Small Cap Value Report (13 Apr 2017) - PZC, SRT, GATC

Thursday, Apr 13 2017 by

Good morning,

This is the last report before the long weekend, so I hope everyone enjoys the break.

Paul is updating us on Gattaca, and I'm writing the rest of the comments.

By the way - Paul updated yesterday's report so that it now includes Norcros (LON:NXR), £D4T4 and Comptoir (LON:COM). This includes a really detailed analysis of some issues arising from a close reading of the footnotes at Comptoir, with Paul providing his own "adjusted adjusted figures"! You can read it at this link.



PZ Cussons (LON:PZC)

Share price: 327p (-0.7%)
No. shares: 428.7m
Market cap: £1,402m

Trading Update

These shares have recovered a little since I covered them at the interim report in January.

At the time, I noted that currency depreciation in Nigeria and ongoing exceptional costs were a frustrating drag on results. But I also suggested that it was a company which deserved the benefit of the doubt, after several decades of success.

Today's update tells us that performance to April 12th has been in line with expectations, including cash generation.

As reminder, PZ Cussons is a mid-sized house of brands which includes Carex, Imperial Leather, St. Tropez, Charles Worthington and many others.

Reading through the company's regional news, there are good signs in terms of product launches and range extensions, including a complete relaunch of Imperial Leather.

And the troublesome Nigerian market may be showing signs of improvement:

In Nigeria, there has been some improvement in liquidity in both the interbank and secondary markets although exchange rates in the secondary market continue to be volatile.

There's a shortage of foreign currency in Nigeria due to the gap between official interbank exchange rates and the rates used in the black and secondary markets, causing major disruptions to business. But PZC says all its business units there have traded "relatively well" during the most recent period.

Outlook sounds ok:

Further margin improvement initiatives are underway to mitigate ongoing raw material and exchange rate volatility.

The outlook for the financial year ending 31 May remains in line with expectations.

The Group's balance sheet remains strong and well placed to pursue new opportunities as they arise.

My opinion

Unfortunately the shares are still quite richly valued, leaving a modest dividend yield at the current price.

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

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PZ Cussons Plc is a United Kingdom-based consumer products company. The principal activities of the Company are manufacturing and distribution of soaps, detergents, toiletries, beauty products, pharmaceuticals, electrical goods, edible oils, fats and spreads, and nutritional products. The Company's segments include Africa, Asia and Europe. The Africa and Asia segments are engaged in the sale of personal care, home care and food, and nutrition products. The Africa segment is engaged in the sale of personal care, home care, food and nutrition, and electrical products. The Company's personal care brands include Carex, Charles Worthington, Cussons Baby, Fudge, Fudge Urban, Imperial Leather, Luksja, Premier, Mum & Me, Original Source, Sanctuary Spa, St. Tropez and Robb. The Company's home care brands include Zip, Radiant and Morning Fresh. The Company's food and nutrition brands include Five: AM, Mamador and Rafferty's Garden. The Company's electrical brand is Haier Thermocool. more »

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SRT Marine Systems plc, formerly Software Radio Technology plc, is engaged in the marine technology business. The Company's principal activity includes development and supply of automatic identification system (AIS)-based maritime domain awareness technologies, and derivative product and system solutions for use in a range of maritime applications from safety and security to fishery management and environment protection. AIS is a mesh network radio communications system technology specifically designed for the marine domain, and it uses a combination of global positioning system (GPS) and high frequency radio to enable real time, simultaneous data communication between multiple, independent entities providing information, such as identity, GPS position, speed and other customized data. It offers a range of AIS products and maritime domain monitoring system solutions, which also fuse other maritime sensor technologies, such as radar, closed-circuit television and communications. more »

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Gattaca plc, formerly Matchtech Group plc, is a human capital resources business dealing with contract and permanent recruitment in the private and public sectors. The Company operates through two segments: Engineering and Technology. The Engineering segment comprises Barclay Meade and Alderwood recruitment consultancy brands. The Technology segment includes the Connectus recruitment consultancy brand. The Company is a provider of specialist recruitment services to the engineering and technology industries, both in the United Kingdom and internationally. The Company offers three core solutions: Contingent Workforce Solutions, Permanent Recruitment Process Outsourcing (RPO) and Total Workforce Solutions. more »

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

30 Comments on this Article show/hide all

AlanJenkins2 13th Apr '17 11 of 30

There's a more bullish view of Gattaca on Equity Development by Paul Hill,and a less bullish one over on  Share Prophets by Steven Moore ! :-]

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cic 13th Apr '17 12 of 30

A comment on Gattaca which I hold (but may not by the time you read this). They say that the profit shortfall is due to "Unanticipated one time cost overruns relating to the setting up of international entities to support a pan-European contract win" Are we to believe that the management did not know anything about this contract 10 weeks ago? It must have been pretty big contract to incur additional set-up cost of £1.2m plus (my estimate) and yet we have not been updated about it. And why were these costs unanticipated - have they accepted a contract and subsequently discovered that they don't have the ability to service it. Jax says that they lied. The RNS certainly does not give the impression that they are being honest. Perhaps the management is just incompetent. Either way, its a red flag for me.

