Small Cap Value Report (13 Jun 2014) - JPR, TRT, COMS, BON, ESR

Good morning! I'm using a different computer today, so hopefully the formatting will be  a bit better than yesterday's shambles! Although lying in a hammock in the garden is presenting some challenges with respect to posture whilst typing this, but it seemed too nice an idea not to try out!

Johnston Press (LON:JPR)

The result of their Rights Issue has been announced this morning. I'm scratching my head wondering why there was only 92% acceptance for the new shares at 3p, given that at all times the market price of these shares has been well above that (in percentage terms). So the people who failed to take up their Rights have handed an instant profit to the underwriters, which seems most odd. Presumably then the underwriters will bank that profit by selling the 355m spare shares in the market at 3.9p, bagging a 30% gain? That seems the logical thing for them to do.

Therefore the price might come under some short term pressure possibly?

I'm not familiar with the terms of underwriting agreements, so it might be that they are obliged to find third party buyers for the shares instead?

EDIT: Another announcement has been issued saying that the rump shares have been placed at 3.5p (down from around 3.9p earlier) which explains the price weakness today. The surplus of 0.5p per share over the 3p Rights Issue price will be paid to the people who let their Rights lapse.

Transense Technologies (LON:TRT)

There is a profit warning from this maker of tyre pressure control systems, but it's not a disastrous one, and the company emphasises that it has enough cash.

"The delays in placement of certain new orders is expected to result in an EBITDA loss for the current year, rather than the previously anticipated breakeven result. However, given the encouraging trends in the business including the strong top line growth, robust gross margins in line with expectations and better-than-expected overheads, the EBITDA loss for this financial year will be less than half that sustained in the previous year."

The shares are down about 10% this morning to 6.6p. That values the company at just under £20m. The valuation rests on hopes of future turnover growth, but at least they have a viable product that is selling, albeit not yet in properly commercial quantities. So it's not a complete punt, and good growth in percentage terms is being achieved. Might be worth doing some more digging, for people who like early stage companies. Although this company has been around for a long time, so it's a rather stale story, which could limit the upside.

Coms (LON:COMS)

I reported on results from this company a few days ago. A rather embarrassing RNS today says the auditors have suggested (or required?) a correction to the reported financial highlights, which reduced EBITDA from £1.4m to £827k, so quite a big correction. Although it doesn't affect the profit before tax number.

It looks as if the shares were suspended briefly, but are now trading again. This stock looks to have been over-hyped in my view, and has now more than halved from its peak a few months ago.

We need to be vigilant over market caps, as in the euphoric market moves of the last year, some valuations completely lost touch with reality. That's what happens when you have lots of market participants who follow momentum & short term trading strategies. They distort the market by taking speculative shares too high in the buoyant times, but they also create wonderful opportunities for value investors in bear markets, by selling at irrationally low valuations.

They also create great opportunities for shorting too, although timing is everything with shorts. After all, if a share is already priced at (say) 5 times what it's really worth, then there's nothing to stop it going to 10 times or 20 times.

Bonmarche Holdings (LON:BON)

This is a recently floated womenswear value retailer. It used to be part of a group with Peacocks. Results for the year ended 29 Mar 2014 have been published this morning, and look good. Profit before tax is up 66% to £8m. 

The EPS figures are a bit confusing, and I can't seem to find a pro forma pre-exceptionals EPS figure, which is what I need to see to work out the PER.

It made £11.5m pre-exceptional operating profit, so knock off a bit for finance costs, and notional tax, and this arrives at approximate earnings of c. £9m - so I'm trying to arrive at an estimate of the company's underlying level of profitability.

The market cap is currently £142m (at 282p per share), so that looks to be a PER of just under 16, which is probably about the right price.

The only thing I would say is that Bonmarche has quite a low operating profit margin, at about 5%, so if they got their product buying wrong, and/or in an economic downturn, then the business could quite easily get into trouble. When you look at the retailers that went bust in 2008 onwards, it was the also-rans with low operating profit margins. So this type of stock is good in a period of economic growth, but one to quickly dump the moment the economy takes a downturn.

It only has about £11m in net tangible assets, so there's not any support for the valuation from the Balance Sheet. Although retailers have favourable working capital characteristics, since customers pay immediately rather than on credit. Therefore a much leaner working capital position is perfectly sustainable.

I like that Bonmarche target the under-served over 50s market, whereas most womenswear retailers chase after the crowded 15-35 age market. There's not enough margin of safety in the current share price for my liking, it's probably priced about right rather than being a bargain. 

Ensor Holdings (LON:ESR)

Results for the year ended 31 ar 2014 have been published. This is a supplier of building products, etc.

EPS for continuing operations fell from 4.8p to 4.3p, which they say is as expected.

In terms of outlook the company says;

"There is good visibility of orders for the coming year, which will be bolstered by the delays experienced throughout the current year, but their timing will remain critical to enable their fulfilment."

At 67p the shares don't look a bargain on a PER basis - that's a PER of 15.6, which is a tall order for a small cap. The market is therefore already pricing in improved earnings. I feel that small caps generally are over-priced at the moment, although you can still uncover bargains.

There is a small pension deficit, and it has moved from a small net debt to a small net cash position.

That's it for today, and the week.

Regards, Paul.

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