Small Cap Value Report (12 Dec 2016) - MLIN, CHRT, EAH, PEG

Monday, Dec 12 2016 by

Molins (LON:MLIN)

Share price: 49.5p (-7.5%)
No. shares: 20.2m
Market cap: £10m

Trading Update

Profit warning:

Trading to date in the final quarter has been materially lower than expected, partially due to an unfavourable sales mix and a number of deliveries delayed into the early part of 2017.  As a result the Board is revising downwards its expectation of full year performance

As experienced investors will know, most delays aren't fully recovered in subsequent periods.

Shareholders are given a silver lining:

...order intake in the last three months has been positive, at an increase of 80% over the same period last year, with the Packaging Machinery businesses in particular benefiting from a strong period of conversion of prospects.  The consequence of this recent order activity is that the Group is expected to enter 2017 with a significantly higher order book than it had entering 2016.

So the shares are down by 7.5%, as the reality of a weak year now is offset by the prospect of a good one next time around. That seems to be a fair reaction, as results now are worth more than results later!

Pension: Paul has previously argued, and I agree, that the performance of this business (a good-quality business in its own right, in my opinion) is of secondary importance to investors, relative to the pension fund.

At June, falling interest rates resulted in an accounting pension obligation of £373 million (up from £336 million) against assets of £371 million (also up, from £347 million).

UK Treasury yields may have recovered a little bit since then, but the shares remain effectively call options on the pension fund - the upside is potentially huge, while the downside is that the shares may well turn out to be worthless.

For what it's worth, commissioned research forecasts now suggest that the company will achieve PBT in the current year of £0.8 million, and £3.2 million in 2017.

Cohort (LON:CHRT)

Share price: 382p (-7%)
No. shares: 41m
Market cap: £157m

Half Year Results (for the six months ended 31 October 2016)

The market is also a little disappointed with results from this group of four technology companies:



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All my own views. I am not regulated by the FSA. No advice.

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MPAC Group PLC, formerly Molins PLC, is a United Kingdom-based technology and services company. The Company is engaged in providing instrumentation, machinery and analytical services to the fast-moving consumer goods (FMCG), healthcare and pharmaceutical sectors, together with aftermarket support. The Company’s Packaging Machinery segment supplies automated product handling, cartoning and robotic end-of-line packaging machinery and systems, and operates from three locations, in Mississauga, Canada; Wijchen, the Netherlands, and Singapore. The Packaging Machinery segment provides technical consultancy and machinery to solve packaging and processing challenges from its base. more »

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Cohort plc is a holding company. The Company's segments include MASS, MCL, SCS and SEA. Its subsidiaries include Systems Consultants Services Limited (SCS) and SEA (Group) Ltd. (SEA). Its sub-subsidiaries include MASS Consultants Limited (MASS) and Marlborough Communications Limited (MCL). SCS is a defense consultancy. SEA is an electronic systems and software company operating in the defense, transport and offshore energy markets. MASS is a specialist defense and technology business, focused on electronic warfare, information systems and cyber security. MCL is engaged in sourcing, design, integration and support of communications and surveillance technology for the defense and security markets. It provides a range of services and products for the United Kingdom, Portugal and international customers in defense and related markets. The Company operates in the United Kingdom, other European Community (EC) countries, Asia Pacific, and North and South America. more »

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Eco Animal Health Group plc is engaged in the development, registration and marketing of pharmaceutical products for global animal health markets. The Company's principal activity is the manufacture and supply of animal health products across the globe. These activities are conducted on a global scale, through a network, including both regional offices (notably in Shanghai and Princeton) and overseas subsidiaries. The Company's products include Aivlosin and Ecomectin. Aivlosin is an antibiotic that treats a range of specific enteric (gut) and respiratory diseases in pigs and poultry. Ecomectin is an endectocide that controls worms, ticks, lice and mange in grazing stock and pigs. It operates in the United Kingdom and Europe, the Far East, Latin America, North America, and the Middle East and Africa. Its subsidiaries include Eco Animal Health Limited and ECO Animal Health do Brasil Comercio de Produtos Veterinarios Ltda. more »

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

22 Comments on this Article show/hide all

herbie47 12th Dec '16 3 of 22

Graham, thanks for the Cohort (LON:CHRT), review I was going to suggest that.

I see £E2V, is the latest takeover bid.

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FREng 12th Dec '16 4 of 22

In reply to post #162016

Simon, Recent order intake at Petards (LON:PEG) looks impressive and implies they may have some valuable IPR. They operate in a growing international market, so the fall in sterling should help. Thanks for alerting me to them - I'll investigate further.


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TMFMayn 12th Dec '16 5 of 22

"Pension: Paul has previously argued, and I agree, that the performance of this business (a good-quality business in its own right, in my opinion) is of secondary importance to investors, relative to the pension fund."

