Small Cap Value Report (12 May 2017) - FTC, IPX, ETO, TTG

Friday, May 12 2017 by

Happy Friday!

I usually talk about profitable rather than unprofitable companies, and Filtronic (LON:FTC) is currently the former rather than the latter:

Filtronic (LON:FTC)

Share price: 12.625p (+26%)
No. shares: 206.9m
Market cap: £26m

Trading Update

This company has been on the receiving end of some well-deserved scepticism on these pages in recent times, as it has a track record of losses and ended up significantly increasing its share count in fiscal 2016.

It makes radio frequency, micro-wave and millimetre-wave products for the telecoms and aerospace industries, along with other related products and services (best to take a look at its website!)

Excellent Q4 update today:

Trading during the fourth quarter of the current
financial year ("FY2017") in the Filtronic Wireless business has been
ahead of previous management expectations and despite some marginal,
short-term weakness in trading in Filtronic Broadband, the board now
expects total Group revenue of approximately £35 million in the year
ending 31 May 2017, with a commensurate increase to operating profit,
both of which are ahead of market expectations

Checking the company's H1 report, I see that it made operating profit of £2.4 million from revenues of £21.6 million (and warned that H2 would be lower).

It's still a high-risk micro-cap, of course, and receives a "Highly Speculative" Risk Rating from Stockopedia.

The customer base is probably still rather concentrated. Last year's annual report said that "until we have expanded our product portfolio and customer base we will remain exposed to short term variations in demand patterns at our main customer". The top four customers in aggregate were responsible for a huge 74% of turnover.

Sales have much more than doubled in fiscal 2017 compared to 2016, so diversification should have improved now at least compared to that level of concentration.

Also, it has significantly strengthened its financial position after last year's placing - my initial glance at the interim balance sheet shows it has a significant excess of current assets over all liabilities (nearly all in the form of customer receivables, so it is relying on getting paid).

Anyway, I'm flagging it here as it might be worth more considered research if you have an interest in the industry and the appetite for this level…

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

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Filtronic plc is engaged in the design and manufacture of a range of customized radio frequency (RF), microwave and millimeter-wave components and subsystems. The Company's segments include Filtronic Broadband, Filtronic Wireless and Central Services. The Filtronic Broadband segment is engaged in the design and manufacture of transceiver modules and filters for backhaul microwave linking of base stations used in wireless telecommunications networks. The Filtronic Wireless is engaged in the design of radio frequency conditioning product for base stations used in wireless telecommunication networks. The Central Services segment provides support to the trading businesses. Its products are used in mobile wireless communication equipment and point-to-point communication systems, among others. Its product range includes transceiver modules and multi-chip, surface mountable transceiver packages at microwave, 71 gigahertz (GHz) to 86 GHz (E-band) and 57 GHz to 66 GHz (V-band) frequencies. more »

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Impax Asset Management Group plc is an investment company offering listed and private equity strategies primarily to institutional clients. The Company has six listed equity strategies: Specialists, Leaders, Water, Asia-Pacific, Global Opportunities, and Food and Agriculture. Its real assets business comprises renewable power generation and sustainable property private equity funds. The Company has investments sectors, such as energy efficiency, which includes power network and buildings; alternative energy, which include solar, wind and biofuels; water infrastructure/technologies, which include treatment and utilities; pollution control, which include pollution control solutions, and testing and gas sensing; food, agriculture and forestry, which include logistics and sustainable forestry; waste management and technologies, which include tech equipment and hazardous, and environmental support services, which include consultancies and diversified environmental. more »

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Entertainment One Ltd is a Canada-based independent entertainment company. It develops, produces, markets and distributes content. The Company's segments include Film, Television, Music, Family and Brands, and Innovation. The Film segment in collaboration with partners develops, acquires, produces and finances film content. The Television segment through partnerships and global distribution network produces and distributes television content. The Music segment built musical brands, as the Company is part of the network eOne Management Group. The Family and Brands segment is involved in the creation of family content and develops, launches and roll out content-related products. The Innovation segment provides digital content, such as virtual reality (VR) and the platform to discover it. more »

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

62 Comments on this Article show/hide all

ken lowes 12th May '17 43 of 62

In reply to post #184382

Hi Herbie , CGT let's say you sell everything in your portfolio, you consolidate all profits at a tax rate of 10 % or at worst 20% less the annual allowance of £11300. I would suggest that the current rate will be increased in the not too distant future. Obviously you can take the amount of payment required out of the profit. I am sure you remember when CGT was 40%. Some might argue that the future growth will be reduced if you only reinvest 90% but that only applies if the portfolio is small enough to always qualify for the personal allowance each year. You could always die which means no CGT but it is an extreme form of tax planning.
Got to go now Herbie and continue rereading the magic of Minervini who I believe is also almost all in cash at the moment.

