Small Cap Value Report (12 May 2016) - DRV, WSG, XLM

Sunday, May 15 2016 by

Good day!

This is a catch-up report, being written on Sun 15 May, as I missed one report last week, whilst on holiday in Abu Dhabi.

Firstly though, a profit warning from a building consultancy which warned on profits a couple of days earlier:

Driver (LON:DRV)

Share price: 46p (down 30% on the week)
No. shares: 31.1m
Market cap: £14.3m

Trading update (profit warning) - firstly, the company explains what it does:

Driver provides disputes, programme and project management and other consulting services to construction, engineering and industrial markets around the world

The group reminds investors what it has previously reported:

As previously reported, the delay of contracts in the AMEA region led to a significant softening of revenues in December, January and February. At the time of the AGM in March, bearing in mind the short term nature of much of the company's revenues, it had been assumed that much of the lost profit in those months would be recovered over the remainder of the year. March and April revenues were strong and the current workload / pipeline indicates that the Group will deliver revenues for the year ending 30 September 2016 at least in line with current market expectations.

Note the emphasis on revenues, and not profit! The above sounds reasonable though, so why have the shares fallen 30% this week?

However, following the appointment of a new CEO in March, Driver commenced a detailed review of all aspects of the business and the board taking into account the findings of the ongoing review believes that profit for the current year will be significantly short of market expectations. In addition, a review of the bad debt provision has led to a more prudent approach and an increase of an additional £460,000 has been implemented, primarily due to a small number of outstanding debts in the AMEA region.

This is an interesting example of how a change in CEO can often lead to the new incumbent "kitchen-sinking" the figures. Any skeletons in the cupboard are cleared out, conservative provisions made, and the new CEO then has a clean sheet to start with. Previous management can therefore be blamed for legacy issues, in the honeymoon period for new management.

Costs have been cut, which should help improve future profits (providing the costs taken out are unproductive overheads):

The business has addressed its cost base and this has resulted in the removal of costs totalling…

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Driver Group Plc (Driver) is a United Kingdom-based company, which provides consultancy services to the engineering and construction industries. The Company conducts its operations through three operating divisions: Europe & Americas (EuAm); APAC, Middle East & Africa (AMEA), and Initiate. The EuAm and AMEA divisions provide various services, such as quantity surveying, litigation support, contract administration, and commercial advice/management. The Initiate division offers development, project and contracting management services to the infrastructure market in the United Kingdom. DIALES is its witness support service provider. Driver Project Management provides the strategic and leadership disciplines necessary to develop and deliver a project. Driver Project Services provides customer-focused project controls solutions across a project lifecycle. Driver Trett provides multi-disciplinary consultancy services to support delivery of its clients' projects. more »

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Westminster Group PLC is a security and services company. The Company's principal activity is the design, supply and ongoing support of technology security solutions and the provision of long term managed services, consultancy and training services. It operates through two divisions, which include Managed Services and Technology. Its Managed Services division is focused on long term recurring revenue managed services contracts, such as the management and running of complete security solutions in airports, ports and other such facilities, together with the provision of ferry services, manpower, consultancy and training services. Its Technology division is focused on providing technology led security solutions encompassing a range of surveillance, detection, tracking, screening and interception technologies to governments and organizations across the world. The Company's subsidiaries include Westminster International Limited and Longmoor Security Limited. more »

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XLMedia PLC is the United Kingdom-based online performance marketing company. The Company focuses on paying users from multiple online and mobile channels and directs them to online businesses who, in turn, convert such traffic into paying customers. The Company's segments include Publishing, Media and Partners Network. The Company owns over 2,000 informational Websites in approximately 20 languages. Its Media division acquires online and mobile advertising targeted at online traffic with the objective of directing it to its customers. It buys advertising space on search engines, Websites, mobile and social networks and places advertisement referring users to its customers Websites or to its own Websites. It manages marketing partners, whose role is to direct online traffic to its customers. Its partner program enables affiliates to have a single point of contact for directing traffic. more »

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

4 Comments on this Article show/hide all

d40eq6 16th May '16 1 of 4

Interesting how the Driver results do seem to be isolated and haven't affected many others in a similar sector (such as Waterman) on the read across. It goes back to fundamentals as always.

