Small Cap Value Report (11 Sep 2015) - CBUY, RHL

Good morning!

The major indices are still searching for direction, so I don't know what's going on there. Small caps however remain buoyant, it feels very much like a bull market to me in small caps anyway. Lots of my shares are doing fairly well at the moment, and I'm hearing the same from other small cap investors.

Strategy update

Therefore I'm not particularly worried about what the major indices do, since it hasn't really had any effect on my portfolio overall so far, in fact my portfolio just hit a new high for the year, and friends are telling me similar things. We just have to accept periods of increased volatility. The important thing is that people who sold on the recent spike down, made a mistake, as most small caps shot straight back up again, often too quickly to enable people to get back in.

It soon destroys your returns if you panic sell on every market correction, and then buy back at full price once you feel comfortable again. The best purchases are usually extremely uncomfortable at the time you press the buy button - because the lowest prices are achieved when everyone else is in a state of panic/fear. So bargains sit on a plate in front of you, and the bold grab them first! Remember that your own emotions are your biggest enemy in the stock market - as they give you impulses which are usually the exact opposite of what you should be doing to make a good return.

So my strategy (for my long term portfolio) remains this - screen out junk, research good companies thoroughly, buy good quality companies if risk:reward is clearly favourable, and hold through whatever market gyrations occur. Then I buy more if further research and newsflow reinforces my conviction, or I ditch them if it dawns on me that I've made a mistake - which happens a lot, for everyone, so ditching the ego by admitting it when you get things wrong, is an essential step towards good results. After all, if Warren Buffett can be humble about his mistake in buying Tesco shares, then why should we be scared to admit our own failures?

To keep myself amused, I also do some short term trading, but that's a separate activity. I only mention it now because some people can't seem to cope with the concept that I can happily be a long term investor and a short term trader at the same time. As long as you have mental clarity at the time of buying something whether it's a trade, or an investment, then that's fine. 

Trades are more about taking advantage of shorter term market sentiment. Investments are more about spotting companies that should out-perform and hence re-rate over the longer term. So I suppose the key difference is that trades should be cut if the market goes against you (so a stop loss can be a good thing), whereas investments are held through market gyrations, for the bigger, longer term gain.

NOMAD resignations

I cover a stock below which has seen its shares suspended today, due to the NOMAD resigning. It has one month to find a new NOMAD. This is worthy of wider thought.

There are now fewer NOMADs than before, as some firms are dropping out of the market, since they're (rightly) getting so much flak, and reputational damage, not to mention potential legal action against them, for representing dodgy companies that have lied to investors. There's a lot of that about on AIM, with investors & commentators becoming increasingly vocal about how appalling the current situation is - where the LSE seems to actively encourage overseas companies to list on AIM, thereby endangering the gullible UK investors who put money into those things - since in many cases the companies turn out to not be what they purported to be.

So it seems to me that we might well witness an acceleration of bad companies leaving AIM, due to NOMAD resignation, and then no other NOMAD being willing to represent them. Once the shares have de-listed, that's it - you're almost certainly never going to see a penny of your money back, as these dodgy overseas companies won't care about UK shareholders once the shares have de-listed. The purpose of the listing was to extract money from UK investors, and once that has been done, with insiders dumping their shares, then the listing serves no further purpose.

Therefore, if you do have any residual holdings in dodgy overseas AIM companies, I'd be inclined to chuck them out for at least a little bit of your money back, in view of the risk of the company de-listing once its NOMAD resigns. Not necessarily just overseas companies either, there are plenty of useless UK companies on AIM too.

(although I do want to stress that AIM has maybe 200-300 decent companies on it, so it's not all bad by any means. It's just the other three quarters that are the dross!)

Hopefully UK brokers & advisers will stop floating junk on AIM too. The spotlight is really on this area, and if I see rubbish companies floated on AIM in future, I'm going to really lay into the firms that are promoting such junk. We have to put a stop to this nonsense by naming & shaming the promoters of bad companies - we collectively have tolerated poor ethical standards from the City for too long. It's time to clean things up.

Cloudbuy (LON:CBUY)

Share price: Suspended at 18.75p
No. shares: 128.4m
Market cap: £24.1m

NOMAD resignation - I've never liked this company, and now it seems neither does Westhouse Securities, as they have resigned today with immediate effect, giving no reason.

The Company is in advanced discussions with an alternative Nomad, and expects to appoint a new Nomad in due course.

Accordingly, pursuant to AIM Rule 1, the Company's shares will be suspended from trading on AIM at 7.30am today pending the appointment of a new Nomad. If a replacement Nomad is not appointed within one month of today's date, admission of the Company's shares to trading on AIM will be cancelled.

So the clock is now ticking, and the shares are suspended, leaving shareholders high & dry. I'm not going to speculate as to why the NOMAD has resigned - other than the obvious point that the company has been a dismal failure in commercial terms since it listed in 2005 - it has never turned a profit.