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FREng 12th May '17 44 of 62

This should be a discussion for Moday when the markets are open, not Friday when we have a weekend to worry about it all!

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Luthrin 12th May '17 45 of 62

As a buy-and-hold investor all that really matters to me is that I'm comfortable owning the companies I'm currently invested in and I have confidence that those companies will provide a long-term stream of income that will on average grow over time. This is very much Buffett's view I believe, and he has stated that he takes no interest in the day-to-day movements in the prices of the shares he owns and is only concerned with the fundamentals of the businesses themselves.

He laid out his philosophy on pages 18 and 19 of Berkshire Hathaway's 2014 letter to shareholders, and I was comforted to find it matched my own approach (classic confirmation bias?). A couple of selected paragraphs:

"For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities."


"Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet."

Despite getting a kick out of seeing a sea of green when I open up my portfolio screens in the morning, I don't particularly like it when markets become highly valued, and unless I think the world is about to come to an end (in which case it doesn't really matter what happens to the portfolios I manage) then I welcome major panics and corrections as it simply means that I'll be able to buy more stock at lower prices, both with fresh cash that I've been accumulating and from dividend reinvestment.

I was somewhat surprised at the reaction to my comments a couple of days ago on the SCVR regarding the potential threat of driverless cars to long-established businesses in the motor distribution chain, but it made me realise that many Stockopedia investors likely have equity holding periods much shorter than mine. I have no problems with that and I'm sure for many it's a very profitable strategy - it's just a modus operandi that I'm uncomfortable with because I've never been successful at short- or medium-term trading and I'm a poor market timer.

In short, I like to sleep well at night whatever equities are doing, but if we do have a 30% market decline then I'll be the proverbial kid in the sweet shop.

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Steves cups 12th May '17 46 of 62

I don't know if anybody out there has friends who can talk through an issue like this with - I know I haven't, which is why these bulletin boards/forums exist. Certainly most of my friends wouldn'know a PEG from a clothes line. But I do have one pal who is more of a trader than a long investor who i meet once a month.
For the last 6 months our conversation begins with "when is this bull going to stop". We still don't know and more to the point we still don't know what the trigger will be - Italian election, car buying on PCP, Brexit problem, mountainous debt, Corbyn winning the election, Trump emigrating to Russia, rampant inflation, ill judged interest rate rises- take your pick.

However we like to look at it, being hugely weighted in cash is sleep worthy but but not wealth enhancing. What I have not heard of yet is a mention of bonds. When I seriously started to make use of money from early retirement (after the 2007 crash) my thoughts about structuring a portfolio turned first to income (we all know about the reinvestment adage) to supplement pensions. With that in mind I looked at the ORB and the plethora of retail corporate bonds yielding a minimum of 5%. With this you get guaranteed payback (I trust) and a good yield. I know the new issues market has dried up but even now at heightened prices there is some security in this. I personally have about 30% of the portfolio in this area.

With this yield bias, first mega caps (little gains) were added and as more security was achieved small caps have turbo charged my portfolio so much so that like everyone else I do not wish to lose out.

My point is that it's not just a binary issue , cash or equity, there are other options.

My other point is that share prices are not just about Macro economics (yes baby and bathwater), good quality small caps with international exposure and no gearing are still good investments - maybe it's a question of the quantity of quality you are prepared to hold. A time for weeding or re evaluation maybe.

As always the decision is yours - just don't wait until circumstances decide for you.

Look forward to the ever interesting daily discussions


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ken lowes 13th May '17 47 of 62

In reply to post #184442

I agree with everything you say Steve I have always been a Bear so my view is extreem, the only reason I discuss it here is to help those who are new to this game to realise that the gravy train does stop and when it does it is often a train wreck. In my book investing or trading is about making money and being satisfied when you have. As for bonds do you not think that the next/ only phase in the interest rate market will be up? So bonds are down. I remember many years ago I was giving a seminar when one of the audience told me that building society preference shares could never fall by much because of the security of the building society movement. This argument was followed by journalists who are never responsible for the advice they give. Well we now know differently don't we I often wonder what happened to the man in the audience, he certainly didn't become a client so I will never know for sure but I can guess. I believe you can make a very good profit out of the market without taking unacceptable risks. Obviously you might make more money taking bigger risks but you can also lose it all.

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BH1991 13th May '17 48 of 62

Interesting discussion here from the bulls and bears.