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HornBlower 13th Apr '17 13 of 30

looks like there was an after hours trade of 4.34m shares in Utilitywise yesterday, 5.5% of the company.  anyone any ideas of buyer or seller

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Casabanker 13th Apr '17 14 of 30

I have sold my holding in GATC this morning. Previously, I held Matchtec which promised much but did not deliver and I sold out. Matchtec was taken over by GATC and the new organisation has interest in Europe as well as the UK. I thought this arrangement would give some protection as, at the time, Brexit occurred and there was some doubt about the UK economy. GATC had and still has, a low PER and a high yield so it was attractive. It transpires that it has overspent and underperformed hence the profit warning. It seems to be following the same path as Matchtec. Maybe its model is wrong. How good is it at recruiting online? Profit warnings often occur in groups of two or three and what will happen to the dividend? One thing is for certain and that is that GATC will have to perform well this year in order to reclaim investor confidence.


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alterego 13th Apr '17 15 of 30

In reply to post #179852

re SRT, as muckshifter says, the Philippines is similar to Indonesia and I believe requires coverage for approx 200k vessels. As of SRT's last AGM, work on this was at the planning stage. There are 4 Asian countries listed in the validated sales opportunities pipeline (VSOP). India is one, Indonesia is now contracted which SRT watchers reckon leaves Philippines and Vietnam. The latter is thought to be 60k vessels.

The VSOP lists 4 countries in the middle east, we know Saudi and Bahrain are there. Possibly Kuwait is another.

If good progress is being made on some of these prospects, Ecuador must be in the frame too and Mexico is long overdue.

Like Kalkanite, SRT is my largest holding by far and a stock I've held since 2010 so it's been interesting to see the company mature from a "electronic box seller", to a major integrated system supplier. In fact whilst there are companies who sell similar products, none can offer the full range of equipment and software, proven implementation and customer satisfaction that SRT is able to provide.

The patchy revenue record to date has put off many investors but when selling multi million dollar contracts to governments delays are inevitable. Meanwhile massive progress has been made in designing market leading products. IMO, SRT have become the de facto one stop shop for national scale MDM systems.

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herbie47 13th Apr '17 16 of 30

In reply to post #179880

Matchtech are Gattaca (LON:GATC) it was just a name change, Matchtech took over Networkers and then renamed themselves Gattaca (LON:GATC), since then the shares have been sliding. I have lost faith in the management, 2 months ago they were confident that the results would be in line now they will be 10-15% down, Brexit has not even started yet, it's not a sector I want to be in at the moment. Other recruiters don't seem to be suffering.

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laurie 13th Apr '17 17 of 30

In reply to post #179868

Gattaca (LON:GATC)

I've emailed the company asking if 'Unanticipated one time cost overruns relating to the setting up of international entities to support a pan-European contract' applies to making preparations for Brexit, or to a specific contract. If anyone knows the answer to this, or can point me to specific information, I would be grateful. I will, of course, post any useful answer I receive.

I hold.

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Crystball1 13th Apr '17 18 of 30

with regards to SRT, I think it's the fishing boats and ships industry you need to concentrate on Paul. The market opportunity is huge here.

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RichardK 13th Apr '17 19 of 30

I am a weak holder of Gatica, and thought that management which comes up with such a daft name to be lacking credibility. I wonder how much they paid consultants to devise it?


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phoenixnight 13th Apr '17 20 of 30

In reply to post #179840


I attended the "Sage Summit" last week in London, which was a celebration of all things Sage. It was all rather evangelical at times, as they wheeled out lots of young, good-looking highly intelligent people to tell us about the future of the world of work. Thanks to years of underperforming company pensions & 3 kids, I only have another 57 years of work to survive before I can afford to retire!

Sage, too, are developing robots to automate work. They demonstrated this to the audience by linking up Amazon's Alexa to a Sage accounting system and talking to the ledgers. This was done at a low level: eg Q "How much money does Joe Bloggs owe?"
A: "Joe Bloggs owes you £2,500 of which £1,500 is overdue. Shall I send them a reminder?" etc

Reading about change is one thing. Seeing it demonstrated brought home how real and close it is, and what a dramatic impact it is going to have on so many jobs. Clearly Sage (LON:SGE) are working on AI, along with many other tech firms. Blue Prism (LON:PRSM) therefore obviously don't have this market all to themselves, but do appear to be gaining some traction. However it struck me that this is going to be a huge market and, as investors, I think we prefer growing markets to shrinking ones.