You can however not ignore the Macro. I am convinced that if the Country votes Remain next month, we will see a bounce of confidence in these sectors. On the flip side, a Brexit vote could be very nasty for them.

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Zoiberg 16th May '16 2 of 4

Some time ago I tried to find examples of XLMedia's work and failed. I can only guess as to where they put their links . Any how, I'm not going to buy a pig in a poke no matter how good the figures look.

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rhomboid1 16th May '16 3 of 4

In reply to post #131516

I thought Driver was about dispute resolution in construction ?, so not related to Waterman, in fact arguably disputes occur more often when construction sector is in the toilet so Driver might be a very rough and ready hedge for $wtm holders!

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PeterW 17th May '16 4 of 4

XL Media still gets a significant amount of its income (41%) from the Nordic countries. The following comments were in the prospectus regarding these which suggest to me that they operate on the edge of the law in these areas.

" The Group’s primary markets are Finland, Sweden, Norway and, increasingly, the US, which is a key
target market for the Group. The Group previously operated in Turkey but has now ceased direct
operations there. Set out below is a summary of the position in each of these jurisdictions as well as:
Finland has laws in place that restrict gambling activities from within the country to the national
lottery operator. Although there are laws that seek to limit the marketing of gambling (which are
technologically neutral and so apply equally to offline and online marketing), they are not (and have
not been) enforced outside of Finland. It is not a criminal offence for Finnish customers to
participate in online gambling offered by operators outside of Finland and, therefore, while marketing
to such customers may be considered to infringe Finnish marketing laws, the risk of enforcement is
regarded as low.
The Group seeks to minimise its risk by conducting all its marketing activities with respect to Finnish
customers from outside of the jurisdiction. The laws in Finland have not been tested to date as to
whether or not conducting marketing activities from websites based outside of the jurisdiction (albeit
in the Finnish language) would be considered to fall within the prohibition against directing
marketing targeting Finnish customers but given the low risk of enforcement activity to date (both
against gambling operators, the more likely targets – and affiliate marketing companies) the Group
considers that its operations with respect to Finnish customers are not high risk.
As with Finland, Sweden has in force laws that seek to restrict the provision of gambling services
only to companies based and licensed in Sweden and in turn, the only licensed operator is the
national monopoly operator, Svenska Spel. While enforcement action has been taken against
companies promoting foreign gambling operators (such as newspapers), the action has only been
against Swedish established businesses (which is determined by reference to the place of residence of a
business’ organisation and management as well as the residence of management, board members and
employees). The Directors are not aware of any enforcement action having been taken against either
gambling operators or marketing companies based outside of Sweden and there are restrictions under
Swedish law that prevent the Swedish authorities from doing so.
It is not a criminal offence for Swedish citizens to participate in online gambling products offered by
foreign operators. Nor is it an offence for Swedish operators such as Betsson and Unibet to be based
in Sweden provided that the servers making their gambling services available are based outside of
The Group considers that the enforcement risk for providing its marketing services targeting Swedish
customers is low.
Norway has a more restrictive regime than either Finland or Sweden as it seeks, in addition to
prohibitions against foreign operated gambling and marketing, to restrict the payment processing of
bets and wagers taken from Norwegian customers. Although the laws have been in place since 2010
this has seen little restriction on Norwegian customers placing bets and wagers and the Directors are
not aware of any enforcement action having been taken against operators outside of Norway.
c109234pu020 Proof 10: 17.3.14_09:49 B/L Revision: 0 Operator YouG
Although there are restrictions on marketing to Norwegian customers, these have not been enforced
outside of Norway. The Group bases all of its operations outside of Norway (albeit that it operates
using a Norwegian language website) and on the basis that the Norwegian authorities have
demonstrated no inclination to enforce the restrictions against non-Norwegian entities, the Directors
consider the risk of its Norwegian operations to be low.
The actions of the player in Norway are not criminalised, further evidence that the risk of marketing
to Norwegian customers is low."

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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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