Small Cap Value Report (13 Dec) - VLX, PER, TRK, VLK, OFF, ALY, SNX

Friday, Dec 13 2013 by

Good morning. I ditched my shares in Volex (LON:VLX) after poor recent results, but more importantly on looking at forecasts it was obvious that the company would be running short of cash in 2014, since even on Edison's forecasts it would have hit a level of net debt to EBITDA of over 3.5 (where a level most Banks are comfortable with is nearer 1.5). So I sensibly sold, only to see a flurry of PR, including 2 commissioned research notes in the same week (a sure sign that they want to raise some money!), and sure enough a small Placing has been announced today at 116p. The only surprise is that they haven't raised more, so I suspect this won't be the last time they come back for more money.

In normal circumstances poor results, and a fundraising would have been a disaster for the share price, but in this case the price has bounced back and simply shrugged off the problems. Although I hear that management have been telling a convincing story on the rounds of broker/Institutional meetings, so for the time being the market is giving new management the benefit of the doubt on a turnaround story that hasn't yet delivered anything convincing. So I'm much more sceptical on this one now, and don't plan on revisiting it - the market could be a lot less forgiving the next time they disappoint perhaps?

The announcement today also indicates the the Volex Employees' Share Trust has sold 3.4m shares, of a total of 4m. Seems odd. I thought the purpose of such a Trust was to award shares to employees on predetermined performance measures? So it looks as if they are giving them cash instead perhaps?


It's absolutely extraordinary the amount, and frequency of fundraisings going on at the moment - literally every day there are Placings and/or IPOs, of increasingly dubious quality/value. So on this measure we're very much in late stage bull market territory. Sooner or later the market's appetite for new issues and Placings will be satisfied, but in the meantime on we go.





The danger of over-paying for a growth story was very much in evidence yesterday when shares in Perform (LON:PER) were absolutely crushed by a profit warning…

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Volex plc is a supplier of power cords and cable assembly solutions servicing a range of markets, including consumer electronics, telecommunications, data centers, medical equipment and the automotive industry. The Company's segments include Power Cords, Cable Assemblies and Central. The Power Cords segment is engaged in the sale and manufacture of electrical power products to manufacturers of electrical/electronic devices and appliances. These include laptop/desktop computers, printers, televisions, power tools and floor cleaning equipment. The Cable Assemblies segment is engaged in the sale and manufacture of cables permitting the transfer of electronic, radio frequency and optical data. These cables range from universal serial bus (USB) cables to high-speed cable assemblies, and are used in a range of devices, including medical equipment, data centers, telecoms networks and the automotive industry. It is also engaged in contract manufacturing service and product development. more »

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Torotrak plc is a United Kingdom-based technology development company. The Company designs, develops and delivers technologies focused on products, such as Gearless traction drive transmissions (Torotrak), Variable drive superchargers (V-Charge) and Mechanical kinetic energy recovery systems (Flybrid). The Company's segments include licence agreements, engineering services, and development activities, including research and the creation of new intellectual property. The Flybrid technology relates to design, development, manufacture and control of high-speed flywheels for use in moving vehicles. Its V-Charge is a variable drive supercharger for gasoline and diesel engines. The V-Charge allows downsized engines to maintain their emissions levels. The Company's infinitely variable transmissions (IVTs) combine its full toroidal traction drive variator with other conventional transmission components. more »

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23 Comments on this Article show/hide all

Ramridge 13th Dec '13 4 of 23

In reply to post #79923

Pathetic attempt to attract chinese investors...

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Brokertobroker 13th Dec '13 5 of 23

Although I hear that management have been telling a convincing story on the rounds of broker/Institutional meetings

RE: Volex, total agree Paul.

Sometimes I buy shares not because of strong fundamentals, but because I know others will. The management at Volex is charismatic, has an impressive track record and a compelling ‘transformation’ story. Sounds like a spivvy cliché but, ‘people buy people’.

