Small Cap Report (31 May) - HVN, VNET, DQE, RGO, MRM

Good morning!

It's a quiet morning for announcements, so I won't split the report into pre and post 8 a.m. sections today.

 

Harvey Nash (LON:HVN) announces a mixed trading statement. However, the key summary paragraph indicates that trends improved into Q2, and that they are confident of meeting expectations for the full year. That's all that matters really, so despite having some negative detail, the overall picture sounds OK, so it's not a profits warning.

Harvey Nash has been on my watch list for some time, and as you can see from the table on the left, it looks good value on the key PER and dividend yield bases.

It also reported net cash of £5m at the last Balance Sheet date of 31 Jan 2013.

It's diversified geographically, with 62% of revenues coming from outside the UK/Ireland.

Overall, it gets a positive quick review from me, and I might buy some on any dips.

 

 

Vianet (LON:VNET) (one of my largest personal holdings) announce the recruitment of a veteran Non-Exec, with what looks like highly relevant industry experience. So I like the look of that. Good Non Executive Directors can add enormous value to a business, so I like to see relevant & experienced people being recruited, not just box-tickers who happen to be mates with the CEO. They're supposed to be independent of course, but not many actually are in reality.

Vianet are due to announce results on Tue 11 June. So let's hope they've finally made some progress on contract wins, after interminable delays.

 

Looks like a quiet start today, with the FTSE 100 Futures essentially flat (down 5 points). Market opens in a few seconds, so I'll hit the publish button now.

 

I see that shares in Harvey Nash (LON:HVN) have dipped 2p to 69p. I'm not surprised, as the wording of the IMS this morning did begin to read like a profits warning, but then says they are in line with expectations at the end. So not the best presented IMS I've seen, so that might give me a buying opportunity, although I'd want a lower price than this to give me enough margin of safety.

I've mentioned this to a couple of financial PR experts in person, but in my view trading statements should be given a clear title which reflects the true overall message. Not spin, but truthful. So in this case, HVN should have titled their statement, "On track to achieve its expectations for the full year", which is the most important sentence in the statement, but is actually the last sentence! It shouldn't be the last sentence, it should be the first! Clarity is everything with trading statements in my opinion.

 

 

A couple of friends have asked me to look at DQ Entertainment (LON:DQE) in the past, even though I don't normally invest in overseas companies Listed on AIM (because, as Mark Slater says, "there's usually something wrong with foreign companies that come to AIM for a Listing!" - and he's right)

The problem with DQE is that despite good profits, it never turns into cash, but just piles up on the Balance Sheet in Debtors. That is nearly always a desperately bad sign of trouble ahead, as it means those debtors are probably not going to be collected in, if they were ever real at all.

So it looks like more of the same from DQE today, with their results for year ended 31 Mar 2013. Debtors has now shot up to more than the year's turnover, so forget it - that's not a proper business!

 

 

At a market cap of only about £2m, 2Ergo (LON:RGO) is far smaller than I usually go, but I've maintained coverage of it here because I reckon they have a very interesting product, which could develop into something very significant over time. It's a device which integrates into shop tills, and enables customers to redeem electronic vouchers using their mobile phones.

That's clearly the way of the future, so it's not a question of if this technology will take off, it's a question of whether someone else gets in there & hoovers up the market before 2Ergo manage it. Rolling out this type of system is going to be costly, and they've run out of cash (again), and are in the process of fund-raising now. Hence I wouldn't touch the shares with a bargepole until the refinancing is agreed, as existing equity could be all but wiped out by people putting in the fresh funds, which is a risk that we just don't need to take.

Note that Nigel Wray holds 16%, which I think he bought fairly recently, so he's not likely to walk away so soon at a guess?

Their interim results today show a £2.4m loss in six months, so the business is still very cash hungry, and I suspect needs at least £10m in fresh cash to make a big difference. But the narrative has details on some promising-sounding trials, so who knows? I shall remain on the sidelines for now, awaiting developments in the fund-raising.

 

 

Mello Extra

My friend David Stredder organises many "meet the management" events each year, and his latest one is called Mello Extra, and is on Monday, at 1pm, at FinnCap's offices in New Broad Street, London.

There are a couple of interesting companies presenting, including Newriver Retail (LON:NRR) and Inditherm (LON:IDM), and also a special guest, a former FD of a Listed property group, who will be giving her thoughts about life after Quintain.

These events are a great way to meet other investors & network, and we always enjoy a few glasses of wine & nibbles afterwards. So if you would like to come along, follow the contact details on this link (scroll down to the section titled "Reservation"). I'll be there, so come and say hello if we've not met before, I always enjoy meeting readers & hearing your feedback.

 

 

De-Listing of the Day

Another instant 50% loss for shareholders, as the latest de-Listing is announced: Metrodome (LON:MRM) which puts out a fairly sensible de-Listing announcement saying it doesn't make any sense for them to be Listed any more. It's worth reading to see if any of those reasons apply to any micro caps you hold. If they do, then one should seriously think about whether they are worth hanging on to? Although often there is no Bid anyway, so you can't sell.

I am more convinced than ever that it simply is not worth the risk delving down below £5m in market cap, without very good reasons.

 

Right, that's me done for today, a very slow day for news. The sun is out here in Hove, so I might wander down to the beach and do some reading on my iPad.

Have a smashing weekend everyone, and see you back here at 8 a.m. on Monday morning!

Regards, Paul.

(of the companies mentioned today, Paul has a long position in VNET, and no short positions)