I noticed a few comments about the "safety" of large cap, defensive stocks. I agree these stocks tend to have lower volatility and can be good investment choices for risk off situations. However, in my opinion, all stocks are inherently risky. Just because you hold a portfolio of large cap, defensives such as Tesco, Unilever or British American Tobacco doesn't mean you are immune from irrational behaviour of investors/traders panic selling in a market correction. Just look at Sainsbury's share price in 2007/2008...

For me, the transition must be between equities & cash/bonds, not speculative and defensive stocks. Although the relative strength of defensive stocks are higher than speculative shares in bear markets, that does not necessarily equate to positive absolute gains.

I use technicals to identify whether we are risk-on or risk-off (Minervini inspired) and scale back into cash when appropriate. The technicals on my stocks are still bullish so I don't need to panic just yet. When the technicals begin to weaken i.e Burford Capital then I sell and lock in my gains.

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ricky65 13th May '17 49 of 62

Anybody else worried that some companies may have been affected by the global ransomware attack?

The nightmare scenario is having all their data encrypted and no backups.

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gus 1065 14th May '17 50 of 62

Thought provoking discussion on where we are in the market cycle at the moment.  An often used analogy is that as investors we are "climbing the wall of fear" - as the market goes up the views improve but there is a growing fear that as and when we eventually fall off we come down with a harder bump. The less risk averse climb down into cash earlier, the braver/more foolhardy keep climbing (often fueled by leverage) and either get down in time (having made more on the ascent) or end up in the back of an ambulance (or hearse!).

I'm by no means a TA (and apologies to those who are if the following stream of consciousness jars), but in the spirit of “a picture painting a thousand words” I thought the attached chart might be worth considering:-


The main chart gives a long term monthly view of the FTSE All Share index since 1981 (the maximum data set on Stockopedia) re-based on an exponential basis (otherwise the current data trends would swamp the old).  I’ve superimposed the Bollinger Bands as well as two simple long term moving averages for 12 and 60 months.  At the top there is a chart of the RSI for the same period.  A few observations:-

  • The chart shows a generally upward trend with 2 major corrections in 2000 and 2008 with historically minor downturns in 1987, 1994, 2011 and 2015.  Interesting to note that for those with a relatively short term investing experience, the bumps in 2016 in Jan/Feb and post Brexit vote that seemed pretty bad at the time barely register.
  • These market corrections tend to follow on when the positive divergence between the shorter 12 month moving average is furthest away from the longer term 5 year moving average.  At the moment the gap is quite marked but perhaps not as wide as 1999 and 2008 (I’m doing this by sight – a more thorough analysis of the underlying data is probably required).
  • There seem to be numerous instances where the market drops but appears to bounce back up from the shorter 12 month moving average.  When it does cross below the 12 month average this often, but not always, presages a significant further sell off.  We are well above both moving averages at the moment.
  • The 12 month moving average has only crossed down through the 5 year trend on two occasions and both times there was a significant further sell off after this point in time.  Not so much a leading indicator as a prompt that things can go from bad to significantly worse if and when the market does turn.       
  • We are currently at the top of the Bollinger Band range having bounced off the bottom seen in 2015.  In previous parts of the long term cycle this has been a point of resistance from which there has been a downward correction of varying degrees.
  • The RSI chart at the top shows a small number of periods where the RSI has risen above 70 (often interpreted as a sign that the market is “overbought”).  These can last for several years but in the three cases where the market has been at this level for an extended period this has been followed by three sharp downward corrections. We are currently nudging up against the 70 level but are not presently “in the red”.  To my untrained eye this appears to be quite a key indicator as to an impending downturn although I would add that plenty of money could have been made by investors from holding on during the “red zone” which can last for a few years provided they manage to bail out in time.
  • In a similar vein, the MACD in the bottom chart suggests we are below the 1999 and 2008 peaks but still in slightly elevated territory.

The chart is deliberately long term with slow moving averages to try and give more of a historical perspective.  One thing I have learned in 30 years or so of investing is that when bombarded with the daily market cacophony of “white noise” it is really difficult to take a step back and see the bigger picture (terrible mixed metaphor!).  In my layman’s view, while the markets might seem “expensive” at the moment, I think we are in the upper quartile of valuations rather than being at or beyond boiling point. 

