Small Cap Value Report (1 Mar 2016) - SOM, TRB, JSG, MYSL, STM, HYD

Tuesday, Mar 01 2016 by

Good morning!

Sorry there was no report yesterday - I've been in bed for the last 36 hours, with a high temperature. There seem to be a lot of lurgy around at the moment. Anyway, thought I'd better drag myself out of my pit so as not to miss the email deadline of 1pm two days on the trot.

Somero Enterprises Inc (LON:SOM)

Share price: 148p (up 10% today)
No. shares: 56.1m
Market cap: £83.0m

(at the time of writing, I hold a long position in this share)

Results y/e 31 Dec 2015 - this company is the global market leader for laser-guided concrete screeding machines. There was a lot of useful information in my interview with the CEO on 20 Jan 2016, here.

Good results were expected, as the company has issued several upbeat trading statements, including this one on 7 Jan 2016, indicating that EBITDA would be "materially ahead" of market expectations, following a strong Q4.

These numbers look terrific, a few highlights & comments;

Revenue rose 18% to $70.2m - note that sales in the US did the heavy lifting, with sales to RoW actually falling:


A friend emailed me this morning about Somero's results, saying, "Forget China, this is a simple all out play on the US economy – yee haw!" He's hit the nail on the head. With US sales now representing 70% of the total, and growing the most in absolute terms (although EMEA grew more in percentage terms, from a low base), then it's the state of the US economy which matters most.

Somero management told me that the US economy was strong, in our interview, and today's commentary from the company reiterates this;

Healthy trading momentum in the US has carried forward into 2016 from the strong finish to 2015.  The momentum is driven by demand for replacement equipment, fleet additions, technology upgrades and new products.  The underlying non-residential construction market fundamentals in the US remain strong, evidenced by lengthy project backlogs for our customers that extend well into 2016.  This gives us confidence in our growth prospects for 2016.

I'm somewhat confused, as we seem to be getting highly contradictory signals about what's going on in the US economy. Manufacturing is apparently in recession, yet Somero are reporting boom-like conditions in their sector - which is primarily related to the…

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Somero Enterprises, Inc. is a manufacturer of laser-guided equipment. The Company's equipment automates the process of spreading and leveling volumes of concrete for commercial flooring and other horizontal surfaces, such as paved parking lots in North America. The Company's products include S-22E, S-15R, S-15M, STS-11M, S-840, S-485, CopperHead XD 3.0, Mini Screed C, PowerRake 3.0, 3-D Profiler and SiteShape. Its Somero Floor Levelness System monitors Laser Screed performance, operator performance and reports alert percentages of issues. The Somero SiteShape System allows for grade shaping automatically using users' motor grader, dozer or other grading machine. The Somero 3-D Profiler System allows automatic paving of contoured sites using a Somero Laser Screed equipment. The CopperHead XD machine encounters applications, such as chaired rebar, low slump and poor subgrades. The Somero eXtreme Platform (SXP) allows users use their Laser Screed equipment. more »

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Tribal Group plc is a United Kingdom-based company, which provides software and services for education management. The Company's segments include Product Development and Customer Services (PD&CS), Implementation Services (IS), Professional and Business Solutions (PBS) and Quality Assurance Solutions (QAS). The PD&CS segment represents the delivery of software and subsequent maintenance and support services. The IS segment represents the activities through which it deploys and configures software for its customers. The PBS segment represents a portfolio of performance improvement tools and services, including analytics, benchmarking and transformation services, and the QAS segment represents inspection and review services, which support the assessment of educational delivery. Its products and services include license and development, implementation, maintenance, professional and business solutions, quality assurance solutions and other systems related. more »

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Johnson Service Group PLC is a United Kingdom-based company that provides textile rental related services. The Company is the supplier of workwear and protective wear. The Company operates through Textile Rental segment. The Textile Rental segment is engaged in the supplying and laundering of workwear garments and protective wear; linen services for the hotel, restaurant and catering markets, and high volume hotel linen services. The Textile Rental segment principally consists of workwear garments, cabinet towels, linen and dust mats, are initially treated as inventories. It operates Textile Rental business under the brands, including Apparelmaster, Stalbridge, Bourne and London Linen. Its market workwear rental business, providing a clothing portfolio to the workplace, supported by sourcing supply and aftercare service solutions. Its Johnsons Stalbridge Linen Services offers the laundry service to the hospitality sectors. more »

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  Is LON:SOM fundamentally strong or weak? Find out More »

49 Comments on this Article show/hide all

VegPatch 2nd Mar '16 30 of 49

In reply to post #122846

The key leading indicators to look at are the permits issued for new residential construction and for non residential construction. There is a strong correlation with a 1-2 year lag between these permits and construction activity levels. Pg 13 of yesterday's Ashtead presentation is illuminating in this respect with another 2 good years forecast

Having said that, don't rely on the companies own forecasting ability, which is notoriously bad eg Ashteads biggest ever spend on new equipment in the prior cycle was in 2007 before the US construction cycle went off a cliff....

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cig 2nd Mar '16 31 of 49

Re "2% for 4 years" at Johnson Service (LON:JSG) the way I read their blurb is that they replaced LIBOR + 1.75 with a fixed 1.47 + 1.75, so more like 3.2%, assuming stable gearing. Still very cheap by historical standards obviously.

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herbie47 2nd Mar '16 32 of 49

Paul thanks for the review on STM (LON:STM) and Hydro International (LON:HYD), hope you are feeling better today.

