Small Cap Value Report (11 Jun 2015) - AVS

Thursday, Jun 11 2015 by

Good morning! This is turning out to be a cracking week, with a lot of my favourite stocks reporting good, or at least acceptable results & trading updates. That's encouraging, as I've had a run of relatively poor performance for about a year, with my long term positions anyway, where I was beginning to think I was a magnet for profit warnings!

I was discussing this the other day with a fund manager, and we agreed that with small & micro caps, to be on the safe side, you have to assume that everything will warn on profits at least once every five years. That's a good rule of thumb anyway, and valuations should allow for this - i.e. small caps should be at a discount to the market as a whole, to accommodate the higher risk.

So it's a real problem at the moment when most small caps seem to be priced to perfection. I'm just not prepared to pay 20 times earnings for businesses that have historically been priced on 10-14 times, which is the situation I'm finding with many small caps that I research at the moment.

Happily, as we have so many to choose from (well over a thousand UK small caps), there are still bargains to be found, but it's getting harder to unearth them. Often I'm finding it's stocks where there is no broker coverage at all, or where the broker forecasts are lagging way behind reality of improving trading updates, that present the best opportunities, one of which is:

Avesco (LON:AVS)

Share price: 179p (up 27% today)
No. shares: 19.1m
Market Cap: £34.2m

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

Interim results - for the six months to 31 Mar 2015.

I've been banging the drum about this share quite a lot this year, because the trading updates were flagging a much improved performance, but the share price was only modestly rising. Really good figures out today have put a rocket under it, up 27%, so the question now is whether to top-slice my position or not? I had a price target of 200p in the back of my mind, so it's not a million miles away from that. Let's get stuck into the numbers!

Revenue for H1 was only up 1% on prior year, but the important thing to note is that there were no…

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

7 Comments on this Article show/hide all

dasv 11th Jun '15 1 of 7


Any thoughts on the current ratio? It put me off - stocko's bankruptcy meter is almost in distress for this one.

ROCE, ROE levels are poor - reflecting loss making years?

Operating Margin is wafer thin.

Revenues are lumpy historically. European Games will help with this.

I agree prior to these results the stock has been undervalued, and despite today's rise it's still cheap on PE, book and PEG.

What stops me buying is the low margin nature of the business but on a value basis there is a lot to be said for AVS.

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Paul Scott 11th Jun '15 2 of 7

In reply to post #100953

Hi Dasv,

Those are all valid points.
However, Avesco (LON:AVS) is a turnaround situation - they've restructured & fixed most of the problems (mainly heavy losses in Germany). So that means the historic figures are now of little relevance to how the business is likely to perform in future. They've also smoothed out the lumpy alternate years issue, as mentioned in today's narrative.

Current ratio - bit of a red herring in this case, in my view. The current portion of bank debt of £8.9m skews the current ratio down, but in reality that debt won't actually need to be repaid, it will just be rotated into new loans on the assets. Remember that AVS also has substantial freehold property assets, so banks are happy to lend against that. They own Fountain Studios I believe.

There's no sign of any financial distress at AVS in my view, and one has to accept that equipment hire businesses like this will carry some debt.

Regards, Paul.

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jonesj 11th Jun '15 3 of 7

Thank you for bringing this one to my attention a few months back. After checking it over myself, I have a long position too.

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dasv 11th Jun '15 4 of 7

In reply to post #100957

thanks very much for reply - good points. They do seem to have turned a corner with today's numbers.

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simoan 11th Jun '15 5 of 7


Great call on Avesco! I'm currently reading the James Montier "Behavioural Investing" book and you definitely hit the "Great analysis, Great result" quartile of possible investment outcomes. Looking forward to watching the video when I get home tonight... only downside of Youtube is not being able to listen to the audio at work :(

All the best

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hayashi22 11th Jun '15 6 of 7

cheap shoes from shoe zone and a plastic bag. Dear oh dear. Gordon Brown used to wear cheap shoes before T. Blair put him right. What a ghastly pair.
I note there has been an announcement by GATE. What it signifies I do not know.

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jetstar 28th Jun '15 7 of 7

Just a short note to show my appreciation for the video reports. Adds a new dimension to understanding!

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 Are LON:AVS'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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