Small Cap Value Report (13 Aug) - TRB, SWJ, WTL, CGS

Good morning! It's very quiet for news this morning, so this will be a comparatively brief report. The Futures are indicating the open should see the FTSE 100 Index up 15 points at 6,589.

 

Tribal (LON:TRB) issues its interim results for the six months to 30 Jun 2013. The market seems to like them, as the shares have opened up 3% at 207p, which values the company at £194m. Tribal provides services to the education sector.

Turnover rose 12% to £62.1m, and adjusted operating profit rose 15% to £5.4m for the six months. Adjusted EPS rose 36% from 3.6p to 4.9p, but was flattered by an unusually low taxation charge this period. The company says that trading will be weighted towards H2, and the outlook statement sounds good, with them confirming "at least in line with our expectations for the full year".

So really it all looks good until we get to valuation. Broker consensus is 11.4p EPS for this year, and 12.4p next year, which look about right, if you normalise the tax charge. So the shares look expensive to me at 207p, which is a PER of just over 18 times this year's earnings. That's too expensive by far to my mind. Tribal has always been fairly cheap when I've looked at it before, and personally I wouldn't pay more than a PER of 12 for what is really a pretty ordinary business, that's been quite accident prone in the past.

The dividend yield is lousy, at only 0.7% forecast yield.

Furthermore, Tribal also has a weak Balance Sheet, with negative working capital (current assets are £36.0m, versus current liabilities of £53.3m), with another £19.4m of long term liabilities too. My internet is about to go down for a little while, as fibre optic man is here to upgrade us, so will continue when I am reconnected ...

... yes I'm back, and apparently 10 times faster!

Going back to Tribal's Balance Sheet, it has £77.6m in Goodwill, and further intangibles of £14.8m. Writing off both of these takes net tangible asset value down to minus £31.4m, which is not a good position at all. It might be fine for the time being, but what happens if they run into trading difficulties, as they have done in the past? There's nothing to cushion the impact.

I just cannot understand why these shares are rated so highly. Have I missed something?

 

 

 

 

Results from micro cap Scottish auctioneer John Swan and Sons (LON:SWJ) look poor. Their underlying trading (before pension adjustments) has gone from breakeven in 2011/12 to a loss of £344k in year ending 30 Apr 2013. Its property has been revalued, and the market cap of £2.8m is now less than half net tangible assets of £6.3m. Seeing as the assets are being unproductively used, that discount is entirely logical I would suggest.

They blame underperformance on the weather and, "Sheep were slow in coming forward and prices were down, which led to reduced commission". It just doesn't make any sense for a company this small to be Listed on the Stock Market.

 

 

 

 

Shares in Waterlogic (LON:WTL) have dropped sharply today, by 15% to 140p, on the back of a trading update. I don't recall having looked at Waterlogic before. The market cap has dropped to about £109m at 140p per share. They say today that revenues for the year ending 31 Dec 2013 are expected to be $120-125m, and that adjusted EBITDA is expected to be approximately $20m (up from $14.7m). Those numbers don't sound too shabby, but clearly are lower than the market was expecting.

They had an installed base of 640,000 machines at the end of 2012, so clearly a pretty substantial business. Looking back at the last set of full year results, 38.6% of group revenues were recurring (machine rentals & servicing) which is good.

Their Balance Sheet looked pretty good at 31 Dec 2012, with net cash of $29.8m.

Overall, I like the concept - of water purification machines to use in offices & public buildings, to replace conventional bottled water dispensers. The trouble is, with a profit warning today, and prior to that EPS estimates tumbling quite fast, there is clearly something going wrong with their business model. So I'd need to do more research on it, but it does look potentially interesting - mainly because of the recurring revenues, and a decent EBITDA forecast relative to the market cap.

Have any readers looked at Waterlogic before? If so, I welcome your views in the comments section below.

 

 

 

 

Shares in Castings (LON:CGS) are up 20p to 435p on publication of a positive trading update this morning. Broker consensus is for 36p EPS this year (ending 31 Mar 2014), so that puts them on a PER of 12, which is probably about right. The dividend yield is around 3%, and they have a tremendously strong Balance Sheet.

A very nice business, although a potential problem is flagged in the AGM statement today, when they say:

 

However we remain cautious of the potential impact of the new European emissions legislation in 2014 as previously reported.

 

So that would need investigating before buying any shares in this one.

As with so many companies at the moment, I can't help feel that there will be more attractive entry points in the future, it's so difficult to find value at the moment after fairly indiscriminate share price rises right across the small to mid caps space. Hence why I'm keeping some powder dry.

 

 

Nothing else to report today, so I shall sign off. Back tomorrow as usual.

Regards, Paul.

(of the companies mentioned today, Paul has no long or short positions)