Small Cap Value Report (14 Apr 2015) - PRV, AN., FLO, MANX

Tuesday, Apr 14 2015 by

Good morning! Today's report is a bit earlier than usual, as I have to be in Reading by noon, for an investor lunch. It's certainly going to be a busy fortnight - on Saturday there is the UK Investor Show, and I'm delighted to have been asked to appear on a small caps/value investing panel with Nigel Wray and Paul Jourdan of Amati. So it's quite something for a humble blogger to be sitting alongside such high profile investors!

Then next week, on Thu & Fri, it's the latest Mello event - where I've been asked to do a talk on Balance Sheets, and I'll also be doing a session explaining in more detail the dangers of spread betting - and what specifically went (disastrously) wrong for me in 2008, which I've mentioned here (and elsewhere) many times before. I think it's important to be open about, and learn from, one's mistakes, as well as the successes, as hopefully other people are then forewarned about what can go wrong once gearing is involved.

My feeling is that with this bull market now looking long in the tooth, and with plenty of over-valuation around, there's an increasing likelihood of another big shock to the system at some point - so hopefully my warnings might help one or two people avoid over-extending themselves in the good times?

Porvair (LON:PRV)

Share price: 303p
No. shares: 44.8m
Market Cap: £135.7m

Trading update - this specialist filters company is just over a third of the way through its current financial year, ending 30 Nov 2015.

I feel the company has managed investor expectations well, in that it has been open about last year's results including some large one-off contracts, which won't recur. Therefore investors were prepared for softer figures this year, and hence have not gone into a panic about that.

Today's statement says;


I think it's stretching credibility somewhat to strip out the big contacts from last year, and then say that "underlying revenue" is 6% ahead, whilst then saying in the next paragraph that it's actually 4% lower.

There's no mention of whether profitability is in line with expectations or not, but I suppose that since revenues are "just ahead of management expectation" then it's reasonable to assume that profits should be in line with expectations.

The outlook sounds solid too, so there's nothing to panic about here.


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Porvair plc is a specialist filtration and environmental technology company engaged in the development, design and manufacture of filtration and separation equipment. The Company's operating divisions include Metals Filtration and Microfiltration. The Metals Filtration Division designs and manufactures porous ceramic filters for the filtration of molten metals, principally aluminum. The Microfiltration Division designs and manufactures a range of filtration equipment for application in aerospace, energy, bioscience, water and industrial applications. It is developing a range of products, including the products for the manufacture of turbine blades, solar panel manufacture and energy storage. It operates Microfiltration division through its subsidiaries, Porvair Filtration Group, Seal Analytical and Porvair Sciences. It operates Metals Filtration Division through its subsidiary, Selee Corporation. It has plants located in the United States, the United Kingdom, Germany and China. 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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  Is LON:PRV fundamentally strong or weak? Find out More »

12 Comments on this Article show/hide all

Darktrade 14th Apr '15 1 of 12

To be fair to Porvair they have been pretty consistent in explaining the 'one-off' nature of a number of large contracts, & their exceptional impact on profits last year.

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Paul Scott 14th Apr '15 2 of 12

In reply to post #96600

Hi Darktrade,

Absolutely, which is exactly what I said in the second paragraph of the section on Porvair (LON:PRV) !

The company has indeed managed investor expectations well by flagging up the issue of non-repeating large contracts well in advance.

Regards, Paul.

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janebolacha 14th Apr '15 3 of 12

Paul, tha comments from Flowtech (FLO) you highlight are in line with comments today from Northbridge (NBI):

"Capital investment in the oil and gas industry as a whole has seen a noticeable reduction in almost all areas of operation and recent M & A activity amongst the majors will lead to further consolidation in a sector which includes many of our key customers. Underlying demand for our goods and service will take some time to stabilise and, as current contracts unwind, replacement contracts are likely to be harder to secure."

Imo, food for thought for oil services stocks.

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Darktrade 14th Apr '15 4 of 12

Oops that will teach me to skim read your reports! My full attention from now on.

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imranawan 14th Apr '15 5 of 12

In reply to post #96609

Agree with your points Jane, and don't think we've reached the bottom with oil services stocks. Am surprised Northbridge Industrial Services (LON:NBI) is still on a relatively high PER, given the wobbly outlook statement. Projected EPS for 2015 is 35.6p, and given they missed EPS for 2014 I can't see how this is realistic. I think a lot of oil services stocks could still fall further.

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Beginner 14th Apr '15 6 of 12

In reply to post #96609

Oil services stocks in general, especialy Petrofac (LON:PFC) and Hunting (LON:HTG) , have become a trader's dream, but with all the uncertainty in the field I cannot see them as a viable long-term investments currently. As Jane has said elsewhere, there are also implications for Pressure Technologies (LON:PRES) . Competition for contracts will become cutthroat. Tenders will be pitched too low, and profits will be slashed for a considerable number of years. Mergers and takeovers may occur, but some companies will also take minor works in-house. This is a very uncertain time.

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djpreston 14th Apr '15 7 of 12

Ah, beginner, but when tings are looking "dodgy" is it not the time to start to dig around for value?