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Ramridge 2nd Mar '16 33 of 49

Re STM (LON:STM) this share was covered in your interview with Edward Roskill at the back end of last year, who by memory was very bullish about it.
.As you say the biggest risk factor is a possible change in pension legislation which could severely damage the QROPS business. HMRC and the Chancellor have been closely looking at the pension sector for some time now.

On the positive side, STM's operational leverage is fantastic. The company can turn up revenues with little if any increase in operational costs, so most of a revenue growth flows straight into profits.

Declaration: I am long.

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herbie47 2nd Mar '16 34 of 49

In reply to post #122873

Yes Edward Roskill was very bullish about it. I don't know about STM's history, it says its moving into higher margin business, is QROPS a new area for them? Yes Govt. changes could be a concern but also 70% of their business comes through 1 provider.

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purpleski 2nd Mar '16 35 of 49

In reply to post #122789

I have two brokers. TD Direct let me deal online for Somero but bizarrely not for Swiss stocks (£50 to deal by phone!). But HL let me deal in Swiss stocks. So I use whichever works. W8-BEN is a non issue for TD. Just fill it in and away you go.

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gus 1065 20th May '16 36 of 49

RNS released by Hydro International (LON:HYD) saying they have been approached with a view to a possible takeover by Hanover Investors. Share prices is up about 17% at the moment.

Was just in the process of evaluating a possible top up - d**n!


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smatthews1 21st May '16 37 of 49

Regarding somero, fundamentally there's a lot of ticks next to this one and the big question mark remains over a possible recession.

My view on this is, is that interest rates are currently very low which tends to stimulate growth as credit is cheaper, I believe it was February this year where the Fed increased it by 0.5%?. I don't know exactly how this correlates with the demand for construction, but I can only imagine finding credit for new building's will get harder as the rates increases.

This would be my key to a decision on dumping the stock if these rates got to high.

I'm Proberbly way of the mark here so would be interested on any views regarding this.

I currently don't hold this stock and I can't find a decent reason why not as their figures are reporting small growth.


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herbie47 21st May '16 38 of 49

In reply to post #132314

My view is if rates are going up thats ok because the economy is growing and there is more demand for new buildings, for me the real threat is the economy slowing down which is a real fear and is why stocks such as Ashtead (LON:AHT) have fallen back. Some brokers require a witholding tax form for Somero Enterprises Inc (LON:SOM) which is why I did not buy any.

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gus 1065 21st May '16 39 of 49

In reply to post #132314

A minor niggle I have with Somero Enterprises Inc (LON:SOM) is that as a quasi US company they pay their dividends in USD with no STG or DRIP alternative. Consequently, as I don't have a huge holding, a fairly big chunk of the dividend stream is wasted on FX and bank charges. Is anyone able to do anything better/different?

As you say, the company itself is well run and has good recent performance and financials.


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jashunter 21st May '16 40 of 49

In reply to post #132347

When I held Somero Enterprises Inc. (LON:SOM) through Halifax Share Dealing there was no withholding tax form requirement and I received Dividends in sterling. Change of broker could be the answer.

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gus 1065 21st May '16 41 of 49

In reply to post #132350

Thanks jas. I checked with the registrar, Computershare, who gave me the "no alternative" explanation. I use Charles Stanley as broker who are generally pretty good. I'll raise it with them and see what they say.


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cig 23rd May '16 42 of 49

In reply to post #132350

Before changing broker it may be worth checking that this didn't involve paying the full 30% withholding tax, and that whoever did the dollar/sterling conversion did not charge too much.

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herbie47 23rd May '16 43 of 49

This is what HL said when I queried it with them: "clients must complete a W8-BEN form before investing in US incorporated securities. Somero Enterprises Inc (LSE:SOM) is incorporated in the United States for tax purposes and traded on the London Stock Exchange. As such, the W8-BEN criteria is required for all purchases on the HL Vantage platform."

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gus 1065 17th Jun '16 44 of 49

In reply to post #132260

I believe that 5pm today (June 17th) is the Takeover Panel deadline for Hanover Investments to either put up or shut up in the putative offer for Hydro International (LON:HYD) made on May 20th. No news yet and the share price is about 10-15% back from the spike at the time of the announcement so things are either being kept very quiet or the bid is falling away.


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gus 1065 17th Jun '16 46 of 49

In reply to post #136445

Thanks darlocst.

For some reason the RNS only came out under the name of the bid vehicle, Ely Acquisitions, not in the name of Hydro International (LON:HYD) itself. Still not up on their RNS page so I hope management are aware they've just been bought. Decent result for shareholders although I was quite happy with an investment in the company on a stand alone basis.


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herbie47 17th Jun '16 47 of 49

In reply to post #136457

Actually I thought it was a poor deal, the price was higher (200p), before this deal a few months ago, back in March, which is when I sold out, really to accept a takeover bid this low is surprising.

Yes all the RNSs have been in different names from Hydro.

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gus 1065 17th Jun '16 48 of 49

In reply to post #136466

They justify the price in the RNS on the basis that rumours of a possible bid surfaced in March when the share price was around the 150p level. 194p was the level about the time the bid RNS came out in May. I think the peak intra day price I saw was about 217p - folk speculating on a healthier premium. With hindsight I should have sold then but waited for the two birds in the bush and lost out a bit Still, I bought it in my Naps portfolio at 135p in December so can't complain.


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herbie47 17th Jun '16 49 of 49

In reply to post #136478

OK I see did not realise the previous rise was on bid speculation I thought it was more to do with the good figures. I bought at 150p, so a nice profit in 2 months.

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 Are LON:SOM's fundamentals sound as an investment? Find out More »

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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