According to MLIN's 2015 annual report and the 5-year summary contained within, revenue, underlying operating profit, underlying return on sales, underlying EPS, the dividend and net assets per share were all lower in 2015 than they were in 2011. The only item to have risen it seems is net debt.

That hardly suggests a good-quality business to me.

"UK Treasury yields may have recovered a little bit since then, but the shares remain effectively call options on the pension fund - the upside is potentially huge, while the downside is zero."

UK treasury yields won't change the demands on MLIN's pension scheme -- i.e., it is on the hook to pay annual benefits of £20m a year (going on the figures for 2015).

The 2015 report says total scheme assets were £362m, so it needs a 5.5% return a year to cover the annual benefits. I have previously looked at other schemes, and the required returns generally come in at 3% or less. I get the feeling MLIN needs to pump more money into its scheme. Contributions were just £2m for 2015, versus benefit payments of £20m.

Note that the £2m contribution is not charged against headline earnings. I see from the 2015 City presentation that such recovery payments will occur every year until 2029, which is a long time away. 

Underlying PBT for 2015 was £4m, so if these payments were charged to earnings -- which in reality they should be -- then PBT would halve. Any low P/E may not be so low then.   

All told, I just can't see how the downside can be zero here, when there is a pension scheme that may one day need a lot more cash to shore it up. If anything I think the upside potential is more likely to be zero.

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tabhair 12th Dec '16 6 of 22

I think that some comment on Fairpoint (LON:FRP) is needed given the press release they put out on Friday evening.

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Graham Neary 12th Dec '16 7 of 22

In reply to post #162031

Hi, thanks for that - I meant that the downside scenario is that the shares are worthless. I will rephrase to make it clear!

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Graham Neary 12th Dec '16 8 of 22

In reply to post #162013

Hi Simon, yes I've been in China recently but will be moving again soon. Thanks for your interest!

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Graham Neary 12th Dec '16 9 of 22

In reply to post #162034

Hi tabhair, good point - I updated Friday's SCVR to include it, not sure if you saw that?

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grumpy5 12th Dec '16 10 of 22

Re FRP if Scotty were at his keyboard I am guessing he would say it was on his Bargepole list. His comments on TWTR on Friday left absolutely no doubt about what a crock of s**t it was!

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Carey Blunt 12th Dec '16 11 of 22

In reply to post #162016

Petards (LON:PEG) is too small for me to consider at the moment. It seems to me that you have to offset the growth in eyeTrain installs against a decline in MOD orders (which seems likely to continue). The new business has some recurring revenues and eyeTrain parts and spares will provide a trickle of revenue which I like but overall the potential for the big orders to be lumpy makes me think its too small to risk at the moment.
Does anyone have a view on the size of the addressable market for eyeTrain? I might be convinced to take a small position if I could understand the potential better than the info that the half year report provides (not a lot).

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crazycoops 12th Dec '16 12 of 22

Re: Petards (LON:PEG)

Thanks for adding your comments Graham.

Carey, I believe the addressable market is significant in relation to the company's size. From the 2015 final results published in March 2016 (my emphasis):

During the course of the year the Group secured a number of significant orders for eyeTrain systems from train builders that included Siemens Mobility Germany, Bombardier Transportation and Hitachi Rail Europe. In addition, the trend of increasing recurring revenues from spares and support reported at the half year continued. Orders for spares and support were 90% ahead of those received in 2014, supporting management's view that this will increasingly become a significant contributor to revenues as the eyeTrain installed base increases and the trains to which eyeTrain systems are fitted enter operational service.

Looking to the future we are working on a number of exciting opportunities for eyeTrain with both UK and overseas based train builders and we anticipate that some of these will come to fruition during the course of 2016.

Since then, the company have announced contract wins with all three of these train builders. I seem to recall that one of them was a deal for 2 trains but with a possibility to win contracts for a further 18 similar trains. I keep hearing the term "lumpy" in relation to their revenues and I accept that the proportion of recurring revenues is low (albeit growing). However, they are delivering a succession of contract wins that provide earnings visibility for 2017 and 2018, so when I compare this company to some of the other valuations out there, Petards (LON:PEG) seem to be good value. There is also the possibility that they will begin paying dividends next year.

As ever, please DYOR


Blog: Share Knowledge
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tabhair 12th Dec '16 13 of 22

In reply to post #162031

The average investment return from the last 8 years is £16M (this includes 2008 when the scheme shed £60.3M in the value of their assets), so combined with the £2M annual contribution, the company are not too far off meeting their obligation of paying out the 2015 figure of £20.3M a year in benefits. Of course, that ignores the fact that the benefit payout itself has steadily increased over the last 8 years.

2008 £17.2M
2009 £18.5M
2010 £19.1M
2011 £19M
2012 £19.3M
2013 £19.6M
2014 £19.8M
2015 £20.3M

At what point do the members of the scheme stop drawing down on their benefits and this number starts to fall off? I have no idea, I am not sure we even have the data to compute this.

