Small Cap Value Report (1 Jun 2016) - KNOS, PEN, FLO

1st Jun '16 by Paul Scott

21 comments 14234 reads

Good morning!

I continued working throughout yesterday afternoon. Prompted by a reader, I had a look at software group Kainos (LON:KNOS). What a fascinating company! If you missed that section, click here to revisit yesterday's complete SCVR.

The organic growth at Kainos from 2013-2016 has been remarkable. Thank you to the reader who pointed out there were many, generally favourable reviews, from its employees on Glassdoor. This website should I think become an automatic checklist item for me to research, from now on. It gives a glimpse into a company's culture, and flags potential strengths and weaknesses.

The internet is full of interesting nuggets of information about companies. So it's vital to dig around for them, rather than just relying on the airbrushed versions of events coming from companies themselves. Peter Lynch emphasised the importance of picking up such "scuttlebutt" in his books. It's never been easier now that we have so much information out there, and Google to rummage through it for us.

Anyway, I potentially like Kainos, but need more comfort on whether its stellar growth, and profitability, are sustainable in the long term. So it's gone on my watchlist, to be researched in more detail one rainy weekend - i.e. probably this coming weekend!

Total voting rights

There seems to have been a proliferation of these announcements from companies, often at month end. It's been bugging me as to why they are issued. So I googled it! This article came up.

If I understand the rules correctly, then companies need to issue an update at the end of each month, if there has been a change in the number of shares in issue. On top of that obligation, companies also have to make an immediate announcement if any material change occurs at any other time.

This is helpful to investors, in that we can quickly check whether a market cap figure is correct and up-to-date. All we have to do is look to the most recent "Total Voting Rights" RNS, for the total number of shares in issue, and multiply it by the current share price. It's worth checking, as occasionally data sources can overlook recent Placings, for small companies.

Primary Bid

I'm watching the development of PrimaryBid with great interest. This is a new venture, to allow private investors to offer funding for companies which are considering doing a Placing. Wouldn't…

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zho

1st Jun '16

Deltex (DEMG): excellent results this morning from a large Spanish trial of the Deltex blood flow monitor showing improved outcomes and reduced length of stay after a range of surgeries. Sadly, the NHS is so poorly funded that they’ve stopped buying, hence the beaten up share price – a scandal given the wide evidence base suggesting that the monitor saves money as well as lives – but it may be worth keeping an eye on the Company to see if they can gain traction in overseas markets.

Paul Scott

Hi zho,

In my view Deltex Medical (LON:DEMG) has been trying for too long, and getting nowhere.

I don't buy the argument that bureaucracy has stopped the NHS buying it. If the product really was as good as the company makes out, then surgeons would insist on it being bought.

Regards, Paul.

arfournier

I own shares of Keyword Studio but one thing to keep in mind is that they are a very acquisitive group and you will get diluted. In the past they have financed their acquisition with cash and by issuing shares. Backing out acquistions the firm generated cash from operations so the expansion is partly self financed. They just took on a line of credit with Barclays so maybe that will be changing. Keyword just completed a fairly significant acquisition of Synthesis Group for 18M pounds along with at least two other acquisitions in the last six months. So there is a bit of a risk that they will over pay considering everyone in the industry knows that Keyword is on an acquisition spree. That said the sellers usually get a slug of Keyword shares so they do have a motivation to be successful within the group.

seadoc

Hi Paul,

"then surgeons would insist on it being bought."

I did. Cancelled an op until kit was couriered up from Chichester. NHS managers have minimal commercial experience and at the middle level come mainly from a nursing background. Now retired but my old place of work featured in dispatches (including in H of C) 10 years ago. Wrong Wrong Wrong for Deltex Medical (LON:DEMG) to have fought NHS amateurs for so long. The move to US of A moved the goal posts and this report from Spain show another way forward. The saving per probe placed is over £1000. The probes sell to the NHS for around £80, they (the new ones) cost £5 to make. If you are ever in Chichester the burger van on the entrance to the car rental company (not sure if I am allowed to mention names here so just think Black and Green) over the road is a very good source of (Edit - current) information ;-)

Regards, Seadoc

JASPERTHEDOG

Paul,
Re:PrimaryBid
If the company cannot find better ways to spend its time than trying to raise money for the likes of Ascent Resources it deserves to fail. Sucking in the 'Suckers' may look like a business plan, but all too soon it will become a bucket shop. Unless it concentrates on companies with some sort of future, it will never become a credible entity.
The problem, clearly, is one of the chicken or the egg. How can better companies be persuaded to use the service without a track record of success, and how to get a track record without the decent companies coming forward? The more successful and investible companies have better and more durable relationships with their Nomads and brokers, giving better access to the capital markets. Crowd funding of basket case miners and e&p oilers is an area that sooner rather than later should be looked at by a responsible authority. Unfortunately, we do not seem to have any proper oversight of the most junior markets.
Thanks for your column.