How many people can honestly say they consider the: Broker; PR firm; IR outfit and the management’s relationship with the city before investing. Unfortunately, it is very important.


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bsharman 13th Dec '13 6 of 23

Morning all, With regard to Volex. I'm glad I sold out with a small profit as the debt situation is not very appealing. However having said that Nat Rothschild has been buying and now owns over 24% of the company.
There seems to be a disconnect between the Large cap and Small cap indexes at the moment and the FTSE 100 has lagged the DOW and DAX. This is probably due to the large number of mining and oil and gas companies listed in London.

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emmo1210 13th Dec '13 7 of 23

Good report, thanks

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hedley05 13th Dec '13 8 of 23

TRK, my first share in 1999. Paid £3. Should have sold at £6 in 2000. Held until this year, and sold at 20-odd-p, as i conviced myself that i had learnt my lesson of avoiding jam tomorrow! Was a useful reminder in my portfolio to cut loosers! Hope i remember now its gone!

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Paul Scott 13th Dec '13 9 of 23

In reply to post #79939

Hi hedley,

Indeed, I'm sure most of us have ended up with the dregs of previous mistakes sitting in our dealing accounts, holdings worth less than it would cost in commission to dispose of them!

I keep a share certificate of about 11 Medisys plc shares, as a reminder to myself not to believe hype, and not to fall in love with a story.

Cheers, Paul.

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kevanp 13th Dec '13 10 of 23

In reply to post #79930

And Nat Rothschild's Bumi venture went really well!

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boothbym 13th Dec '13 11 of 23

Vislink broke 40p support, next support at 38p and 50 day sma then no support untill 32p

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Bezhe 13th Dec '13 12 of 23

In reply to post #79924

The main implication of £60m of accumulated losses is that dividends may not normally be paid until the losses have been made good. Otherwise, it would be paying dividends out of capital (share capital plus share premium usually). Share premium arises when shares are issued for more than the nominal share value. For example, issuing 1,000 shares of £0.25 each at a price of £1.00 would give share capital of £250 and share premium of £750. By cancelling the share premium and netting it off against accumulated losses on the P&L, you regain the ability to pay dividends if profits arise. It is not a straightforward matter to cancel the share premium - as far as I am aware, it requires an application to the courts for permission to do so.

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Camtab 13th Dec '13 13 of 23

SEE have had an interesting day.

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rick 13th Dec '13 14 of 23

RE: Volex

Doesn't the fundraising mean that one of your previous key concerns (cash position) is now addressed? Also the price of the placing is not diluting for existing holders. So it maybe a win-win for the new institutional and current shareholders. An upward move in price would appear to reflect this.

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Paul Scott 13th Dec '13 15 of 23

In reply to post #79944

Good explanation Bezhe.

To add to your reply to Gostevie, the Balance Sheet is divided into two sections. The main section lists the company's assets & liabilities, and shows the total net asset value.
The other section of the Balance Sheet below this is called "Reserves", and details where those assets & liabilities have come from overall. So the total reserves is always exactly equal to the net asset figure.

Here is an example Balance Sheet.

So at the top are Non-current assets, also called Fixed Assets - this is things like property, machinery, anything that has long-term use. These total £4,167k here.

Next you have current assets - which is basically stuff that will turn into cash in the next 12 months - so money owed by customers (debtors), stock, and of course cash in hand and at the Bank. These total up to £16,256k here.

So that gives total assets of £20,423k.

Next the company's liabilities are listed, firstly the current liabilities - i.e. things that have to be paid for in the next 12 months, such as money owed to suppliers or the Bank. These total up to £6,242k here.

Finally there are some longer term liabilities, which are only £45k here.

Grand total liabilities comes to £6,287k

Total it all up, and this company has net assets of £14,136k - i.e. all the assets (£20,423k), less all the liabilities (£6,287k) = £14,136k.


The second section of the Balance Sheet is then entitled "Equity" - i.e. where have the £14,136k net assets come from?

