Small Cap Report - SMWH, WYN, ZATT, SFR, FOUR, FIF, TTR, FDL

WH Smith (LON:SMWH)

Good morning. Interesting trading statement from W H Smith (SMWH). Despite reporting LFL sales down 5% for the 20 weeks to 20 Jan 2013 (which would normally be pretty disastrous for profits), they report a "good profit performance" (although not quantified in absolute, or relative terms).

This has been achieved by tightly controlling costs, and a planned strong increase in gross margin. This is pretty impressive, I've not heard of such a big (5%) drop in LFL sales being recouped through margin improvements & cost control before.

I still can't shake off the feeling that W H Smith is an accident waiting to happen - it's as old economy as you can get - books, greetings cards, travel, etc. Yet somehow it still manages to not only survive, but to apparently prosper. Perplexing.

Wynnstay (LON:WYN)

Wynnstay (WYN) is an agricultural products group, but reading their results (Finals to 31 Oct 2012), they also have a retail division, including 21 pet stores, so a potential roll-out story there perhaps?

They report record results, with revenue up 9% to £376m, and profit up 13% to £7.8m. Note the wafer-thin profit margin there. EPS is up 16% to 35p. That is ahead of forecast of 32.8p EPS, so looks good, but a share price of 468p means the PER is 13.4, not exactly a bargain.

The divi yield of 1.8% is unexciting too (total of 8.5p for the year). It has debt  of £13.8m (compared with a £79m mkt cap), so all in all this looks fully priced to me, so not of any interest.

£10m mkt cap computer games company Zattikka (ZATT) has disappointed in its short history as a Listed company, with the shares halving after a profits warning in Nov 2012. Their trading statement today indicates that things are not getting any worse, with trading in line with the expectations set out in Nov. I generally avoid this sector, after several bad experiences in the past. These companies constantly have to run to stand still, with frequent profits warnings if new releases (which have an extremely short shelf life, but up-front costs) flop, as inevitably they will from time to time.

However, the holy grail of gaming these days is to come up with something addictive online, where silly people pay money for imaginary objects through platforms such as Facebook, and waste vast amounts of time playing games.

Last week a new friend told me that Severfield-Rowen (SFR) looked like a good short, and I'll know to listen to him more carefully in future, as SFR has served up a nasty-sounding profits warning this morning. It's a structural steel maker, for buildings, etc. Cost over-runs on a project at 122 Leadenhall have triggered today's warning, and worryingly they don't seem to be on top of the figures either - with a review needed of its contract base. Clearly poor management, and the CEO has been kicked out.

Its funding position is also wobbly, discussions with Banks taking place over Covenants. This is the nightmare scenario, and is the reason now why I rarely touch any company with significant debt, relative to cashflows. "Gear today, gone tomorrow", as a wise man once told me (wish I'd listened more carefully!)

SFR shares are likely to be pole-axed today - halved maybe? I'm deploying my bargepole, and am not tempted to catch any falling knife where there's a risk of insolvency - been caught out too many times before.

4imprint (FOUR) puts out a "broadly in line" trading statement, so in other words slightly below. I do wish companies would stop using this trick, and just say "slightly below". It's a bit like charging £9.99 or £10 for an item. £10 is far more honest, and customers respect honesty. Although it's one of those situations where the first company to break ranks on this will probably regret it, as the market will probably over-react. But does it really matter what the short term share price is anyway? These things correct over time.

I like FOUR, it seems a steady growth company, but the price is now up with events in my opinion. Nice divi yield of over 4%, and a solid balance sheet with net cash, so it's my type of company, just not quite cheap enough for me to be a buyer now.

Finsbury Food (FIF) puts out a solid trading statement, although despite gradual reduction, there is still far too much debt for it to be of interest to me. I rarely (if ever) invest in food companies, as nearly all the profit is screwed out of them by the power of the big supermarkets.

32Red (TTR) is an online casino which has caught my eye in the past due to its very effective marketing strategy, and strong growth. Their trading update today shows continued growth with revenues up 28% for 2012. Profits are in line, so that puts them on a PER of just over 11, and a divi yield of 3.2%. Not bad for a growth company, although I don't like this sector, both for financial and ethical reasons.

Findel (FDL) issues an upbeat sounding trading statement. I don't like this one - accident-prone, and still has way too much debt. Low margins, and dreary, old-fashioned businesses. The valuation seems to already price in a trading recovery, so it doesn't interest me at all. There's no dividend either, so it ticks pretty much every box on my bargepole list.

Have a good day.

Regards, Paul.

(Paul does NOT hold shares in any companies mentioned today)