Edit: Just done the sums, and the figures seem to work out like this:

7 for 3 Rights Issue.

3 existing shares * 68p current share price = 204
7 new shares * 23p subscription price = 161

Total = 10 shares at 365p total cost = 36.5p theoretical new share price after Rights Issue completed.

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ericb 28th Feb '13 4 of 12

Email Investegate at to get them to fix their RNS display - they dont seem to think there is a problem.

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adam 28th Feb '13 5 of 12

Wasn't arguing the cheapness myself, just the self-serving interests of underwriters.
Can't see why they would leave themselves with risk of having to take up £40m themselves, so would expect it to be cheap on that basis. However it does look a bit of a basket case. Post rights, using your 36.5p would give market cap of £110m versus equity of £150m (based on just released results plus net rights cash). However £70m of that goodwill.. Hoping to maintain operating margins of 5-6% (implies circa £12m operating profit). MInd you, this is a very cyclical business and clearly trading conditions tough in the steel sector, so bull no doubt will argue that buying at bottom of cycle? I would agree not one to chase!

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Paul Scott 28th Feb '13 6 of 12

In reply to post #71267

Hi Adam,
Yup, I agree. Yes Severfield-Rowen (LON:SFR) is a cyclical business, but it's not likely to reach previous levels of profitability, because that was a reckless credit-fuelled bonanza which is not likely to recur, with banks being so much more careful. I agree that c.£12m operating profit which is their target barely justifies the current market cap, hence no upside on the shares even long-term.

Risk/reward just isn't attractive at all. Share price will tank I think, once the current efforts to support it are withdrawn post Rights Issue!

Regards, Paul.

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Paul Scott 28th Feb '13 7 of 12

In reply to post #71264

Hi Asagi,
I've heard from a market source this afternoon that the overhang at Begbies Traynor (LON:BEG) is indeed cleared, so your information is correct. Therefore, just on simple demand & supply the shares should now rise - since there are already more buyers than sellers, but Caledonia have been supplying all the buyers with shares until today. Now they are gone, buyers could well outnumber sellers, leading to a rising price. The in line trading statement today can only help too. I'm surprised it hasn't moved up more already. I should probably sell something else to free up some cash to buy some more, but what to sell???

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ericb 28th Feb '13 8 of 12

the house ?

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sartingstall 28th Feb '13 9 of 12

Paul - i like your work but your view today on Impellam seems a little fickle compared to your comments back in Jul last year when the share was priced at 317p and no mention of being worth 590p.. do today's results justify such a swing in view?

Jul-12 "Interim results from recruitment/staffing Impellam Group (IPEL) seem uninspiring. Turnover is a massive £591m (up 8%) for the six months, but adjusted operating profit is down slightly at £15.8m, and that's a wafer thin profit margin. Doesn't take a lot of clients to go bust to wipe out profit altogether, so it's only one big bad debt away from a profits warning at any time. Although it is cheap on a PER basis, although looking to be short of brokers consensus for this year. £12.9m net debt, from net cash of £1.8m 6 months ago is a concern too. Maiden divi of 7p is handy though. Reorganisation costs expected in H2."

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Paul Scott 28th Feb '13 10 of 12

In reply to post #71273

I don't refer back to my previous comments, but just look at everything with a fresh view each morning. But from what you've said, it does look as if Impellam (LON:IPEL) is a much better bet now - it's moved into net cash, and the special dividend is a very big plus point (which impressed me greatly today).

Plus we're now in a bull market, whereas the comments you referred to above are from when the market was much more cautious. So valuations have gone up considerably, hence a PER of just under 7 is now quite rare, so IPEL looks relatively better value now than it did back in Jul 2012.

Cheers, Paul.

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woodcutter 2nd Mar '13 11 of 12


FIF sale of free from is indeed good business. The loss of £1.4m profit will be balanced by the reduction in interest payments. Indeed by my calulations this will result in an increased eps to over 9+p if last years figures are repeated. The cashflow is excellent and net debt will be reduced even further this year making the balance sheet much stronger. It looks seriously undervalued imo, even after the rise in sp. On an EV/EBITDA model it sould be close to 90p i have a significant holding for a number of years. so i guess i'm biased;-)

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Monty9 28th Mar '13 12 of 12

Increased my (SIPP) position in BEG. ISTM a very good risk reward ratio.

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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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