The answer in this case is that the original issued share capital is £76k (being 7.6m shares in issue, of 1p nominal value), which will tie in with the notes the accounts in the Annual Report.

The Share Premium a/c of £1,646k represents the additional money paid for subsequent shares issues. So in this case the share price has risen to about 355p, so if the company were to issue new shares, it wouldn't sell them for 1p any more. It might sell them for say 340p, in which case 1p would go into Share Capital, and 339p would go into the Share Premium a/c.

Other reserve I'm not sure about, but usually the main other reserve is the Profit & Loss account, which in this case is £7,325k. That should equal all the cumulative profits & losses made since the company was formed, although it can subsequently be adjusted, e.g. if there is a deficit. Usually dividends can only be paid if a company has a positive Profit & Loss a/c within its Balance Sheet  reserves, since company law dictates that dividends may only be paid out of distributable reserves - this is to protect creditors of the company, as otherwise shareholders could strip the company bare, leaving nothing to pay creditors.

Regards, Paul.


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Paul Scott 13th Dec '13 16 of 23

In reply to post #79946

Hi Rick,

I don't see the Placing at Volex (LON:VLX) as positive, because it's too small to make much difference. They only raised £3.1m, which is not very significant relative to last reported net debt of $41.4m (about £25.4m). Also it rather makes me question the credibility of management reassurances very recently that the Bank position is fine. If so, then why did they need to raise fresh cash?

The reality is that their financing position is tight, and this Placing confirms that.

As "Brokertobroker" points out above, at the moment the City is supportive of management, and has forgiven the poor recent results, vague outlook statement, cancellation of the dividend, and worsening debt position.
However from my point of view, the fundamentals have materially worsened, so I sold out. As it turned out, my timing was very poor, but that's the way it goes sometimes. I'm not trying to second guess market sentiment, I'm just investing on fundamentals.

Maybe Volex will pull off their turnaround, who knows? Trouble is, the market cap is now factoring in too much, when so far execution has been poor. So in my view that has turned risk/reward from positive to negative. So I'm out.

Cheers, Paul.

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hornbeam1 14th Dec '13 17 of 23

Paul, re post #15.
Thanks for filling in the final jigsaw pieces of how to read a balance sheet. ie the share premium account.
I read & appreciate your daily commentaries even if some of the stocks are new to me. Agree some valuations are becoming overstretched and ready for a fall, but exactly when 'denouement' will happen is the in the unknown. Cheers.

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Brokertobroker 14th Dec '13 18 of 23

 Also it rather makes me question the credibility of managementeassurances very recently that the Bank position is fine. If so, then why did they need to raise fresh cash? 

In regards to the Placing at Volex (LON:VLX), my take is that due to the extremely strong demand for shares, the management has had to place £3m worth so new institutions can join the register. Personally I think one of the main reason behind the placing was to improve the shareholder base (adding long term loyal holders). So, all in all, I view this placing at a premium as a positive.

You are entitled to question the credibility of the management over the Banking flexibility and these are my thoughts:

- The balance sheet is far from healthy but it has good headroom on its 3 available banking facilities
- It has a high quality debtor book
- My own conservative forecasts relative to others, suggests that the net debt/ebitda multiple will decline to below c.2.5x in FY14E
- In terms of breaching banking covenants, the management has commented that it is “comfortable and nowhere near covenant levels”

I’d not be ammused if they went bust next year....

In my opinion, those deciding to sell because they invest purely on fundamentals are, without doubt, totally justified. However remember, this was a “kitchen sink job”. As a neutral in football we all like an underdog - Volex is currently in the conference league and with Alex Ferguson’s quality at the helm it has the potential to be in the premiership. The current valuation is obviously skewed by the depressed profitability. However, if historic levels of profitability can be recovered then +225p within 2 years looks very likely. Overall, I view my stake in Volex as a gamble – albeit a pretty good one.