JDW72

On the subject of Kainos, their non-execs are a very strong group who will provide excellent counsel. Tom Burnet many of us know through LO-Q/Accesso and Chris Cowan I worked with a couple of times when I was at Accenture and I always found him to be impressive.

I don't know the other non-exec.

Cisk

Afternoon Paul

I guess most of us hang on to a few poor performers longer than we should, my guilty 'pleasure' is Deltex Medical (LON:DEMG) - probably held for nearly 10 years now! But did manage to trade successfully in the past.

Their latest announcement is quite a big deal for them - and I certainly agree with seadoc that they wasted their time trying to flog the kit to the NHS, and I don't agree that if it was good, then the NHS would buy it

I believe every study that has been undergone has concluded that it's beneficial to use fluid monitoring and that the Deltex Medical (LON:DEMG) offering seems to be the best. But the NHS is so starved of funds (or allocates them poorly), and it's probably fair to say that some of the decision makers don't make the best decisions, so I don't see much future in trying to sell them to the NHS, even if the NHS gets a windfall from Brexit (as some poor souls believe, but that's a different story!)

Also a nice little contract win from CityFibre Infrastructure Holdings (LON:CITY) announced this morning; I know you don't really tend to comment on contract wins, and certainly CityFibre Infrastructure Holdings (LON:CITY) is not a value stock and falls into the jam tomorrow bucket. I, along with others, wasn't too chuffed when they excluded private investors from a large fundraising to buy Kcom's network. But it seems to have been a good deal for them, and maybe they will be snapped up in a few years by some media / technology company (or infrastructure fund) with ambitions to own some infrastructure...

So one to tuck away in the bottom draw; it'll move up the filing cabinet towards the top drawer if / when it breaks even and builds a sustained revenue base.

DWit199

According to the National Institute for Health and Care Excellence (NICE) the annual saving from fully implementing it's advice on the Deltex CardioQ oesophageal Doppler monitor across the NHS for all eligible patients would amount to £413 million. This is in addition to the personal benefits gained by patients of less invasive monitoring and earlier discharge from hospital. With NICE behind them I am amazed they have not been able to make this into a profitable business. The conclusion I have drawn, like Paul, is that in clinical practice, the benefits are less evident than claimed, or the management of Deltex are totally incompetent. Neither would lead me to consider an investment.

edited to add that the NICE guidance is currently under review. According to the review proposal, "almost all hospitals use CardioQ". There is also evidence that the benefits compared to alternative treatments are less evident on more recent research studies compared to those published prior to NICE's initial guidance in 2011. Many show no difference in complications or hospital stay compared to routine management. I think the outcome of the review is unlikely to be more favourable to Deltex than the initial guidance.

David,

This the same NHS that blew £11Bn on a new computer system ordered from a sofa in No 10 by Tony B.liar without any reference to the, even vaguely computer savvy, clinicians?

Thanks to Paul, seadoc, Cisk and DavidWithers for replies on Deltex.

seadoc, can you elaborate on >>If you are ever in Chichester the burger van on the entrance to the car rental company (not sure if I am allowed to mention names here so just think Black and Green) over the road is a very good source of (Edit - current) information ;-) >>

This the same NHS that blew £11Bn on a new computer system ordered from a sofa in No 10 by Tony B.liar without any reference to the, even vaguely computer savvy, clinicians?

The difference is the IT system was a central political decision. The use of Deltex equipment depends on individual decisions made by hundreds of clinicians and managers. The capital cost is within the reach of charitable funding and consumables are relatively cheap. I don't believe the failure of Deltex to profit from this technology is simply NHS bungling.

simoan

Hi Paul,

Yes, I saw the announcement from Pennant International (LON:PEN) and bought some this morning too. It's a company I've held in the past and I quite like although it does suffer from "lumpy contract syndrome". It's a bit smaller than companies I would normally invest in and fairly illiquid apart from days like today, however one thing you can say about the company is that it's not "leaky", which I like to see. This is a big contract relative to the size of the company which must have been under negotiation for several months and there has been no sign of the share price jumping up prior to the release of news... unlike some companies you could mention!

