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

15th May '16 by Paul Scott

4 comments 9504 reads

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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Sharechap

16th May '16

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.

Zoiberg

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.

rhomboid1

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!

PeterW

17th May '16

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
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.
Sweden
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
Sweden.
The Group considers that the enforcement risk for providing its marketing services targeting Swedish
customers is low.
Norway
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.
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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."

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

Driver (LON:DRV)

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Paul Scott

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