On Vislink (VLK), I agree, the move to Aim has to be a positive. It makes no sense for a small cap (sub £100m) company to be main listed. Appologies if I'm wrong, but I haven’t noticed many main market companies making the switch. Given all the tax incentives discussed, I’m surprised. Could this be the first of many more to follow. For Vislink, sure there will be an overhang, created by those that cannot hold Aim stocks – BUT – wait till the IHT money pours into this one. IHT funds (AIM portfolios) are massive and given the valuation anomaly, Vislink should have a good 2014. Regardless of the fundamentals, provided the management is open to the city, Vislink should attract plenty of fund manager attention. Again, as the serious investors we aspire to be, I believe we should be looking to second guess market sentiment. Regardless of investing/trading/gambling time frames, it has to be another string to the bow. Admittedly, it is difficult for Stockopedia to rank this (looking forward to the short interest rank and insiders rank), but using technical analysis usually helps. I’m not an advocate of picking market peaks and troughs – no one is that good – but something as simple as matching up volume capitulation with shadow and tail candles works surprisingly well (see Volex's candlestick chart, 29th April, 22nd July and 14th Nov). You can be a great fundamental investor with a terrible performance if timing is wrong.

Everything is in my opinion....(blah, blah, blah)

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Paul Scott 14th Dec '13 19 of 23

In reply to post #79958

Hi Brokertobroker,

All good points, but I'm not convinced by management assurance over the Bank position at Volex (LON:VLX). There are 2 covenants there, Net Debt to EBITDA, but we don't know what the level is. Have management disclosed this? I'd be very surprised if it's higher than 3. So they won't have much (if any) headroom against that in 2014, especially if performance falls short of forecast. So I prefer to work on how the numbers look, and ignore assurances from management - talk is cheap, and such assurances often turn out to be worthless, and can quickly be reversed by them issuing another statement saying that trading has deteriorated, and now they believe they might breach their covenants - think what that would do to the share price - it would be catastrophic potentially, so I think you're right to regard this share as very high risk now. I originally went in because it paid a divi, and there was negligible bank debt, but both those previous positives have now reversed into negatives. So I'm amazed that investors have been so sanguine about what has actually been a major deterioration in risk/reward for these shares.

I should have got along to the analyst presentation, but it's so difficult for me to do that, as I have to spend all morning writing up reports, and hence can only get into London for lunch meetings, and even those are tricky. Hopefully in the not-too-distant future I'll be able to have a small team working with me, where we can share out the workload, and I can get into London for more meetings.

If you can pull off the clever trick of second-guessing how the market will behave, then good luck to you, but in my view that's a very difficult art to perfect, as it's so dependent on factors that you cannot really measure or even estimate - i.e. it only takes one large shareholder to change their view on a share, and waves of selling can hit the market. How do you predict that?? You can't.

So I just look at risk/reward at any given time & price, and try to make a rational decision on that basis. The share price may go in the opposite direction, but I'm not greatly concerned about that - because I've just done what's rational for me, in selling out of a position that no longer meets my risk/reward criteria. Ignoring that, and continuing to hold or buy more, because you think that other people will see it more optimistically is really when investing morphs into speculating. No harm in that, whatever floats your boat, but that's not really a direction I like to go in too often, as it can so easily go wrong when the mood changes suddenly.

Vislink (LON:VLK) - I completely agree. The current selling on the move to AIM is to be expected, but is nothing to do with fundamentals, which are strong. Therefore it's a buying opportunity in my opinion.
Longer term, I also agree that once the present forced sellers are gone (which will probably not take long), then the tide will go the other way - i.e. Vislink's new tax advantages as an AIM Listed share will pull in wave after wave of fresh buyers, who are seeking a dividend paying stock with IHT exemption due to being on AIM.

So I suspect that in 6 months time, people who were buying now at 40p will be looking very smug indeed! As always, the background noise of day-to-day price movements should not deflect one from the fundamentals. It amazes me how many people panic when a price falls, instead of seeing that they're being offered a bargain! After all, investing isn't complicated, it all comes down to BLASH.


