Small Cap Value Report (10 Jun) - PDC, LTC, RWS, XAR, SNCL, FKL, PGB, VLX

Good morning! Firstly this morning I've been having a quick look at results from Printing.com (LON:PDC) . The big question here is whether they are able to maintain the dividend, which was reduced from 3.15p to 2.55p for year ended 2011/12.

They announce this morning that the final dividend has been maintained at 1.5p, giving 2.55p total for the year, which means the shares have an enormous, but clearly unsustainable yield of 11.9%, with the share price at 21.5p.

Sure enough, when you dig deeper into the narrative, they say that future dividend policy will require them to be covered by earnings. This year EPS was 1,69, so the full year dividend was only 66% covered by earnings. Therefore if earnings are unchanged next year, then the dividend is likely to be cut by at least a third.

They also update on a change of strategy, towards a cloud-based business model. The outlook statement sounds too cautious for me to want to investigate further, so I'll pass on this one.

 

 

Next let's have a quick look at results from Latchways (LON:LTC). This is a company which I've previously mentioned positively in these morning reports. They are a maker of specialised safety equipment, e.g. large suction pads which are used by workers in the aviation industry, so that workers are tethered to the plane wing, and can move about on the plane wing without any risk of falling off.

I like this company's niche products, it's high operating margins (indicating pricing power, hence a product which is in demand), the strong balance sheet with net cash, and a reasonable dividend yield.

In the past the shares have looked a tad expensive, but their results this morning look good, and the valuation now looks more sensible to me. They have delivered a strong second half, and full year revenues have risen 2.5% to £42.4m.

Adjusted profit before tax is up 3.3% to £10.3m. Adjusted basic EPS is up 6.5% to 70.3p.

At a mid-price of 1034p that translates into a PER of 14.7, which is probably about the right price. Bear in mind that net cash of £10.5m is equivalent to 94p per share. More importantly, you know that a company with a decent net cash buffer won't need to do an unexpected fund-raising if it hits a rough patch of trading. So net cash substantially de-risks an investment, hence why it's high on my list of priorities.

There's a good increase in dividends, to a total of 36p per share for the full year, for a yield of 3.5%, which is pretty decent. The all-important outlook statement sounds fairly encouraging, with the order book, "considerably ahead of the same period last year".

All in all, there's a lot to like here, but the price doesn't excite me enough to want to buy. A great quality business though, which will be high on my watch list, and is exactly the sort of company whose shares I would buy if & when they have a profits warning & the opportunity arises to buy say 20-30% cheaper.

 

 

 Webinar this Wednesday! Please note there are only about 20 places left on the next Stockopedia Webinar this Weds lunchtime - where Ed will give a tutorial on how to best use the StockReport. They're very useful things to listen to & you can see him demonstrate things live on your screen, ask questions, etc. More details here: http://www.stockopedia.com/webinars/

 

 

Next I've been looking briefly at the interim results from RWS Holdings (LON:RWS) which describes itself as "Europe's leading provider of intellectual property support services (patent translations & searches)".

The figures certainly look good, with sales up by 9% to £36.7m, and a very strong profit margin delivering £10.6m profit before taxation for the half year (up 31%). With EPS up 31% to 18.9p for the half year they look to be well on their way to achieve or exceed full year broker consensus of 34.1p EPS.

However, at 668p that puts the shares on a pretty lofty rating of 19.6.

There is also net cash of £28m at the year end, which is about 10% of the market cap.

It's worth noting what they have to say about the European Union Patent plans, where they seem to say that it will have some impact on their business, but not for the time being. I wouldn't like any uncertainty hanging over a business if I was asked to pay a PER of nearly 20 for it, so this one isn't for me.

 

 

It's really a mid-cap now, but mention has to be made today of a spectacular trading update from Xaar (LON:XAR). I've always liked this company, but their print-head technology has taken years longer to commercialise (as new technologies often do). However, it's taking off in pretty remarkable fashion now. Their update this morning says that they now expect 2013 sales to grow at 50% on 2012, which means they will smash forecasts.

This would have been one situation where chasing up a soaring share price would have worked very well. They're up another 87p this morning to 742p. Well done to holders!

 

 

It's come up here before, as a potential buying opportunity (due to the coldest Spring weather for 50 years), but after looking at their interims this morning, I cannot get excited about William Sinclair Holdings (LON:SNCL) . It just looks too messy, with a lot of debt, a very capital intensive business (being a producer of horticultural products), and a pension deficit. Plus they are developing a large flagship production plant at Ellesmere Port, which involves duplicated overheads for several years. Just too messy, and it doesn't look particularly cheap at the moment either given poor current trading.

 

 

I don't recall having looked at Falkland Islands Holdings (LON:FKL) shares before, but on skimming their results for the year ended 31 Mar 2013 have to say that I'm intrigued. They seem to have three operations, each generating around £1m of annual profit. Firstly, the Falkland Island Company operates retail, transport, port & freight services, etc. It also owns 400 acres of land in the Falklands for development,  and with the economy there set to boom from the commercialisation of oil, this could get quite interesting.

Secondly, they make about a million pounds a year profit from operating the Portsmouth Harbour Ferry Company (at a very high operating margin of 24%), and finally an art handler & installer called Momart.

So quite an eccentric mix of businesses, but with plenty of cash (after a fund-raising during the year), and also owning £3.3m in shares in Falkland Oil and Gas (LON:FOGL) it could potentially be interesting.

The obvious risk factor is if Argentina once again invades & occupies the islands. I don't really know where to start in how to valuing this company, although given the unrelated nature of the three businesses, it should probably be on a sum of the parts basis, with a hefty risk discount included for the Falkland Islands stuff, offset by some extra for the growth potential there. It pays a fairly decent dividend too, which is forecast to yield 3.4% this year. My conclusion for now is, potentially interesting, will research it it in more detail when time permits.

 

 

People have said they like to know when I've sold things. It's not that simple, as my standard strategy is to top-slice positions as they rise, in order to free up cash to buy new ideas that crop up on a seemingly almost daily basis. Although it's getting harder to find bargains right now.

One such bargain which I reported on two months ago in April, was Pilat Media Global (LON:PGB) . After a good contract announcement, and positive write-ups in Investors Chronicle, the shares are up a remarkable 60% in just two months. Stripping out the big cash pile, they still actually look good value, so I remain a holder, however my usual top-slicing approach has been used, and I've banked about half the profits for recycling into other things that have not yet risen (such as Volex (LON:VLX) ).

 

That's it for today. I'm off into the City shortly for an investor update meeting with Directors of Silverdell (LON:SID) who are very investor-friendly, which is a good thing. So many companies & advisers completely overlook the private investor market, yet we are the people who create the liquidity & set the share price! So you would think that companies should prioritise communicating with us. Silverdell do, so well done to them.

I'm away from home all this week, visiting family, but have made sure that they have reliable WiFi, and will take 2 laptops with me, so hopefully my morning reports service will be seamless this week.

Have a good week. Regards, Paul.

(of the companies mentioned today, Paul has long positions in: PGB and VLX. He has no short positions)