True, some stocks (arguably NBI) still look a bit pricey but there are pockets of value starting to appear - looking at a longer term value basis. PFC looks vulnerable with the debt it carries but AMFW on the other hand looks a lot more interesting at current levels, especially with the benefits to come from improving Foster Wheeler and intergration savings. There will also, IMO, be a rise in strategic M&A as long term bigger players take advantage of depressed prices and sentiment to acquire companies, especially if they can fund it from cash or ultra low rate debt.

With the PE of cash so high at present, using it to acquire other companies is going to be EPS enhancing, even before cost savings etc. Which is why, of course, we are now seeing a rising tide of deals, not just in the O&G space.

Fund Management: European Wealth
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carmensfella 14th Apr '15 8 of 12

Just a reminder that the Mello Workshop event where Paul is appearing in three workshops and also on the MasterClass panel with Ed Croft is next week on Thursday and Friday and the full programme including the company presentations has just been released under the Mello workshops tab here....

We are rapidly selling out to our full capacity for the Thursday in particular so do please book as quickly as you can and tickets can be booked online at the website. The hotel is completely sold out on the Thursday evening when we have a wonderful dinner planned with Gervais Williams speaking to the 150 dinner guests and also Clarke Carlisle the ex PFA chairman.

We have a great two day event lined up so do come and join us but please book quickly and start selecting which of the fifty workshops you want to attend.


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Beginner 14th Apr '15 9 of 12

In reply to post #96621

You are quite right DJ. I actually like Hunting (LON:HTG) , as there is comparatively little debt, and some good longer term contracts in place. I simply lack the brave gene!

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janebolacha 14th Apr '15 10 of 12

This was from Hunting's last annual results:

"Over the last few years, a quiet revolution in North America has taken place which has reshaped the supply of hydrocarbons. Hydraulic fracturing (fracking) initially transformed the US natural gas market from a concerning deficit to an exportable abundance. Further advances in fracking and horizontal drilling have now made a positive impact on US oil production and coupled with global supplies, have created a temporary imbalance to the world's supply/demand curve.

Accordingly, oil prices have declined dramatically, and the global oil and gas industry is quickly resetting its expenditure and profitability expectations. Rig counts continue to decline each week with varying estimates of future levels. Operators initially set modest targets of contraction, but have escalated those reductions depending on their geographic focus, debt position and cost structure.

This rapid decline in industry expenditure and activity will inevitably feed through to our revenue and profitability levels for 2015. Depending on the geographic location and product description, profit levels will vary. North America onshore activity will be the most affected and will be the target region for most of Hunting's initial cost actions including, headcount reduction, hiring and salary freezes and capital investment constraints. Since year end, approximately 500 employees or 13% of the Group's global workforce have been affected. The offshore Gulf of Mexico, primarily deep water drilling and production, will have modest changes in rig count and expenditure.

Internationally, we expect the Middle East and Asia Pacific to remain at activity levels seen in 2014 however, tubular margins will decline. Canada and the North Sea has and will continue to experience contraction in rig counts and activity at varying levels dependent upon the individual operator's cost points.

Despite the subdued consensus for the short term oil market, Hunting remains confident in the long term fundamentals for oil and gas demand. Our capital investment programme for additional and more efficient capacity will be completed throughout 2015 with a strong belief in preparedness for the eventual recovery. Our balance sheet remains solid with modest levels of net debt. Our unique products, global footprint, flexible manufacturing capacity and experienced personnel will enable us to manage the downturn yet capture opportunities which often appear in cyclical environments.

We do not know the length or depth of the industry contraction. We will however endeavour to provide updates more often than required regarding the activity and developments we see in the markets and clients we serve. Your Company has an excellent team of experienced managers to respond quickly during this period and react to the changing developments of individual clients, commodity prices, geopolitical influences and financial requirements. They remain committed to improving further the Company's Health, Safety and Environment record. They will introduce new products that will aid in reducing customer costs for oil and gas extraction. And finally, they will be mindful of shareholder value and the need to operate as if Hunting were their personal company. "

That is a very cautious outlook statement with next to nothing in the way of profit guidance for the current year.

Hunting is also a manufacturer of equipment for the N. America fracking market and so might well be exposed to a serious downturn there, beyond the effect on oil services as such.

Imo, it was worth buying at around 430p. Now, it wouldn't be on my buy list at 570p, except as a potential takeover candidate.


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janebolacha 15th Apr '15 11 of 12

From today's Q1/15 update from Hunting:

"During Q1 2015 market conditions across the oil and gas sector continued to be volatile, with global rig counts continuing to decrease, particularly in North America where data indicates a 46% decline since the start of the year. WTI oil prices averaged $49 per barrel during the first quarter of 2015, and capital expenditures across the industry have continued to reduce or be placed on review. This market environment has resulted in operating profits across Hunting's business being approximately 60% lower during Q1 2015 compared to Q1 2014."

If extrapolated over FY15, a 60% fall in operating profits would probably mean no nett profit at all in 2015.

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Beginner 15th Apr '15 12 of 12

In reply to post #96735

Top job Jane. Hunting (LON:HTG) and Amec Foster Wheeler (LON:AMFW) are big enough to weather the storms and may even be seen as takeover targets for their assets. However they are far too expensive now. I would like to see the former at sub 400 again, possibly 335 or so, and the latter at around 620. Those number mean the forcasts and figures add up to long term value. We must be patient (and probably disappointed).

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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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