Another thing. You also have to remember that the £2M company contribution increases by 2% a year. This sound small but within 13 years it'll mean the company is paying in an extra £0.5M a year. This is a significant number when your profit before tax is £2M.

A few weeks ago, I started thinking that companies with a pension deficit could offer an opportunity. After spending some time on it, I've decided that speculating on pension deficits is just too complicated and too risky. Maybe bond rates will continue to fall, but what if equity returns in the next 10 years are rubbish, but inflation is high? That would decimate the value of index linked defined benefit pensions.

Better to just find a decent company than guess what markets will do over the next 10 years.

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Paul Scott 12th Dec '16 14 of 22

In reply to post #162055

FRP - I've broken my own rules by holding it in the first place, but also I tripled up today - probably a mistake. I hate the company & the management. However, I think the bank debt should be covered, in time, by recoverable debtors. Just not sure how honest mgt are - grrrrr. The swine ruined my holiday anyway.


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Paul Scott 12th Dec '16 15 of 22


Thanks again for holding the fort so brilliantly. I'm flying back to UK overnight (dreading it) I hate those red eye flights so have used up all my Avios points to upgrade to first class. Trouble is, then you have to pack in as many glasses of expensive champagne as you possibly can, and arrive at Heathrow at 6am, impossibly tired & doubly hungover, to get your money's worth!

So, realistically, please can you cover for me tomorrow too. Then I'll be back in action from Weds.

The good news is that Graham & I will be writing the SCVRs every day from now on - so readers get (free) reports every day. On busy days, we'll both write. On quiet days, one of us will take up the strain. Should be much better!!

Cheers, Paul.

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PJ0077 12th Dec '16 16 of 22

In reply to post #162073

Evening Paul, I remember earlier this year you wrote a piece called 'falling knives' which was a useful check-list to test whether or not it made sense to buy a stock that had profit warned:

"I ask five key questions after a profit warning or warnings, the answers to which determine whether I buy some (or more) shares;

  • Is this a speculative, story stock? (if it is, then I will now never buy after a profit warning)
  • Are the problems fixable in a reasonable timescale (say 1 year or under)?
  • Is the company financially sound & stable? (i.e. won't need to do a Placing)
  • Will there be another profit warning (i.e. has all the bad news come out yet?)
  • Are management doing the right things to fix the problems?

Clearly this is not a speculative situation, but given your dislike of Fairpoint (LON:FRP) & distrust of it's management, it would appear that you are over-looking the answers to two or maybe even three of these questions?!

Regardless, good luck with the investment.

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Paul Scott 12th Dec '16 17 of 22

In reply to post #162079


Hands up totally on Fairpoint (LON:FRP) - I knew something was wrong, so kept it arms length.

Sold it from my fantasy portfolio (only a small position there to begin with) recently.
I was walking to the pub, and thought to myself, this either has to go (as such a small position), or I have to buy lots more, to make it worth holding. I made a mistake, by buying more.

I've bought loads more today too, which may be a mistake, maybe it won't. Anyway, whatever, it's not important. Not a big position, so what will be, will be. The big positions are making plenty of money. This sort of shit is just doing what it's doing.

Regards, Paul.

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cig 12th Dec '16 18 of 22

Re ECO Animal Health (LON:EAH) wouldn't be sure that a patented molecule means no competition: maybe there are competitors with different but similarly efficient (and patented) molecules. The European Meds Agency page on Aivlosin on  says that it works better than no treatment but as well as other available drugs of the same class for several indications.

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Graham Neary 12th Dec '16 19 of 22

In reply to post #162085

Thanks cig... a fair point and a very useful link.

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Carey Blunt 12th Dec '16 20 of 22

In reply to post #162064

I agree with you on the Petards (LON:PEG) value aspect, I do like the Stockreport in general. I would have to break my "never buy anything less than 50Million market cap rule" if I was to get in but its the share thats most tempted me to do so for a long time.
I'm going to add it to the fantasy portfolio and watch it for a bit I think.
Thanks for the input around the potential market size.

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garbetklb 12th Dec '16 21 of 22

Petards, Cohort & other defence contractors

I'm not sure about defence spending. Much as I detest Trump, it's hard to argue with some of his comments about some European NATO members having a free ride on the back of US spending. With him being so irrational, unpredictable & in love with Putin, I imagine a number of European countries will be looking vary urgently at their defence spending.

And things like ANPR systems must be of interest re terrorism.

I suspect lumpy orders are more a feature of many of our invesments than we realise.

Disc - long Petards & Cohort

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tomps3 15th Feb '17 22 of 22

Cohort (LON:CHRT) are presenting next Tuesday, 21st February 2017, afternoon, Central London. If you want to come email me through 


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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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