Small Cap Value Report (11 Oct) - C21, ATUK, TMMG

Good morning! Am running a bit late today, overheated axle at Berrylands. I'm working on the report right now, so please refresh this page from about 11:20 until 14:00.

 

Troubled CCTV company, 21st Century Technology (LON:C21) has announced the appointment of a new CEO and FD. They are formerly from Quadnetics, a much larger competitor, so that looks encouraging. Both have been granted chunky share options, but I'm pleased to see that the exercise price has been set at the current market price - I have no issue with share options, providing management are only being rewarded for creating shareholder value above the current share price. Both have also given irrevocable undertakings to buy £60k and £90k worth of shares in the market, so that's an encouraging sign of commitment. I hold a few of these shares, and might top up when funds permit.

 

Not a small cap, but I see that the Royal Mail IPO has started well, with the shares about 33% up at 437p. Personally I didn't bother applying, as it would have cost too much in double commission, from selling something else to raise the cash, and the likelihood was that applications would be greatly scaled back. Also, given the appalling customer service at my local sorting office, from a militant, unionised workforce, it strikes me that the likelihood is for a long period of conflict between management and staff, as they are dragged kicking & screaming into the commercial world.

 

I've seen five companies this week, at Mello Central on Weds, and an excellent Blackthorn Focus event yesterday, both kindly hosted by FinnCap. Myself and two other investors had a 40 minute session with the Chairman of @UK (LON:ATUK) yesterday. I had originally assumed that it was just another blue sky story stock, but after going through the business model with the Chairman, I'm intrigued. It's a very interesting company - they have a partnership agreement with VISA, whereby ATUK offer cloud-based software, which enables companies to do their procurement online, with cost savings that are partly paid for by a kickback in the "interchange" (the 1% card fee that is charged to the vendor on all credit card transactions). So it requires clients to move their purchasing over to a credit card, with associated benefits for everyone - the supplier gets paid almost instantly, instead of having to wait typically 60 days, there are no bad debts, and there is less administration for the buyer.

Whether they can persuade enough companies to move over to this system, is the big question. I would have been interested if the market cap was £10m, but the market cap is now (post Placing/Open Offer) over £40m, which I think is probably too rich for me. Interesting company though.

 

 

 

Another company that I saw yesterday was Mission Marketing (LON:TMMG). This stock has been mentioned here before, several times, as it has previously caught my eye as looking a reasonably-priced business that has recovered from previous near-fatal problems. I spent 20 minutes with their FD yesterday, who explained the business very well, and reassured me over their debt position.

I've picked up a little bit of stock this morning, but won't be going in big here, as it doesn't meet my usual criteria for Balance Sheet strength. It has negative net tangible assets of £8m, so should be regarded as high risk. They are resuming dividends this year, which is encouraging, although I think it would make sense to keep the payout low until they have rebuilt the Balance Sheet some more from retained profits.

Also the company had a poor H1, and uttered the dreaded words that they expect the year to be H2 weighted in terms of profits. That can often be a deferred profit warning, so that's another reason why I'm keeping the position size small - so that I can add to it if the stock does plunge on another profit warning. As mentioned yesterday, you do have to be careful buying on profit warnings, as falling knives can be dangerous to one's wealth, but on the other hand some of my most profitable investments have been fundamentally sound companies that have destroyed investor confidence in the short term with a profit warning. Investors tend to think in a delusional way that profits will follow a smooth upward trajectory. Whereas those of us who have actually run businesses ourselves in the real world, know that it's far more erratic than that in practice. Businesses go through good & bad patches, for a variety of reasons, so a fundamentally sound company that has disappointed in the short term can sometimes be a shrewd longer term investment. If market sentiment is really negative on a stock, then I take that as a positive - because it could mean that people are selling their shares at an irrationally low price.

 

 

 

Other than that, it's extremely quiet today, hardly any results announcements, so I must make a note that this week would be a good time to book a holiday next year.

Great news about my Scope fundraising - we hit my £3k target last night, due to a mystery and possibly inebriated benefactor who made a £170 donation (matching all the donations marked as being from TMF). We have a couple more donations in the pipeline, and 2 friends kindly gave me CAF cheques for onward sending to Scope, so all in all a wonderful performance from all of us, that we should rightly be proud of!

No more charity stuff now until January!

 

Best Wishes,

Paul.

(of the companies mentioned today, Paul has a long position in C21 & TMMG, and no short positions).