Absent a “new paradigm” giving a step change in market valuations (which I agree with an earlier comment is usually a good indicator of when to head for the exits), the odds seem to be moving towards downside rather than upside but in the meantime could well run up further (nothing like sitting on the fence is there?).   Whether the downside is one of the occasional tsunamis a la 2008 or 1999 or just a short term corrective blip like 1987 or 2015 is moot.  Perhaps perversely, the longer the markets bulls continue to climb up the wall the harder the bump when we eventually fall off.  Given the often mixed messages of where we are in the cycle I’ve found it beneficial to avoid going “all in” on a particular strategy holding a pretty widely diversified portfolio of different asset classes and asset types within the classes.  Probably more cash and defensive assets at the moment than this time last year but still happy to keep a decent exposure to good quality stocks and funds (and a few Sucker Stock dogs as well).


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Nick Ray 14th May '17 51 of 62

In reply to post #184634

How did you get the chart to go back to 1981? When I try, it refuses to start earlier than 1997.

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gus 1065 14th May '17 52 of 62

In reply to post #184658

Hi Nick.

Not sure if it makes a difference but I used the old style chart function for the ASX index found under the "Home" section as opposed to the new version and selected the option for "maximum" data.


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Nick Ray 14th May '17 53 of 62

In reply to post #184670

Thanks Gus. That is actually very useful. I wanted to look at it using a log scale because I have a feeling that the current growth is really historically not that exceptional, but I've never been able to find anywhere that goes back this far with ASX.

So anyway, fwiw, here it is with a log scale. It puts a slightly different feel on things to my mind.


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gus 1065 15th May '17 54 of 62

In reply to post #184676

Hi Nick.
Your reply made me realise that although my commentary referred to a log scale chart, I'd mistakenly pasted in an absolute levels link. Chart should have been as below:-


Same basic story, but makes some of the earlier sell offs (especially 1987) a little bit more apparent and dilutes slightly the visual impact of the 2000 and 2008 sell offs.  Also suggests that since 2000 there has been a fair bit of "treading water" compared with the sharp rise in the preceding 20 or so years.


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Ramridge 15th May '17 55 of 62

In reply to post #184713

Hi Gus - I may be wrong but both your graphs are on a log scale. The scalar difference on the y-axis is multiplicative in both cases and not linear.
Happy to be corrected.

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gus 1065 15th May '17 56 of 62

In reply to post #184752

Hi Ram.

I think you may be commenting on the scales in the charts in posts 53 and 54 (which are, as you say, both on a log scale). My post 54 was referring to and correcting my original chart in post 50 (which was on a linear scale). Hope that makes sense.


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Ramridge 15th May '17 57 of 62

In reply to post #184772

Yes. makes absolute sense. Cheers.

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Chris.Brown 15th May '17 58 of 62

Regarding the UK market, Stockopedia's home page currently has the median PE ratio at 14.5x, dividend yield at 3.13% and earnings growth at 13.8% - those seem like entirely normal metrics to me (taking into account that earnings forecasts usually do tend to be overly-optimistic at the market level).

Furthermore the headline FTSE100 index has heavy weightings of commodities and financials - sectors which have been out of favour for the past few years and which would benefit hugely from higher inflation if it does come through. Considering stock markets are priced nominally, if you gave me a choice I'd put my money on the index being 10,000 rather than 5,000 in a few years' time.

However I have thought that the US market has been verging on overvalued for the past couple of years, and if it corrects others will follow. My main concern is we're clearly coming to the end of a multi-decade bull market in bonds (since the early '80s!). While you theoretically can't lose money on bonds when held to maturity, this is a huge beast of a market where investors have gotten used to capital gains, and these will soon turn into paper/mark-to-market losses when yields do rise.

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Graham Neary 16th May '17 59 of 62

In reply to post #184166

Hi Si, well that is probably true about the riskiness of the assets but what counts is the fees... you can charge more for managing riskier assets :)


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Graham Neary 16th May '17 60 of 62

In reply to post #184202

Hi wheelo, I'm afraid I haven't done enough research to answer that Q.


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langley59 16th May '17 61 of 62

In reply to post #184634

Regarding the MACD, this does seem to give quite clear buy and sell signals as it crosses over the signal line, eg. sell in late 2007 and buy back in mid 2009. Likewise the crossing of the 12 month moving average gives the same signals at the same time. So on that basis we are ok at the moment. But then who knows what is around the corner.

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vik2001 19th Jul '17 62 of 62

TT Electronics entered a conditional agreement for the sale of its Transportation Sensing and Control division to AVX, for £118.8 million on a cash free, debt free basis. As a result of the disposal, TT Electronics will be in a much stronger position to focus on its strategy of investing in structural growth markets where there is increasing electronic content, with the benefit of significantly enhanced financial capacity.
Share price is up 8% on this news. Could be a lot further upside to come from this now they are better positioned.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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