It seems to issue more shares every year, to keep going, always promising great things ahead, but so far nothing of any substance has been delivered financially. This is very much reinforced by today's lamentable interim results.

Interim results to 30 Jun 2015 - I have to put my BS-ometer into safe mode before I start reading the narrative, to prevent it blowing a fuse! It's just the usual jam tomorrow stuff. So best ignored, in my view.

The numbers tell a very clear story;

• Revenue for H1 down 40% to £887k
• Operating loss almost doubled to £3.2m
• Cash fell from £4.5m to £1.9m in the last six months (cash burn of £2.6m in 6m)

Therefore there seems to only be enough cash to last a few more months. Although note that £1m was raised post the period end from a single (very optimistic!) investor. So adjusted cash of £2.9m, giving them just enough cash to last into Jan 2016 - just 4 month's worth from today.

Perhaps that's why the NOMAD resigned? Because it's soon to run out of cash, and there's probably little to no appetite to refinance it again?

My opinion - this company is clearly very much in the last chance saloon now. It doesn't help that today's results also contain a profit warning;

...Unfortunately, and beyond our the control, some of the more advanced marketplace opportunities have been delayed and will now only contribute a small amount of revenue in the current year, which means the Company may undershoot market expectations for the year ending 31 December 2015...

This company doesn't really deserve to survive - it's had long enough to make its business model work, and has squandered so much shareholder cash, that perhaps it would be better if it's put out of its misery? So management probably have one last chance to make their impressive-sounding, but commercially poor business model actually work, in the next few months.

Redhall (LON:RHL)

Share price: 6.28p (down 27% today)
No. shares: 49.1m + 95.7m Placing + 19.6m Open Offer + 41.5m D4E = 205.9m
Market cap: £3.1m before, £12.9m after

From one financially distressed company to another. I've written 9 negative articles here about Redhall shares, since Feb 2013, in which time the shares have lost over 90% of their value, so nobody can say they weren't warned!

Placing, Open Offer & Debt conversion - it looks like a solution has been found, and the company's finances sorted out, so for that reason I have today removed Redhall shares from my Bargepole List.

I reported here on 5 Jan 2015 how an elegant solution had been found for the problem bank debt - Redhall's largest (27.7%) shareholder, Henderson, bought out the £10m bank debt - it was not disclosed what discount was agreed with the bank, but I imagine Henderson would have negotiated a haircut, as a much cleaner solution for the bank than forcing the company into Administration.

Banks don't like putting Listed companies into Administration, as it's such bad publicity. That's actually one of the main advantages of being Listed- better access to, and more reluctance by the banks to withdraw, borrowing facilities.

Here is a quick summary of the fundraising announced today;

• Placing of 95,689,827 shares at 5p, raising £4.78m before expenses.
• Open Offer (excellent - well done for including one) on a 2 for 5 basis - up to 19.63m shares at 5p, raising up to £982k.
• Conversion of £3m of the Henderson debt into 41.5m new shares, plus 18.5m Conversion Options, so 60m shares in total if the Options are exercised, which at 5p equates to £3m. It looks as if the 30% limit for triggering a takeover bid is the reason why it has been structured this way.
• Fees of about £0.5m
• Directors participating in Placing for £2.2m shares = £110k
• Shareholder meeting to approve deal (a formality) on 28 Sep 2015
• New LTIP terms - share options over 29.8m free(!) shares for Directors/senior mgt, subject to performance criteria (not stated) - so worth £1.5m at 5p Placing price - looks generous, so Henderson must rate the management & want to lock them in.
• Capital reorganisation to lower nominal value of shares (a formality, but required to legalise the issue of new shares at 5p, since existing nominal value is 25p)
• Henderson will exercise enough Options to take them to 29.9% (and thus avoid being forced to launch a takeover bid)

Outlook - the announcement today just quotes the outlook comments from the interim results published on 11 Jun 2015, and concludes that;

Since the date of the Interim Announcement, the Board does not believe there has been any material change to its future prospects.

My opinion - it remains to be seen whether refinanced Redhall will do any better than hopeless old Redhall, but clearly the major shareholder, Henderson, thinks it's worth backing. I'm enormously impressed with the commitment Henderson has shown to this micro cap, to push through a complex restructuring with the company, for relatively small amounts of money. I think most other Instis would have walked away.

Therefore, Henderson is now clearly one of the absolute top Institutions that smaller companies will want on their share register, as they have demonstrated both at Redhall, and also recently at Styles and Wood (LON:STY) that they are prepared to roll up their sleeves and help fix problematic situations.

Also note that Henderson has acted in a very ethical way here, acting fairly towards minority investors by including an Open Offer. If they had chosen to, I reckon they could have diluted PIs down to next to nothing, but instead have been fair to everyone.

The company says today that its turnaround is going well, so it's one I shall watch with interest, to see how things progress. With critical financing issues now resolved, management should be able to focus on running the business for the long-term, rather than day-to-day firefighting.