Also, I disagree with your last point that you can be a great investor on fundamentals, but do badly if your timing is wrong. Lord John Lee said the exact opposite in his talk at Mello the other day, and indeed so does Buffett. Paying a bit more for a stock, with bad timing in the short term, doesn't matter in the slightest in the long run. If you bought a fundamentally good stock, at a reasonable price, then in a few years' time you'll be looking at multiples of the current price, so whether you paid 45p or 41p will hardly matter at all, once the price is say 200p+.
And in any case, if the value gets better, I just buy more, which is exactly what I've been doing with Vislink. Averaging down when you're right about the fundamentals is a very lucrative strategy - all of my best investments have been things where I've appeared badly wrong in the first few months, but then went on to absolutely clean up. Of course, it's also true that averaging down when the stock is rubbish, is a disastrous strategy, as I've also discovered several times before!!

Cheers, Paul.

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Brokertobroker 15th Dec '13 20 of 23

In reply to post #79959

Hi Paul,

Unfortunately, I don’t have the details of the banking contact, I doubt if this was disclosed. I suppose I am gambling on it being above 3. I’m also gambling on a recovery and the management's ability to turn it around.

You are right - talk is cheap – despite being more confident on Volex, I’ve been infrequently let down by reassuring comments from management. Even if it is an honest statement, things inevitably change and develop over time.

As we agree, it’s a high risk investment – I’ll keep the sell button in reach if the turnaround does not develop as I envisage. I’m always amazed at how slow the market is to react to announcements, especially unexpected ones. Large and small caps, from 8:00-8:10, we see people buying or prices flat before the 30-40% intraday fall.

I disagree with your last point that you can be a great investor on fundamentals, but do badly if your timing is wrong. 

Admittedly, my comment was somewhat flippant so apologies. I wouldn’t dream of disagreeing with Buffett but I would say that timing is more important for shorter time frames. Driven by emotion, it’s not totally unusual for small caps to double and then half over a one year period. I think market psychology and second guessing sentiment can help with timing.  Am I speculating - probably, but some aspects can be measure - I hope to write something on it when I have the time. Take Vislink for example – where (given, in line trading) I'm a buyer sub 45p and a profit taker above 60p – waiting until the company is actually on AIM “might” prove to be a good strategy that could potentially increase gains over c.15%. Also waiting until investors/fund managers will be prepared to meet them (mid Jan) might be an even better strategy. A lot of guess work and maybe a more disciplined approach is more rational. I'm young in investing year so still leaning. Looking forward to seeing how these two stocks develop. The beauty is, if I lose, I’m sure I'll learn something. 

Anyway, plenty of food for thought, so thank you. 

Keep up the good work. 

Cheers, BtoB

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Dendyver 15th Dec '13 21 of 23

With regard to Visilink is not the debtors figure of 13302 compared with revenue of 28028 a concern?

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Paul Scott 15th Dec '13 22 of 23

In reply to post #79962

Hi Dendyver,

I've double-checked the most recent Bal Sheet for Vislink (LON:VLK), and it looks fine to me.
Debtors is higher than last year at £13.3m, but bear in mind that the most recent full year turnover was £57.2m, so that represents about 85 days turnover in debtors. Anything up to 90 days is fine in my opinion.

Also remember that Debtors includes VAT for UK to UK sales.

The mistake you've made is taking Debtors of £13.3m, but then comparing that with turnover of £28.0m which was only for the six month interim period. You always need to annualise sales before comparing it with Debtors. Easy mistake to make, which is why I always double-check whether I'm looking at full year or interim figures.

Cheers, Paul.

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Gostevie 16th Dec '13 23 of 23

In reply to post #79948

Many thanks to Paul and bezhe. Your answers to my question are really useful and educational. Very much appreciated.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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