Small Cap Value Report (12 Aug 2015) - UTW, HRN, CAP, TRB, TRCS, SCS

Good morning!

I'm running late today, as had to check out of my hotel in Bournemouth at 10:30, and then remembered that I'd left the car a mile away (due to being over the limit after last night's curry). Anyway, it took a while to get organised, but here we go.

Utilitywise (LON:UTW)

Share price: 193p (down 12% today)
No. shares: 76.6m
Market cap: £147.8m

(EDIT: I opened a small long position in this share, after publishing the article below)

Trading update - the market has interpreted this as a profit warning, as the shares are down 12% today, and have been on a losing streak for a while now (see chart below). It's a rather long-winded update, so I'll work my way through it, and this relates to the year ended 31 Jul 2015.

Turnover is higher than expected;

The Board is pleased to announce that revenue for the period is expected to be slightly ahead of market expectations at approximately £69m, representing growth of c.42 per cent. against the prior year.

Six bullet points are then given explaining why costs have risen, and all seem to relate to increased headcount, for sales & marketing, overseas trials, etc. As a result;

As a result, EBITDA is expected to be slightly below market expectations.

So only a slight miss, which is not the end of the world.

Net debt - is reported at c.£7.5m at 31 Jul 2015, which looks modest compared with the level of profitability and size of the business.

Outlook & Directorspeak - this sounds upbeat, including;

This momentum provides the Board with confidence in its expectations of continued significant revenue growth in the new financial period.

Also, it sounds like the company is gearing up for further growth;

Fuelling and sustaining our growth is key and, as such, we now have significantly more Energy Consultants acquiring new customers than at any time in the Group's history and, importantly, the internal infrastructure sufficiently bolstered to support them. At the same time, we are continuing to build out our multi-channel route to market and drive innovation through the introduction of new products such as controls technology into the smaller and medium size business segments, which we believe is integral to building our reputation as a trusted advisor.

My opinion - I've flirted with this share in the past, but have always felt uneasy when going through their accounts. I'm not keen on their accounting policies, of anticipating profits. It may be technically permissible, but it still makes me uncomfortable.

Neil Woodford commented at a recent conference that he had met management, and gone through all the accounting issues with them, and was happy with everything, indeed his funds have been heavy buyers of the shares.and currently hold 24.1%, and we can now buy considerably cheaper today than Woodford paid, which in itself would be quite satisfying!

I commented in my report of 21 Apr 2015, covering the interims, that I felt uneasy about the outlook statement at the time. I don't really like this company, but must say that at the current valuation of 193p, this could possibly be a buying opportunity. There doesn't seem to be anything horrendous in today's update, and missing forecasts slightly because you're cranking up overheads to drive future sales, is the sort of thing that the market quickly forgets, and can move from glass half empty to glass half full. That's happened before with this share too.

So overall, I'm toying with the idea of picking up a small position in this. What do readers think? Comments in the comments below please!

I feel there was far too much detail, and not enough overview in today's trading update, as I'm finding it difficult to fully understand how the various points fit together. That uncertainty could be why the shares have dropped heavily. More is less sometimes, and I feel trading updates are much better when they are concise. Detail could perhaps be put into an appendix, for those who want it, in future, instead of lots of rather rambling text, as we got today.

Board change - there is another announcement, stating that the Deputy CEO, Andrew Richardson, is leaving the business. The wording of this announcement strikes me as slightly odd too, in that the company emphasises its "regret" twice in the announcement that he is leaving.

So I'm wondering if this is meant to convey that he has not been sacked, and that there is nothing untoward (e.g. bad conduct) behind his resignation? Although the reasons given of "take a break from work and pursue other interests" makes me wonder if it's stress-related?

A new appointment to the Board has been made to a differently named (but possibly similar?) role, namely Steve Atwell becoming MD of the Enterprise Division.

I think it's important to think about changes to the Board, but this doesn't seem to indicate any business problems, from my guesswork reading between the lines.

Therefore overall, I'm now leaning fairly strongly towards possibly picking up a few shares in this company around the 190p level, but have not made up my mind yet.

Hornby (LON:HRN)

Share price: 107.7p (up 2.3% today)
No. shares: 39.2m (55.0m after Placing)
Market cap: £59.2m (after Placing)

Admission to AIM - Hornby shares have today moved from the main list, to AIM, as planned - I covered this in my report on 18 Jun 2015. The company did very well to get a Placing away at 95p, because it was really almost a rescue fundraising, to get the bank off the hook.