I have also noted the words "Blue Prism" practitioners springing up on friends LinkedIn profiles. Like you I too had a holding. Not huge, but off the back of what I witnessed last week and today's announcement I feel more confident than previously.


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redrum 13th Apr '17 21 of 30

I sold out of GATC on the afternoon recovery after watching it plummet this morning
Including the full year dividend it was only a small loss.
Management obviously can't be trusted so are not worthy of my investment.

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janebolacha 13th Apr '17 22 of 30

In reply to post #179902

Phoenix, thank you.

There's an excellent research note (of 25 pages) on Blue Prism (LON:PRSM) , their technology and their markets, from Whitman Howard, from March 29 and available through "Research Tree", well worth reading.

Best wishes,

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back2value 13th Apr '17 23 of 30

Graham, when SRT talks about compliance and enforcement, they are not talking about oceangoing merchant ships, all of which already have AIS fitted - this can easily be checked during inspections by port or flag state authorities. The US coast guard, for example, wouldn't be very impressed if you arrived at a major US port with no AIS signature! What they are referring to is small leisure craft and local fishing boats, which are much more numerous, making it practically much more difficult to ensure all have an AIS transceiver fitted.

I continue to hold SRT for the same reasons as Kalkanite - either we havd been badly misled or there are several highly profitable, transformational projects due to come through in the next couple of years which should make the current valuation look like peanuts. It's more of a "jam - yes, but when?" situation, which is a real patience-tester. Getting contract win news with no information about the counterparty or potential value is especially frustrating.


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laurie 13th Apr '17 24 of 30

In reply to post #179872

Utilitywise (LON:UTW)
My guess is that Woodford's new Income Focus Fund bought the shares in Utilitywise. Final instructions for investment at launch for this fund were to be received by midnight on April 11th. Woodford already holds over 28% of UTW in his other funds; it would be unsurprising if he decided to buy these for a high income fund.

yours speculatively,

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paraic84 14th Apr '17 25 of 30

A question for more seasoned investors: why do you think Gattaca (LON:GATC) announced this on Thursday instead of waiting for their scheduled update on 20 April? Do you think they are getting the bad news out of the way now? I'm trying to understand the possible tactics here. I guess we might find out in 6 days time!

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Aislabie 14th Apr '17 26 of 30

In reply to post #179908

As the Whitman Howard report on PRSM confirms the company will still be making losses in 2020 when the revenue has tripled (if it does).. At that point, and assuming that it is no higher than today's price, the market cap will still be almost 20 times the gross revenue.
So in the next four years will there be no chance to buy this at below today's price?

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Paul Scott 15th Apr '17 27 of 30

In reply to post #179932

There are a lot of smart people in Blue Prism (LON:PRSM) - so I wouldn't dismiss it altogether. Maybe it is the next big thing? But at such a sky high valuation????

For me though, I can't value it, so it's not of interest to me. Too difficult folder.

Regards, Paul.

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janebolacha 15th Apr '17 28 of 30

In reply to post #179932

" At that point, and assuming that it is no higher than today's price, the market cap will still be almost 20 times the gross revenue."

No idea where you get those figures from.

WH have now (this week) upgraded Blue Prism (LON:PRSM) FY18 revenues to £28m. The robotic process automation market is forecast to show CAGR of between 30% and 60% to 2020/2022 (various reports and forecasts are available). Taking even the lowest figure of 30% pa market size growth, that would give revenues of £47m in 2020. Taking the higher CAGR would give £72m of revenues in 2020. The present MC is £353m which equates to between 5 times and 7.5 times those revenues, not the 20 times you state.

"when the revenue has tripled (if it does)."

Revenues were below £10m in FY16 so they will have actually almost tripled in the two years 2016-2018.

"So in the next four years will there be no chance to buy this at below today's price? "

Just asking for people's opinions, not entering into polemical argument.

Have a good weekend.

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Aislabie 15th Apr '17 29 of 30

In reply to post #179970

My apologies if this came across as an argument, I thought I had an PRSM opinion based on facts. However this was not the case, your numbers are correct and mine are based on a howling error in a spreadsheet.
Lesson learnt for the future: double check before hitting "submit"!
Thank you for your many contributions.

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HornBlower 18th Apr '17 30 of 30

In reply to post #179914

you are probably right that woodford might have transferred from an existing fund to the new fund. can't be any other seller as no other holders with enough shares except the founder, who would have had to disclose

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 Are LON:PZC's fundamentals sound as an investment? Find out More »

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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