Small Cap Value Report (10 Nov 2014) - INTQ, TNI, RTG

Good morning! I'm still recovering from a tremendously busy & interesting three days in Derby, for the Mello 2014 investor event. For anyone interested, I've done a write-up on a panel discussion held there talking about when to sell shares, with some tremendous pearls of wisdom from Lord John Lee & Giles Hargreaves. Click here for that article.

Not much going on this morning with results, but there is a very interesting situation going on at a company I cannot mention (as I have a short position), which has kept me busy this morning.

InternetQ (LON:INTQ)

Share price: 270p
No. shares: 39.8m
Market Cap: £107.5m

Q3 update - this Greek software company listed on AIM, puts out an update this morning which reads positively - turnover up 20%, adjusted profit before tax up 26% to E7.6m, and EBITDA up a strong 49% to E13.5m.

That's all great, but as I explained in my article on 12 May 2014, the EBITDA figures at this company are meaningless, because it capitalises so many costs into intangible assets on the Balance Sheet. On a cash basis it was trading barely above breakeven, despite reporting big EBITDA numbers.

Outlook - today the company says as follows;

Our pipeline remains strong and we are confident that results for the full year

will be in line with current market expectations."

My opinion - the way I look at things (expensing all development spend as a normal & ongoing P&L cost), then this company doesn't make any profit at all. So for that reason it's not of any interest to me. Although the growth is good, and I shall scrutinise their next set of figures, to see if any genuine profit is starting to come through.

Trinity Mirror (LON:TNI)

Share price: 160p
No. shares: 257.7m
Market Cap: £412.3m

IMS - covering the 17 weeks to 26 Oct 2014. Not great, as it shows revenue trends have once again deteriorated, after steadying in H1.

On the other hand, Trinity Mirror is still a cash machine, and has repaid nearly all its loan notes. Net debt is now only £24m. The thorny issue of the huge pension fund still exists though, but that is not mentioned in today's update.

Dividends - at last the divis are being reinstated, and 3p will be paid for this (almost) calendar year. That is in line with previous guidance.

Outlook - in line;

Continued momentum on our strategic initiatives coupled with ongoing cost mitigation and an increase in structural costs savings to at least £12 million provides the Board with confidence that profit for 2014 is expected to be in line with our previous expectations.

Valuation - EPS seems to have stabilised around 31p, forecast for this year and next. So the PER is very low at only just over 5! However there's no escaping the fact that this is a slowly dying business. Newspapers will have to go to free distribution (like the Evening Standard) at some point, or just wither away to nothing.

Phone hacking - this seems to be under control;

The Company continued to deal with and resolve a number of civil claims in relation to phone hacking. During the period a number of claims have been settled and a subsidiary, MGN Ltd, has admitted liability to a number of individuals who had sued MGN for alleged interception of their voicemails many years ago. The Company confirms that these steps were within those contemplated at the time of the interim results announcement, and that at this stage no changes are required to the provision held for dealing with and resolving civil claims in relation to phone hacking.

Note the words "at this stage" - so leaving the door open there to potential additional provisions?

My opinion - I loved this share when it was 25p, and on a PER of 1, in 2012. Myself & readers here did very well on that. However, it's now on a PER of just over 5, which I reckon is about the right price. The digital strategy isn't convincing at all, and the newspapers will inevitably die out. So it's just a question of what divis the company can pay out whilst it declines?

Don't forget the pension deficit too. That takes priority over divis, so when profits decline (they can't cut costs forever), then divis will have to be stopped, and cashflow prioritised for the pension fund.

Rethink (LON:RTG)

De-Listing - this £5 m market cap announces its intention to de-list. Looks like a done deal, as 72% have already agreed it irrevocably. I mention it because, in a very unusual move, the company is doing a tender offer to allow shareholders who do not want to own shares in a private company, to tender them at 5p, being a premium of 25% to last Friday's closing price. That seems a fair deal to me. Any shareholders here care to comment? It's not a company I've looked at before.

Combining a de-Listing with a tender offer at a decent price, looks like a good way to doing things, which other companies should consider if they wish to de-List too. Although personally I feel that if a company lists on the stock market, then it has a moral obligation to remain listed for the foreseeable future, unless there is some pressing need to re-list. I don't want shares in any private companies, I want shares that are readily tradeable on the stock market.

Nothing much else to report today.

See you tomorrow. I'll be back home by then, so should be a more detailed report.

Regards, Paul.

(of the companies mentioned today, Paul has no long or short positions.

A fund management company with which Paul is associated may hold positions in companies mentioned)