Small Cap Report (7 May) - QPP, SNX, CAP, KBC

Tuesday, May 07 2013 by

Pre 8 a.m. comments

Good morning! It looks as if small cap Directors spent the weekend enjoying the sunshine, as there are very few results or trading announcements from them today.

Synectics (LON:SNX) announce a major contract win with Stagecoach. Although I'm wondering whether they have got the balance right in announcing frequent contract wins, when in this case £5m over three years doesn't sound material to their results?


Although it's now a mid-cap, I cannot hold back on commenting on results from Quindell Portfolio (LON:QPP).

On the surface they look amazing - turnover has risen from £13.7m to £137.6m. The profit margin looks incredibly high, as in not credible. However, the biggest red flag by far is that Debtors has risen from £31.7m to £202.3m! That's not a typo. The increase in Debtors is higher than the entire year's turnover! So that surely means that all the sales & profits booked for the year have not actually resulted in a single penny in cash being collected from those sales?

I'm almost blinded by the red flags jumping out at me from both the figures & the commentary. It reminds me very much of one of my worst investing mistakes a few years ago, Accident Exchange - which operated in the same area as Quindell, supplying replacement vehicles to people who have had accidents & then trying to reclaim the money from their insurance company.

They load up the pricing, which generates huge paper profits, and then haggle with insurance companies over payment, which results in a debtor book just getting longer & longer, before eventually there are huge discounted settlements, a large chunk of debtors is written off, the shares collapse, and a rescue refinancing is needed.

Quindell might be different, but the key figure to watch is debtors, and as I expected, this has ballooned to a clearly excessive level with QPP, so the big warning sign from similar companies in this sector whose shares eventually collapsed to virtually zero, is there - loud & clear.

I will never again invest in any company which cannot keep a tight control on its debtors. A large & growing debtor book is almost always a precursor to serious problems. That's the same reason I never invest in any Chinese companies, as they don't…

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Watchstone Group plc offers technology solutions to the insurance, automotive and healthcare industries. Its segments include Hubio, Healthcare (pt Health and InnoCare), and ingenie. Hubio provides integrated solutions to help organizations in the insurance and automotive sectors to build customer engagement and enable usage-based personalization. Healthcare includes ptHealth, a national healthcare company that owns and operates physical rehabilitation clinics across Canada, and InnoCare, a clinic management software platform and call center and customer service operation based in Canada. Its ingenie is an insurance broker. Using telematics technology, ingenie gives its community feedback, advice and discounts to help young drivers improve their driving skills. more »

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Synectics plc is a United Kingdom-based company that designs, delivers and manages integrated security and surveillance systems for security environments. The Company operates through two divisions: Systems, and Integration and Managed Services (IMS). The Systems division provides specialist electronic surveillance systems based on its technology to customers in oil and gas operations, gaming, infrastructure protection, high security and public spaces. The IMS division supplies products and technology from its Systems division. The IMS focuses on delivering end-to-end, security and surveillance solutions, specialist mobile systems for transport operators, as well as service-led solutions for the management of facilities and security services. The Company primarily works across oil and gas, gaming, transport and infrastructure, and high security and public space sectors. It offers Synergy 3, which a command and control software platform for security. more »

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Clean Air Power Limited designs, develops and delivers Dual-Fuel and second-generation MicroPilot engine systems. The Company designs, develops and delivers compression-ignited natural gas engines for heavy duty transport applications and manufactures hydraulic valves, injectors and filters for natural gas engines sold to truck manufacturers around the world. Its business segments are the Dual-Fuel segment, which sells, installs and services compression-ignited natural gas engine systems, and the Components segment, which designs and delivers hydraulic valves and components for natural gas engines. The Company operates through three business units out of facilities in Leyland, United Kingdom and Poway, California: engineering services, natural gas systems and specialist components. It assembles, distributes and installs two types of Dual-Fuel engine system: Non-interfaced Dual-Fuel Systems and Interfaced Dual-Fuel Systems. more »

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  Is Watchstone fundamentally strong or weak? Find out More »

13 Comments on this Article show/hide all

ericb 7th May '13 1 of 13

I agree with your comments on SNX - its not even really a *new* contract win, just an extension of an old one.

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CantEatValue 7th May '13 2 of 13

"Of course that presented some spectacular bargains when the TMT frenzy was at its peak, but the point I'm making is that when the market is looking for growth stories, then value shares can just languish for a very long time, so they're not necessarily good things to be in during a bull market, unless they pay a good dividend."

True Paul, put probably only if you're a trader. If you're an investor the underlying businesses will be carrying on producing profits, throwing off cash and growing regardless of what the markets think of them. If anything it presents great opportunities for share buybacks at an attractive price and so increases the attractiveness of it as an investment option.

I don't think I'd be able to time getting in and out of market favourites du jour at the right time (can anyone?) so I think this practice is probably best avoided in favour of investing with a long term perspective.

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Paul Scott 7th May '13 3 of 13

In reply to CantEatValue, post #2


Generally I agree with those points you make. However, it amazes me how even the most successful value investors can lose patience with a great company whose shares languish for a long time. Remember that there is an opportunity cost with every investment. So holding something where the shares are dormant, or in a slow gradual decline, whilst other things are going up, is very frustrating for even the most disciplined investors.

It's easier if the share is really deep value - e.g. Trinity Mirror (LON:TNI) last year. I got my timing wrong, by about a year, but as it got cheaper & cheaper I just bought more & more, confident that my research was correct. By the time it got to 25p I was almost all-in, with 60% of my portfolio in that one stock. It paid off of course, as my research was correct.

However, it's a lot harder to be so bold if a share is good, but not great value.