All the best, Si

Apologies to Paul for hijacking his BB.

zho,

Nothing too exciting, after I retired I had parked my boat in Chichester Harbour for a few days. We needed to return to base for medical reasons. We put the boat into one of the smaller marinas, family owned for many years, fraction of price of the posh marinas and the in-water structures still all original if any locals want to guess! I booked a car for the day from the green and black company but the courtesy car was out (rented?) so cycled up on my Brompton to collect the car. The car had not yet been returned so I had lunch at afore said burger van, sharing small table with engineers very interested in the bike. They worked over the road, and we had a very interesting chat about the new crystals. More than half the cost of probes was the time to solder the crystal onto the end of the probe. It seems it was very fiddly, desperately boring and damaged the crystals. The opo was the expert but looking forward to joining the others full-time making the monitors. The new crystals were ?printed onto paper/mylar and so could be clipped/glued onto the leads and encapsulated. I think this is now all in the public domain but what is not is the cost which, and bear in mind that this is lunchtime chat at burger bar so has zero provenance, is a fiver. I topped up at last cash call, rounding up in the open offer. Caveat emptor but if this becomes cash generative the only question is at what point the company gets taken over. The more shares taken on by the non-execs in lieu of cash the more difficult a take-over becomes. Back of envelope calculation would value company in double figures on basis of potential NHS sales alone, 100p if all Europe adopts probes on UK results, ?double that on latest Spanish study, $10 in US alone on their protocol and $100 if you apply American protocol world wide. Regards, Seadoc

Seadoc, Many thanks for replying. V interesting.

Julianh

Paul
Re - www.glassdoor.co.uk and your fascinating director interviews
Following your recommendation above, I have had a short look at Glassdoor. You are right. It provides incredibly useful information about the inner workings of a company, information that we won't get from anywhere else. As a first exploration I looked up Accesso (ACSO) because I hold shares, because the company seems to be doing incredibly well and to provide a counterpoint to your CEO interview:
* I was very impressed by what I heard of the CEO from your interview. It gave me the confidence to add to my (then) small holding in the company. I was especially impressed by the moat surrounding the company, making it difficult for competitors to take their business. Many thanks for that.
* on Glassdoor, 20 employees gave the company an average 4 stars
* the good points - an exciting go ahead company, hard work but a good sense of being part of a team building a great company
* the bad points - technical decisions (according to the employees who contributed the reviews) are made by non-technical management. As a result they are slow to adopt modern development technologies. Development targets are often unrealistic and therefore not met
I am not sure how to balance the different viewpoints but the note of caution (from the Glassdoor employee reviews) are prompting me to reduce my holding in case the companies development plans come unstuck
Many thanks again for providing so many helpful suggestions on how to be a successful investor

apad

2nd Jun '16

J,
"technical decisions (according to the employees who contributed the reviews) are made by non-technical management. As a result they are slow to adopt modern development technologies. Development targets are often unrealistic and therefore not met"
Is very common feedback on a lot of (particularly) software companies.
It is my view that the techies need to be kept in check or chaos might reign.
apad

cig

PrimaryBid is part-funded by Henderson, and Henderson is the effective owner of Ascent, so they're starting with house stocks. Give them some time.

Companies do not need to be persuaded, the business model is reversed: investors put bids (you can put bids on all AIM companies, the company need not be aware PrimaryBid exists in advance), and when there's critical mass, PrimaryBid goes to the company and says "we have investors interested in buying $AMOUNT worth of new shares at $PRICE, do you want it?". If it's a good deal, why would a company reject a windfall? So the hard problem for them is to get enough investors placing resting bids.

Thanks apad.
This is definitely also true. And it is worth looking at all the positives and all the negatives before forming a view. I am still a happy shareholder of ACSO along with many others who are enjoying the success this company is having.
Julian

3rd Jun '16

cig,
Many thanks for your reply. I think I used the description 'Crowd Funding' in a slightly too derogatory way.
The problem remains gaining critical mass to make the company credible.
It will require a good number of highly sophisticated investors who have full knowledge of an upcoming offering and cash on hand, demonstrating good faith, prepared to express interest.
Wealth management companies have an established foothold in this territory for those of sufficient net worth and are always(?) in the loop for these offers; they use a pool of client cash to make an offer credible. PrimaryBid is trying to attract individuals of less asset value and without the cash committed, unlike the wealth managers. Does PB take cash up-front, apply for shares to that value and allot the results pro-rata, if necessary? Or does it gather interest in an offering and approach on the basis that they 'may' have clients prepared to pony up the cash?
The sale of shares in an associated company, even in a novel way, hardly shows a strong business plan.

They require a deposit of 1/4 of your max bid. You can bid on as many companies as you like with the same deposit.

You do not need knowledge of an upcoming offering, that's the thing: the demand for shares is creating the offer. You can let bids rest permanently (adjusting your prices every so often for changing circumstances) for all the companies you like.

You do not need much more sophistication than you need to buy shares the regular way, essentially it's the same thing as putting a limit buy order below the bid on an electronic market waiting for a big seller to hit it. The deal for the punter is that you get a slower process (compared to buying at the market price) in exchange of a discount, and possibly capacity for illiquid shares (you can bid for a quantity that would move the price on the secondary market).

Small Cap Value Report (1 Jun 2016) - KNOS, PEN, FLO

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Paul Scott

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