Small Cap Value Report (13 Sep 2016) - CHRT, FLO, GOAL

Tuesday, Sep 13 2016 by

Good morning!

We have about 20 people coming along to ShareSoc Brighton tonight, which is (just) above the threshold where it's worth doing. So I'm putting the finishing touches to my talk on small caps.

I'm dreading the train journey from London to Brighton. It's bound to be packed full of people who've thrown a sickie from work, to do some sunbathing! Summer is putting in one final appearance today apparently.

Cohort (LON:CHRT)

Share price: 315p (up 1.6% today)
No. shares: 41.0m
Market cap: £129.2m

AGM statement & Q1 update - this group of defence sector companies has a 30 April year end. So it's reporting today on the first quarter (May, June & July), although the figures given are as at 31 August, so that's actually 4 months, and not just Q1.

Anyway, the order book looks strong, and the all-important in line with expectations message is given;

The Group's order book stood at £128m as at 31 August 2016, underpinning a higher proportion of our externally forecast revenue for the year compared to this time last year.

The pipeline of orders beyond this and expected renewals give us confidence that the overall performance for the year will be in line with expectations, despite SCS's market in technical consultancy remaining a challenge.

The cash position remains healthy, although note that most of it is ear-marked for hoovering up minority shareholders in existing subsidiaries;

"The group's net funds as at 31 August 2016 stood at £14.4m.  The reduction in the Group's cash position since the year end was as signalled in our final results statement, stemming from the partial reversal of working capital inflow during a very strong fourth quarter of last year.

A further £9m is expected to be spent in the rest of this financial year in acquiring a further 23% of EID, taking our holding to 80%, and the remainder of the shares (49.999%) of MCL, taking our holding to 100%.

That all sounds fine to me. Also, note the valuation is hardly demanding;


My opinion - it looks good value to me. Although I'm not madly keen on this sector, as contracts can be lumpy, leading to the ever-present risk of a profit warning. Or, something might go wrong with a major contract.

Mind you, at the current valuation, the risks seem…

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Cohort Plc is a holding company. Its business segments are Chess, EID, MASS, MCL, and SEA. It provides a range of services and products for the United Kingdom, Portugal and international customers in defense and related markets. Chess Technologies, through its operating businesses Chess Dynamics and Visoin4ce offers systems and technologies for detecting, tracking, classifying and disrupting naval, land and air threats. EID designs and manufactures advanced communication systems for the global defense and security markets. MASS is a specialist defense and technology business, focused mainly on electronic warfare, information systems and cyber security. MCL is engaged in sourcing, designing and integration of communications and surveillance technology, as well as support and training for end users including the Ministry of Defense (MOD) and other government agencies. SEA is an advanced electronic systems and software house operating in the defense, transport and offshore energy markets. more »

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Flowtech Fluidpower plc is a United Kingdom-based distributor of technical fluid power products. The Company operates through two divisions: Flowtechnology, which is geographically split into Flowtechnology UK (FTUK) and Flowtechnology Benelux (FTB), and Power Motion Control (PMC). FTUK and FTB focus on supplying distributors and resellers of industrial maintenance, repair and operation (MRO) products, primarily serving urgent orders rather than bulk offerings. The PMC division is engaged in the design and assembly of engineering components and hydraulic systems, which are managed by component supply along with a service and repair function. Its business is focused on its distribution offering in over three categories: Pneumatics (products that enable the use of gases to provide mechanical motion), Hydraulics (products that enable the use of fluids to provide mechanical motion) and Industrial (products and accessories that act as conduits for gases and liquids). more »

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Goals Soccer Centres plc is a United Kingdom-based company engaged in the operation of outdoor soccer centers. The Company operates in the United Kingdom and United States, and operates in the operation of soccer centers segment. The Company offers 5-a-side soccer centers across approximately 50 centers in the United Kingdom and one in Los Angeles, the United States. The Company's centers are in locations, including Aberdeen, Beckenham North, Beckenham South, Chingford , Coventry, Sheffield, Norwich, Sunderland, Teeside, Bexleyheath, Birmingham (Perry Barr), Birmingham (Star City), Black Country (Wolverhampton), Kingston (Tolworth), Bradford, Bristol North, Bristol South, Glasgow South, Wimbledon, Plymouth and Heathrow, among others. The Company's subsidiary includes Goals Soccer Centres Inc, which is engaged in the trading business. more »

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

23 Comments on this Article show/hide all

valueman 13th Sep '16 4 of 23

Are you not concerned that the returns FLO makes are derisory and that it ,as Charlie Munger puts it ,over the long term the share price will match the ROCE of a company ?

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doug2500 13th Sep '16 5 of 23

Don't know if I'd recommend buying shares in Thalassa Holdings (LON:THAL). They've gone from being a pure value share IMO to blowing all their cash on non-core investments.

I would however definitely recommend reading the chairman's report as mentioned by grb! Always interesting.

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Graham Fraser 13th Sep '16 6 of 23

In reply to post #150228

It certainly does.

