Small Cap Report - AMO, CLL, TMMG, FTC, PRV, SEPU, SPRP, KBC

Hi Paul

Great first post on s'pedia. Wonderful to see you here with your excellent analysis a real scoop for Stockopedia in my view.

Looks a little to me that a lot of the easy money has been made in small caps in recent months as prices have run up. Nothing is jumping out to me as very very deep value any more. Maybe it is time to sit on our hands a bit longer - or go for a run :-)

Log

Hi Paul,

Good to see you here continuing with your penetrating and insightful ideas. Being new to the world of small caps I hope I can draw useful lessons from them.

Thank you.
Ramesh

Hi Paulypilot - any chance we could have some comment on you r.e. today's trading statement from Chamberlin (LON:CMH)?

Regards,

Asagi

(no position)

In reply to loglorry, post #1

Hi Log,

Many thanks for your feedback, much appreciated!
I'm also thrilled to be doing my morning reports exclusively on Stockopedia, it's a fantastic quality site, which I use extensively myself for researching shares, so great to be associated with.

I also agree with your 2nd paragraph. There's been a big re-rating of small caps since July 2012, and deep value has now largely gone.

My current investing theme is therefore to catch companies which are delivering out-performance in their current trading & outlook, yet whose shares are still at reasonable prices. Broker forecasts often lag behind improved trading, hence if you can find something like KBC Advanced Technologies (LON:KBC) where the fwd PER is only 8.5, yet estimates have scope to be upgraded (hence lowering the PER), then there's still good upside.

I also feel that once economic recovery is established, we should get used to higher multiples, so that things which currently trade on a PER of say 8-10, might not only deliver higher earnings, but also get a PER of 12-14. But that's thinking 1-2 years ahead.

Companies with good operational gearing also interest me, like say Indigovision (LON:IND), where a 20% increase in sales would double profits, due to 60% gross margin and fixed cost base.

On the other hand, it's only a matter of time before more shocks to the system trigger a market correction, so always wise to keep some powder dry & top-slice big winners.

Cheers, Paul.

Hi Paul,

excellent first article for Stockopedia, keep them coming!!

I've been looking at Sprue Aegis for a while. It's hard to get a price for them. Via Sippdeal I have to enter their SEDOL number (3050875) through the dealing interface, which showed an offer of 62p today. I went to buy and the system said I had to call to buy and when they got a price for me it was 67p. I was told no market makers wanted to offer a price and that only two trades had gone through today.

I'm think I'm going to pass on it.

Sprue Aegis (SPRP)

PhilH - Normally you have to deal via phone.

FWIW, the bid & ask were 65p vs 67p for the duration of today...at no stage were they 62p to buy! trust me on that.

I've a detailed investment thread with up-to-date header here.

http://uk.advfn.com/cmn/fbb/thread.php3?id=24324751

Investment write-up over on The Fool,

http://t.co/JnFg0CXs

FWIW - For clarity, Westhouse have adjusted PBT coming in at £3.25m for 2012. This is £150k down on £3.4m previously forecast & probably equates to 6.8p EPS. Taken in context, SPRP has a £25m market cap, around £6m net cash after repayment of £500k loan in 2012 and currently forecast to provide a dividend yield of 4.5% this year.

They are forecast to grow earnings to 10.5p in 2013....earnings growth of 53% or thereabouts and prospective PER of 6.3

Way undervalued when one considers barriers to entry, exclusivity with major retailers and deals such as those with British Gas and Baxi coming on stream. It's all in my write-up & on the ADVFN thread.

Kind regards,

GHF

In reply to Asagi, post #3

Hi Asagi,

Not sure how I missed the profit warning from Chamberlin (LON:CMH) this morning, but have run my slide rule over the numbers this evening, and comment as follows (it's not a company I can recall looking at before, so this is not a hugely in-depth comment).

Whenever a company warns on profit, I tend to ask 3 questions to start with;

1) How severe is the profits warning (i.e. can we quantify what profit is likely to be, and how far off forecast is it),
2) Is the survival of the company under threat? (if it is, deploy the bargepole!)
3) What factors caused the profits warning, and how quickly is the company likely to recover?

In the case of Chamberlin, looking at the RNS, they say that market conditions have "materially softened", which sounds bad. They don't quantify how bad, and just state that, "the Group will deliver pre-tax profits below market forecasts for the full year".