I don't see any problem at all with blending investing & trading, and that's something that feels natural to me. So I'll happily hold some shares for years (I've held Indigovision (LON:IND) continuously for 9 years now!), whilst will nip in & out of others in quite a short timescale (say a few weeks) if a good trading opportunity arises in a company whose accounts look sound to me.

I'm very wary of blue sky these days, and hardly ever touch it - because such a proportion of blue sky stories from years ago turned out to be commercial failures.

Quite a big topic that we could discuss widely. Just to emphasise though, my approach is still very much value & GARP. But in a bull market I'm prepared to be more flexible if the right opportunities arise.

Cheers, Paul.

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Marky 7th May '13 4 of 13

Re: Quindell debtors

If QPP was growing revenues purely organically then of course you would be correct, however it has made an array of acquisitions which have had the effect of increasing the balance sheet, including the level of debtors.

Some of these acquisitions occurred late in 2012, so for these QPP was taking on minimal 2012 revenues vs full debtor balance.

"So that surely means that all the sales & profits booked for the year have not actually resulted in a single penny in cash being collected from those sales?" No Paul, it doesn't. EBITDA to cash conversion was 74%, at a time of exceptional growth.

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it_trader 7th May '13 5 of 13

I think the issue with QPP currently it is all very much in the air and risky. Due to all the acquisitions throughout 2012 it is hard to give them the true credit for the increased EBITDA figures as well as all the blame for the increasing debtor figure.

I'm sure they are well on with sorting out the debtor problem now into 2013 and there wasn't probably much they could do about the 2012 figures. However they did use those debtor 'asset' figures as a way of 'valuing' their acquired companies so a very big issue for current share holders who saw their holdings diluted time and time again with the presumption they were earnings enhancing.

They need to collect that cash, or at least the majority of it.

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Paul Scott 7th May '13 6 of 13

In reply to Marky, post #4

Hi Marky,

Fair point, about multiple acquisitions meaning that the year-end Debtor is included in full on the Balance Sheet, but the P&L might only have a small impact from the acquisition, especially if it happened near the year-end.

So we need to know the run-rate of annualised turnover really. Stockopedia shows 2013 forecast turnover at £442m, so that implies that at £202m the year-end debtor is still very large, but not quite as horrendous as it originally appeared in the results.

Trouble is, large numbers of acquisitions in a short space of time, is itself a red flag, and rarely ends well. Aside from the problems of integrating multiple acquisitions, acquisitions can also obscure the underlying performance of a group. It's only when the acquisitions stop, and you see the underlying situation, that the fog clears.

I may be wrong on QPP, as my bad experience with Accident Exchange taught me that companies which try to exploit the insurance sector and book apparently huge profits, come unstuck in the end, when the insurers or Govt eventually wise up to the problem. It's like the huge numbers of fraudulent whiplash claims made in the UK - it's been going on for many years, but at some point that will be snuffed out too.

Regards, Paul.

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thekingsgambit 7th May '13 7 of 13

Hi Paul,

I was just wondering why Iofina (LON:IOF) doesn't show up on your daily screen as the year end results were released here.  Do you have a stockopedia screen you are using?

Thanks in advance


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jraitt 7th May '13 8 of 13

In reply to thekingsgambit, post #7

Tiny point your heading is QED - should be QPP. Just for information.

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jraitt 7th May '13 9 of 13

In reply to Paul Scott, post #6

I have only paid a very cursory interest in QPP so may be entirely wrong. Is not the difference between QPP and Accident Direct? also Helphire that QPP is employed by the insurers to handle the claim on behalf of the insurer whereas the others solicited the no fault victim of the accident to hire a replacement car from them. They were thus third party suppliers who seemed to rather abuse their position by loaning bigger cars, at very high prices for longer than necessary periods.
If QPP are, in fact, just subcontractors of insurers outsourcing their back office work providing a one-stop shop in claim handling then they would have proper contracts and payment terms. Working for the insurers is a very different business model
Have I misunderstood?

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SevenPillars 8th May '13 10 of 13

Quindell share price has now been hammered two days running. News today in The Times that the company has £13.3million of derivatives, CFDS, listed in the accounts as a wager on the share price to go up. The company seems to feel that the share price will be sorted out, in a positive way, once it moves to the main market.

Big moves one way or the other seem to be the order of the day with this company. So far, rapid growth by acquisition hasn't convinced those buying in the AIM market. Shorters seem to be having a better time of it lately.

There is quite a long article in the Investors Chronicle, The curious case of Quindell, that is worth a read by any holder. Most of the comments I've read around the web from those that hold it on fundamentals seem to suggest that the acquisitions they have made are all good, sound buys and will pay off long term. Others clearly doubt the strategy as too much to soon.

Also worth noting that CEO Robert Terry was previously at Innovation Group and did much the same thing there. Haven't checked the history of that company, but in the article below the share price was around 305p and today they stand at 25p 'ish (don't know of any share dilution, new issue, etc since then). So, Quindell's CEO has a reputation for the rapid acquisition approach.



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dangersimpson 8th May '13 11 of 13

If what the times is reporting is correct that alone would be a red flag to me - any company not incorporated as an investment company that uses shareholders funds to speculate on the price movements of their own shares shows, in my opinion, an attitude of management which is inconsistent with an aim of building a successful long-term business whether their speculations are ultimately profitable or not.

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SevenPillars 8th May '13 12 of 13

It's also reported that Evil Knievil, Simon Cawkwell is short of Quindell. According to Quindell CEO Robert Terry's twitter feed, EK has had a big short forcing down the price.

EK is probably looking to get back some of his ASOS losses.

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Paul Scott 10th May '13 13 of 13

In reply to jraitt, post #8

Many thanks, I've corrected it now.
Regards, Paul.

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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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