Small Cap Report - PLA, NFC, DLC, SPO, NWF, CFX, MWG, CCT, TCG

29th Jan '13 by Paul Scott

7 comments 23705 reads

Plastics Capital (LON:PLA) is a company which I follow closely, as myself and David Stredder interviewed the CEO 6 months ago. My impression was (and remains) that this is a good quality, niche company, well managed, but with a tad too much debt (albeit being reduced steadily). Growth has proved somewhat elusive in recent years too. Incidentally, we would like to do more interviews (of quality companies only!), but so far we've found that the ones we would like to interview seem camera-shy! Such is life.

Their Q3 trading update today (PLA has a 31 March year end) is "broadly in line" with market expectations. Broker consensus is for 11.6p EPS this year, so that corresponds to a PER of 6.3, which looks cheap.

Net debt was £8.6m when last reported at 30 September 2012, which is equivalent to about 31p per share, so adding that to the share price of 72p takes us up to 103p Enterprise Value, and a cash/debt neutral PER of 8.9.

I know this is a crude way of doing things, since it doesn't adjust out interest cost from the EPS figure, but it's a quick & easy way of getting to an estimate of how the PER really looks once you adjust out the net debt, which I find very useful.

I believe that PLA might gradually re-rate as the debt steadily reduces, so whilst the shares are unlikely to set anyone's portfolio on fire, they might prove a useful long-term holding? The dividend is forecast to grow from 1.3p to 2.0p this year, so if that happens, then the yield will be starting to matter at 2.8% yield.

There has been a flurry of trading statements from marketing groups lately, and today it's the turn of Next Fifteen Communications (LON:NFC) to give an AGM trading update for the period from 1 August 2012, which I'm pleased to see they have issued before the actual meeting, so everyone has a chance to read and digest it simultaneously, before the market opens. This strikes me as best practice, and really all trading statements should be issued at 7 a.m. for all companies. Intra-day profits warnings are every investor's nightmare, as it's just a race for the exit, won by whoever happens to…

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Asagi

29th Jan '13

Hi paulypilot,

Plastics Capital (LON:PLA) reported at 24% decline in net debt with the last interims and an 18% decline with the prelims before that.

In two years, the reported headline net debt figure has come down from £14.9m to £8.6m.

Management are doing EXACTLY the right thing here. They are going big on debt reduction and slowly introducing a (rising) dividend at the same time. The first should be very good for the P/E and the second should work wonders for perceptions about the company as an investment proposition i.e. management are in control and are rewarding shareholders.

Stockopedia data sheet says the P/E is 6.25 for 2013 (March). That seems a bit mean considering the clear progress that the plc is making. Also a good economic recovery play.

Regards,

Asagi

no position

Paul Scott

I agree. To my mind, the share price of Plastics Capital (LON:PLA) is likely to gradually rise to say 100p as the debt is reduced over 1-2 years.

Then you might get a further re-rating when/if profits show some growth from an economic recovery.

Management are competent, and sensible, although there is a question mark as to why it needs all the plc costs at all - it's a lot of expense (around £600k p.a.) to have an unnecessary layer of senior management doing little more than twiddling their thumbs.

Regards, Paul.

loglorry

Re PLA interview. I've never been big on the talking to directors directly approach to finding out what is going on. The ones that agree to do it are probably using it as a way to promote their stock and so I'm instantly wary of that. The ones with good businesses can just let the numbers speak for themselves and focus on running the business.

FWIW I think meeting management via internet vids or mello events can produce bad investment decisions. If you take the time to listen to a persuasive pitch by a director in person you are probably more likely to buy into their story. Unfortunately, it seems to be the ones that spin fiction that are most likely to participate in these types of storytelling. Also lots of legal reasons why a director can't "spin" in an RNS or set of audited company results whereas an informal chat is a different story. Harsh perhaps and just my view but I'd rather focus on the numbers and other external validation metrics. Just my 2p not a criticism of the effort that has gone into setting up these vids and events.

Dan Green

I agree with your assessment of Thomas Cook. I have sold out today after banking 50% profit in two weeks. Maybe it has further to go and there is momentum, however it is clearly speculating rather than investing. I feel much more comfortable with long term holds and this is the first time I have traded. Although it has proved profitable this time, I can see how you can easily lose money. Thomas Cook doesn't offer a margin of safety and the first objective should be to not lose money.

DarwenLad

I don't agree. It is great if you can have one and one chats with company execs but for most people this is well nigh impossible. We cannot get access to the company management briefings with institutional investors, and it is hard to get into AGMs if you are not a shareholder. Of course, there are some canny investors who can get all the information they need from reading the annual report and RNS announcements. But I think there is a lot to be said to having a look at a company (especially if it holds its AGM at its HQ) and watching how management responds to questioning. Of course, they may be bull shitters and some who are keen to "spin" a special line. But investors should always keep this possibility in mind when digesting management's performance in front of the cameras or in public.

I am kicking myself for not attending Nanoco's AGM in Manchester just before Christmas. I had made 40 per cent on the shares in a few months, and felt it was about time to take a profit after they touched £1.

I know that Nanoco's management would not have told me they were just about to sign a manufacturing deal with Dow (which has sent the shares up another 50 per cent plus) but I think I would have been better able to guage the calibre of the management and whether it was worth sticking with them as a long term investment rather than a short term trading play.

30th Jan '13

I can see both points of view on this - some investors like to meet management, and make better decisions as a result, whereas others can be too trusting, and get sucked into buying and/or holding a bad investment because they fell in love with the story after meeting management. I've certainly done that in the past, but I've met so many companies now that I'm developing a much better nose for these things, and reject the shares of almost all companies I meet.

It can certainly stop you selling at the wrong time, if you meet management and realise that they have a credible plan for developing the business. That's very much why I have stuck with Indigovision (LON:IND) since I have been so impressed with the turnaround strategy of the new CEO, and his intense focus on the job, and absolute determination, which you only really get a handle on by meeting the person (or maybe from a phone call).

Bottom line is, it's horses for courses. Whatever works for you personally is the right way to go.

Cheers, Paul.

5th Feb '13

I know that Nanoco's management would not have told me they were just about to sign a manufacturing deal with Dow (which has sent the shares up another 50 per cent plus) but I think I would have been better able to guage the calibre of the management and whether it was worth sticking with them as a long term investment rather than a short term trading play.

Just sounds like a bit of hindsight thinking to me. So what you are saying is if you had done something that might have led you to be impressed by management (not sure why you are sure they'd impress you) this might not have meant you would have sold and thus you'd be sitting on a bigger paper gain right now?

This is all just coulda woulda shoulda stuff but as yet we've not invented a time machine and so its largely irrelevant. I could construct the same future where you didn't sell went to the presentation then decided to sell. Or you didn't sell went to the presentation were impressed and then the share price dropped and you sold lower.

Log

Small Cap Report - PLA, NFC, DLC, SPO, NWF, CFX, MWG, CCT, TCG

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Paul Scott

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