They've slipped in a general trading update today too, which sounds positive without any specifics;

We are making good progress with our turnaround strategy for the business.In the last financial year Hornby returned to an underlying profit.
Looking ahead, the support of our shareholders, combined with the proceeds from the placing, the move to AIM and our revised banking facilities, all provide us with a stable platform to address the next stage of the turnaround plan. This year will be another one of transition and investment, as we make further major changes, whilst continuing to drive the growth potential of the business. The outlook for the Group remains positive and I look forward to updating shareholders on the progress that we make.

My opinion - I remain of the view that the valuation is too high, since we're being asked to pay up-front for a considerable turnaround. The turnaround may work well, who knows, but personally I wouldn't want to pay now for it, before it's happened.

Clean Air Power (LON:CAP)

Suspension - looks like it's all over. The shares have been "temporarily" suspended, but with the dreaded "pending clarification of its financial position" phrase included in a second RNS from AIM (the link above is to the RNS put out by the company itself).

It sounds as if a buyer has been found for the business, but that nil, or negligible value is likely to be ascribed to the existing shares;

The Board confirms that it is in detailed discussions which may or may not lead to an offer for all or part of the Group.  The terms and basis of any offer have not yet been finalised but, as previously stated, the Board can provide no assurance on the value that would be returned to shareholders.

As I've been saying since Sep 2014, these shares are probably worthless, so I hope no readers here are still holding.

I was thinking about failing companies earlier this morning. If we have paid say £10k for some shares in a blue sky company, and the business effectively fails, as most of them do. So say the shares have lost 95% of their value, so the remaining holding is only worth £499.

Mnay, maybe most people won't sell. They just focus on the £9.5k loss, and consider £499 to be immaterial in the overall scheme of things, and they hold until the shares are worthless. When you think about it, this is madness! If you found £499 cash in a desk drawer, you wouldn't say, oh that's imamterial to my overall wealth, so I'll chuck it in the bin, would you?! So why do we take such a view with the rump of failed shares?

So my view is, once it is obvious that a share is worthless, then ditch them asap, to recover even a small amount. Visualise it as cash in a drawer, and then selling to recoup £499, or even £100, is much more palatable. Throwing the money away, in the hope that a miracle might happen (but hardly ever does) is daft, when you think it through.

Tribal (LON:TRB)

Interim results to 30 Jun 2015 - these look very poor, with adjusted EPS down 63% to only 1.6p. The reason the shares are only down 9% today to 147p is because the company had previously flagged that H1 was going to be soft, with profits skewed towards H2.

I'll look through the figures in more detail later, but the outlook statement says expectations are unchanged. I'm wary about this company, as performance has been somewhat erratic, and the balance sheet isn't great.

A couple of quickies, as I'm just about to go to the beach for the afternoon, with the family.

Tracsis (LON:TRCS)

A strong update today, saying;

Due to strong trading across the Group full year results are now expected to be ahead of the previous year and market forecasts.  The Board anticipates that Group revenue will be circa £25m (2014: £22.4m) with Adjusted Pre-tax Profit expected to be comfortably ahead of market expectations of £5.5m and also ahead of the previous year (2014: £5.0m).  Year-end cash balances were in excess of £12m (2014: £8.9m), and the business remains debt free.

Terrific stuff! It sounds as if they're limbering up to do more acquisitions, and have the firepower to do it. A bit of debt could probably be introduced too.

SCS (LON:SCS)

Trading update - trading seems to have firmed up in Q4, and they report reassuringly;

The Board therefore today confirms that it expects to report results in line with current market expectations for the year ended 25 July 2015 and remains committed to £5.6 million in total dividend payments to shareholders in relation to the 2015 financial year.

Dividends - Stockopedia shows a dividend of 9.6%, which strikes me as unsustainably high.

Valuation - the shares are on a PER of 11.5 times forecast earnings for the year that has just finished. That's probably about the right valuation for what is really quite a poor quality business (it went bust in the last recession).

My opinion - Brokers are forecasting a big increase in EPS to 20.0p in the new year that has just started, but personally I'd be cautious about that, as the company had a wobble last year, so whether such a big increase in forecast earnings can be relied upon is open to question.

There again, consumer spending is on the up, and operationally geared retailers such as this could have a few good years ahead of them, so the time is right to consider stocks like this.

So overall, I'm tempted to buy a few of these at 143p, as there could be upside from this level possibly. Although a bit like Utilitywise, it's not the sort of company that I would want to have as a core, long-term holding.

All done for today, see you tomorrow!

Regards, Paul.

(of the companies mentioned today, Paul has a long position in UTW, and no short positions.

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

NB. These reports are just Paul's personal opinions, they are NEVER share recommendations or advice)