Small Cap Value Report (12 Oct 2015) - TSTL, YOU, MOS

Good morning!

I managed to catch half an hour with ISA millionaire Leon Boros, on Friday, and he recorded an audiocast with me, to update on his favourite stocks. I've tightened the focus of my audiocasts, so instead of lots of rambling about the markets generally, we now just focus on a few specific stocks that the interviewee likes best.

So Leon updated us on: Bioventix (LON:BVXP) , Redde (LON:REDD) , Empresaria (LON:EMR) , Victrex (LON:VCT) , XLMedia (LON:XLM)

The link to that audiocast is here, and a transcript is currently being typed, which will be available on the same page Tue or Weds this week. I really enjoy doing these interviews, and learn a lot from them, so will be doing lots more in future.

Tristel (LON:TSTL)

Share price: 111.3p (up 5.5% today)
No. shares: 41.5m
Market cap: £46.2m

(at the time of writing, I hold a long position in this share)

Results y/e 30 Jun 2015 - the headline figures all look good from today's results announcement (I've added bolding to highlight key numbers):

Financial Highlights

· Turnover up 14% to £15.3m (2014: £13.5m).

· Overseas sales up 21% to £5.5m (2014: £4.5m), representing 36% of total sales.

· EBITDA up 25% to £3.4m (2014: £2.7m).

· Pre-tax profit up 44% to £2.6m (2014: £1.8m).

· Basic earnings per share up 67% to 5.44p (2014: 3.25p).

· Dividend per share for the full year increased to 5.72p (2014: 1.62p), including a special dividend of 3p per share.

· Net cash of £4.0m at year end (2014: £2.7m). Company remains debt free.

EPS - it's always worth checking the figures, if the EPS % gain/(loss) is significantly different to the change in profit before tax. In this case, EPS has gone up 67%, compared with profits up 44%. The reason seems to be a reduced tax charge this year, despite profit going up.

Tax - note 4 gives more detail on the tax charge for 2013/14, and 2014/15, and from what I can make out, the variation in the tax charge seems to be down to unspecified timing differences. I might adjust the EPS figure down by say 10% in my own calculations on valuation, just to be on the safe side.

Balance sheet - this is excellent. The current ratio is 3.47, and there is no long term debt. Therefore, the company probably has a trouble-free existence, with plenty of financial strength. As noted above, it has net cash of £4.0m, although the 3p special divi was paid on 6 Aug 2015, so after this balance sheet date. Therefore about £1.2m cash will have been paid out, still leaving a healthy net cash position of about £2.8m.

Outlook - the narrative to today's announcement is very interesting, focusing on the long-term growth that has been achieved so far, and sounding rather excited about the potential for further international expansion.

This paragraph in particular caught my eye;

As we continue to extend our geographical footprint, and as the enterprises of our distributors (many of which are today almost exclusively focused on the Tristel product range) develop further and expand, it is conceivable that the pace of our growth could accelerate.  Furthermore, we have embarked upon our United States regulatory approvals project and we have a more exciting pipeline of new product innovations than I have ever witnessed in our corporate history.  For now, however, I am comfortable with our stated growth objectives. 

Valuation - growth companies are tricky to value. If you obsess over PER, then you can miss out on the best growth situations. Also, broker forecasts can often be too conservative (e.g. today's result is 27% above FinnCap's EPS forecast), meaning that the shares were not as over-priced as you thought. Ultimately though, good growth stocks are never likely to be cheap, so I am increasingly taking the view that one has to grit one's teeth and just pay up, for the best growth companies.

There are limits though, and personally I become increasing uncomfortable paying a PER of more than 20. The PER here is probably around 20, depending on what profits the company achieves this year. However, if you consider the opportunity that might transpire, if faster growth occurs (as alluded to above in the company's outlook statement), then earnings could grow faster than currently envisaged, and the rating could rise further to a PER of 30 perhaps? Combine those two factors, and I think you'd be looking at a share price possibly 2-3 times the current level. That's obviously the bull case, and it may not happen.

My opinion - it's not cheap, but the narrative today has swayed me, and I've decided to buy back into this share (have previously held it at lower levels).

YouGov (LON:YOU)

Share price: 117p (up 1.3%)
No. shares: 102.9m
Market cap: £120.4m

Results y/e 31 Jul 2015 - as I've mentioned in previous articles, the way this company presents its figures is highly misleading, in my opinion. In particular, the adjusted profit calculations greatly over-state what I consider to be the true level of profitability. The main issue is the amortisation charge for intangibles.

In this case, the amortisation charge is not just a book entry for non-cash items. It's actually real costs that are being capitalised onto the balance sheet each year. £4.6m of such costs were capitalised this year, and the amortisation charge was also £4.6m. So the true profit figure is actually the profit before tax figure of £2.7m (£0.7m last year).

The adjusted profit figure of £9.1m (equating to 7.0p EPS) is a complete red herring, in my view.

Valuation - if you accept the company's (ridiculous) definition of adjusted earnings, then the shares are not exactly cheap, on a PER of 16.7.

However, if you take the statutory EPS figure (diluted) of 3.1p, and then adjust it to normalise the tax charge (since it benefits from a tax credit), then you're really looking at about 2p EPS. Put that on a PER of say 15-20, and I reckon these shares are worth 30-40p. Not 117p, which is the current market price.

My opinion - based on the above, I feel that these shares are mis-priced, far higher than what the company is really worth. This has been achieved by presenting investors with an aggressive view of profits, through the adjusted profit calculations.

Mobile Streams (LON:MOS)

Share price: 11p (up 132% today)
No. shares: 37.1m
Market cap: £4.1m

Results y/e 30 Jun 2015 - a real minnow this one. Also, it's AIM listed, and seems to operate abroad, so the red flags are already fluttering in the wind!

Based on past performance, and problems caused by operating in Argentina (e.g. its cash being stranded in the country, due to exchange controls), I had rather assumed that this company was a dead duck.

However, it's put out figures today that actually show a profit before tax, of £0.8m. Although the tax charge of £495k absorbs more than half the profit. The balance sheet looks reasonable too, although I'm not sure of the status of the cash.

Skimming the narrative, it seems that the company is introducing new mobile services into other countries, such as India. I don't really know much about this company, but am just flagging it as potentially interesting, for the more adventurous amongst you!

Also, a request for feedback - have any readers looked at this company recently, and have an informed view? If so, please leave your thoughts in the comments section below. I'll look into this share in a bit more detail, when time permits.

Unfortunately, I have to leave it there for today, as I'm off into Canary Wharf for lunch with an investing friend, so don't want to be late.

See you tomorrow!

Regards, Paul.

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

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

NB. These reports are personal opinions only. They are never recommendations, nor financial advice)