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JohnEustace 13th Sep '16 7 of 23

Encouraging half year report from Keywords Studios (LON:KWS) - up 5.8% as I type. I'm a holder

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oscar247 13th Sep '16 8 of 23


I'm sure readers would appreciate a transcript of your talk at tonight's ShareSoc event.

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warmerjo 13th Sep '16 9 of 23

Brexit has not yet seriously affected FLO, but it is early days. We ain't seen any of the potential
nasty effects of Brexit yet. Costs of imports are bound to rise, this will bring about inflation,
which in turn will push up interest-rates - which would spell gloom for the construction industry

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JDW72 13th Sep '16 10 of 23

OK. As promised, some thoughts on K3 Business Technology (LON:KBT) .

- CEO is becoming chairman and search for a new CEO is in advanced stages. The CEO looked a bit jaded to be honest so I think a change is not necessarily a bad thing.
- The business model is moving from one-off up front payments to per user per year type which impacts on cashflow in the short term but is more lucrative longer term. It's a model that many other suppliers are starting to adopt with Microsoft actually refusing to do anything else for some of their products.
- Restructuring costs are specific to this year (business too big in one geography and synergies being realised in another region). The recent acquisitions won't attract any restructuring costs although it has to be accepted that any new CEO might want to reshape things....
- Recent acquisitions expand geography into Scandi and Germany (DdD) and vertically (Merac)
- MyLocal going into admin cost £830k. No chance of getting anything back.
- On track to be debt free by 2018 (although with the changing cashflow profile I'm not so convinced by this - heading in the right direction though.)
- Pipeline at record levels
- Dividend growing by 0.25p each year. It's covered 14 times so maybe there's something that could be done here?

If you knock off this year's restructuring and acquisition costs and take out the MyLocal impact the market expectations for next year are virtually in the bag already. With the pipeline up 23% I would imagine that there's scope for an upgrade all things being equal.

Draw your own conclusions as to whether it's good value at this level or not.

JDW72 (no position)

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zho 13th Sep '16 11 of 23

>>Costs of imports are bound to rise, this will bring about inflation, which in turn will push up interest-rates>>

Not convinced by that. RPI averaged 5.2% during 2011, caused, I think, by commodities going on a tear due to a construction boom in China. The BoE could see that inflation wasn't caused by increased consumption or wage inflation at home, and sat on its hands.

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jaykaytee 13th Sep '16 12 of 23

Hi Paul, you have previously covered STM, which has published it's results this morning.
The revenue and Profits have dropped but the forward looking statement is interesting.
Just wondered whether you would have time to review them tomorrow perhaps? Would be interested in your thoughts.

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shauniekent 13th Sep '16 13 of 23

In reply to post #150285

STM (LON:STM) - look at cash flow though - it's well above profit. It looks very cheap on fcf/EV basis imo and with positive outlook to boot.

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Otemple1 13th Sep '16 14 of 23

Hi Paul

Any view on IQE?

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jonesj 13th Sep '16 15 of 23

The Sharesoc do sounds interesting, but getting from Milton Keynes down to Brighton for a mid week evening do is difficult, with other commitments like work.

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Paul Scott 14th Sep '16 16 of 23

In reply to post #150234

Hi DurhamMike,

I visited Redstoneconnect (LON:REDS) at their office recently actually.

It's on my watchlist. I like the CEO & FD, but wasn't convinced the value right now is good, in terms of risk:reward.

The broker forecasts look nonsense to me, so the PER would be too.

I'll keep an eye on it for the next 2 years. Could become interesting in due course. But I would ignore that daft forecast.

Regards, Paul.

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Paul Scott 14th Sep '16 17 of 23

In reply to post #150297

IQE - no I didn't have time to look at it, and don't feel I have any understanding of their business.

The clue is that I didn't report on it originally.


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Paul Scott 14th Sep '16 18 of 23

In reply to post #150303

The Sharesoc do sounds interesting, but getting from Milton Keynes down to Brighton for a mid week evening do is difficult, with other commitments like work.

People have travelled down from France, Leicester, and even Abu Dhabi to hear my small cap talks in Brighton.

You're complaining about Milton Keynes?!!!

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Paul Scott 14th Sep '16 19 of 23

In reply to post #150255


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DurhamMike 14th Sep '16 20 of 23

In reply to post #150315

Thanks Paul, look forward to getting a better understanding of it over time, the space is certainly interesting.



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FREng 14th Sep '16 21 of 23

In reply to post #150228

A classic report! Thanks for the link.

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WDWombat 14th Sep '16 22 of 23

My little memo on Cohort written a fortnight ago
'Problem here is the possible exit of Scotland from the Union and the likelihood of an end to Trident if that occurs. Otherwise a vg company and perhaps at 300 worth buying for a probable bumper year in 2018'

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FREng 16th May '17 23 of 23

In reply to post #150264

K3 Business Technology (LON:KBT) is down 40% today.

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

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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