Small Cap Report (7 Feb) - TRI, UTW, DSG, MTEC, AVON, INL, CAP

Trifast (LON:TRI) presented at a Mello Central event hosted by FinnCap last year, and I wasn't impressed. It seemed to me that this was another example of a company run mostly for the benefit of its Directors - who are drawing fairly hefty salaries, leaving little in profits or dividends for shareholders. It's a low margin business anyway, making industrial fastenings, which can be made anywhere wages are low.

However, they seem to be making progress, as their IMS & Trading update today reports that profits are on track to meet market expectations for year-ending 31 Mar 2013. Forecasts indicate an increase from about 3.1p EPS to 4.7p, a useful increase that seems to have been driven by a sensible focus on higher margin work, rather than chasing low margin turnover for the sake of it.

The shares are currently 52p, so that puts them on a current year forecast PER of 11, which doesn't look good value to me for a low margin, low growth company. Particularly when they also have a fair bit of debt too, which was last reported at £7.7m at 30 Sep 2012. Their balance sheet overall looks alright, but Stock is perhaps rather too high, which suggests to me they are required to maintain quite high stock levels in order to meet customer orders. All very well, but the cost of doing so eats up over 10% of operating profit in interest charges from the Bank.

I just can't get excited about the business, its prospects, or the valuation. If there was a 5%+ dividend yield I might look again, but the forecast yield is only 1.5%. So this one gets a thumbs down from me, there are much better companies out there on cheaper ratings in my opinion.

 

Today's trading statement from Utilitywise (LON:UTW) looks interesting. They are a utility bills consultancy, a sector which interests me because I've used a similar consultant before, and they are very good - negotiating useful savings on energy bills for SMEs, which is often too complicated to do yourself (as the tariffs are so confusing, and sales people from the energy companies make contradictory claims, so it needs a specialist to unpick the facts from the sales puff).

Trading is in line with management expectations (which we always have to assume are the same as market expectations), and "comfortably ahead" of the previous six months. It looks like an interesting growth at a reasonable price ("GARP") situation.

UTW is forecast to make 7.4p this year (ending 31 Jul 2013) and 10.3p next year, so if you look a year ahead, then the current share price of 101p (up 3p on the day so far) looks reasonable.

Unfortunately, the Market Makers have once again worked their negative magic, and prevented me from trading by quoting such a ridiculous spread of 98p Bid, 104p Offer, that's it's pointless spending any more time looking at UTW. Why would anyone buy a share and suffer an instant 6% loss just on the spread? (plus Stamp Duty, if applicable, and broker commission). Unless & until the market is opened up with direct market access ("DMA") for all shares, then it can only be viewed as a completely dysfunctional market for small caps. I don't exist to line the pockets of Market Makers, so they can forget it, no business is transacted, even though I would very much like to buy shares in UTW. Market Makers don't add liquidity to the market at all, since they try to run neutral books, and widen the spreads to such an extent that they actively kill off market liquidity!

It's so annoying because the solution is so simple & obvious! We just need to open up all shares to having an electronic order book, whereby anyone can place orders directly, without the need for intermediaries - other than an electronic broker to provide the DMA platform and take a very small commission on each trade of about 0.1%. I used to use such a platform from GNI Touch, and it was brilliant. There are probably too many vested interests in the way of such a simple solution for all small caps. It absolutely infuriates me, as you might have gathered!

Anyway, I have added Utilitywise (LON:UTW) to the watch list, as something to buy on a dip, if and when its shares become available at a reasonable price.

 

Dillistone (LON:DSG) looks interesting, they are a software company for the recruitment sector. Their trading update today sounds good, with profit for 2012 expected to be "comfortably in line with market expectations", and a good start to 2013.

Forecasts for 2012 indicate a rise of 12% to 6.6p EPS, which puts the shares at 88/90p (note the tighter spread here, even though it's a much smaller company than Utilitywise) on a PER of 13.5, which is probably about right. There might be scope for the shares to go higher, if 2013 is another good year for them. The other noteworthy point is that it has a decent dividend yield of 4%. Always good to be paid to wait for a share to go up in value. It also has net cash, so DSG ticks quite a lot of value boxes, although I'd be happier with a PER of around 10, not 13.5.

 

Matchtech (LON:MTEC) also looks interesting. It's a recruitment group, a sector where the smaller Listed groups are all priced quite low, although there has been a sector rally in the last 6 months. I thought I'd picked a winner with Staffline (LON:STAF) back in Sep 2012, until I realised that most of its peers had also re-rated at the same time. So it's always worth remembering that a rising tide lifts all boats. It's terribly easy to think you're a clever stock-picker in a bull market, but actually you're often just being swept along with the tide!

It's also worth bearing in mind that the turnover figures for recruitment agencies are usually massively inflated, since they often include the wages paid to Temps. So it's the (smaller) net fee income which is the real turnover figure to concentrate on.

There's quite a bit of detail in MTEC's trading update today, but the key sentence says that "the group has continued to trade in line with the Board's expectations". Forecasts are for 28p EPS this year, so at 273p (up 6p so far today) the shares are on a current year PER of just under 10. That sounds reasonable, although it's the >6% dividend yield that has really caught my eye. Dividend cover isn't great though at 1.5, and the fixing of the dividend at 15.6p from 2008 to 2012 tells me that they were probably stretched on this, and came close to cutting it, but didn't.

Net debt has reduced from £14.5m at 31 Jul 2012 to £7.9m at 31 Jan 2013, although that looks to me more like a trading fluctuation rather than a permanent reduction, since most of their profit is paid out in divis, the debt is likely to be fairly static on an underlying basis. On balance I probably won't be following up on this one, but can see the attractions, especially once you factor in economic recovery, and rising earnings from that.

 

Having had a quick look at the IMS from Avon Rubber (LON:AVON), if I held shares I'd be selling them today. They've had a great run, up 50% in the last 6 months, but now look fully valued on a PER of 17 times historic EPS, and 13.7 times forecast current year earnings.

 

The thing that would worry me is the potential impact of public spending cuts in the USA, which is mentioned in today's statement. This relates to the gas masks that AVON makes for the US Military, I understand. Seems like a significant risk, so why take it, when there's not much upside? Risk/reward looks bad to me, so I'm negative on it at this price of just under 450p.

 

There are a lot of mid to large cap trading statements today, but even though I'm itching to comment on Ocado, shall restrain myself as I want to keep the focus here clearly on small caps, otherwise it gets confusing.

I see that Inland Homes (LON:INL) has edged up this morning to 22p. The discount to underlying NAV (NAV could be as high as about 35p once unrealised valuation gains are taken into account) is looking unwarranted, given the buoyant state of housebuilders in the South East, and their need for land. Therefore I am confident this share should close the gap on underlying NAV, but it might take some patience.

Following on from yesterday's comments on Clean Air Power (LON:CAP), I've been buying some more, because they seem to be in the early stages of commercialising their Patented technology to allow HGVs to run mainly on natural gas with largely un-modified diesel engines (some diesel is still used, as a "liquid spark plug"). That really could be a big money-spinner when it launches in the USA in 2013/14, given the glut of cheap natural gas over there. The market cap of £15m does not look unreasonable to me, given that their technology is actually in production, orders are growing, and they are funded for the time being after a Placing in Sep 2012. It's high risk though, so please be especially careful to DYOR (do your own research).

That's it for today, see you tomorrow at the same time.

Regards, Paul.

(of the shares mentioned today, Paul has long positions in INL and CAP. Paul does not have any short positions)