So that at least implies that they will still be profitable for the full year (and not loss-making). They made around £0.9m at the Interims to 30 Sep 2012, which was up about £0.1m on the prior year H1. There doesn't seem to be any seasonal bias to results, so I would estimate that H2 might be anything from a profit of say £0.6m, to a loss of £1m. That is roughly the implied range of outcomes which would have triggered this warning, by my estimates.

They go on to say that the group remains cash generative, so this doesn't appear to be a life-threatening profits warning. Moreover, they had minimal net debt of only £887k at 30 Sep 2012. So that looks fine, no problem of the Bank withdrawing support seems likely.

There is a pension fund deficit of £3.3m, but that's a long-term liability and not big enough to cause solvency problems.

Looking at its track record, 2012 was the first year in 6 that it made any appreciable profit. So it strikes me as a low margin business that is struggling to eke out any significant profit even when things are going well, which sounds about right for a light engineering company - lots of competitors, lumpy sales, not really very exciting.

I think the price would have to be well below a quid a share to get me interesting.

DYOR as usual, just my opinions.

Regards, Paul.

A few of us met with Chamberlain at the end of November. In case it's of any interest, these were my notes from the time.

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Unusually he started off by stressing how strong the company was on corporate governance. I don’t know whether Biddicks (their PR) had pre-briefed him that some of his audience had some recent bad experiences in this area, but anyhow it was an unusual start. He outlined how CMH had been a fully listed company, and then when he joined in 2005 he’d spent £120k to move to AIM. He said that they kept all the same corporate governance standards, and the move didn’t really save any money. I asked if they’d consider moving back to the full list, but he said no, mainly because of IHT investors. Generally Tim came over very well, and he’s someone I’d trust. Perhaps he’s not in the same dynamic mould as the Avingtrans CEO.

Tim outlined how he’d found the company to be a real basket case. He got rid of most of the management and changed virtually everything. It normally concerns me a little when CEOs blow their trumpet in this way and belittle their predecessors, but in this case it’s probably worth giving him the benefit of the doubt. Anyway, he’d pretty much completed when the downturn hit, and there was a huge de-stocking in all the supply chain above them. They went to part time work in Nov ‘08 and survived.

After the pick-up, it sounds like they were still suffering some quality problems - which seems to have been most of their difficulty - but he indicates that’s mostly cured now. So, in their current situation, they look to have good steady customers, although tied to automotive and general industrial macro trends, and they’re paying down debt very rapidly with their strong cash flow. I’d guess that in a year or two when the debt’s gone, they’ll look like a traditional (fairly low tech) engineering business on a P/E of about 9, with a 7% yield. So it sounds fairly fully valued on that basis.

Tim talked through their growth plans, and to be honest, that’s the area where they sounded a bit weak to me.. He talked about macro factors in the automotive turbo market as being the main growth opportunities. He also mentioned gearboxes for the turbine side of the businesses. I asked why they weren’t in the electric motor casings business, as that was surely much bigger than turbine casings, etc. He said he’d talk to his new marketing guy when he got back.

In relation to inorganic growth, Tim discussed how they’d looked at buying several machine shops in the past, but the valuations were crazy, and he’d end up earning just 2-4% return on capital. I asked why that would be any different than his own business, and whether it was only viable because all the fixed assets were devalued. He said it would probably cost about £25m to rebuild one of his own foundries from scratch, but it was only held on the books at say £4m. I’d need to look some more to see if there was any significance in that statement.

He said that they rarely quote on the same jobs as Castings Plc, and if they do, the customer’s normally made a mistake. Having now looked at Castings Plc, that seems an interesting statement. Castings Plc simply look like what CMH should be if it grew properly and substantially. I’d be interested to see if he agreed with this, or had any vision of trying to reach that scale and capability, instead of picking up the small crumbs that fall off the bigger table.

During the meeting, I asked if they have design guides that the provide to their customers to help them optimise their designs for the CMH process capabilities. He said they hadn’t and that sort of thing was too complicated, so it was better having the two sets of engineers meet and discuss the designs. While I sympathise with this to a degree, it’s a big help to customers and in generating business if there are some basic design rules. Interestingly Castings Plc has its basic casting tolerance rules published on its home page, and also examples of benefits of its added value design service. CMH could partner with a very competent company like Mechadyne to offer a similar service.
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Brian.