Small Cap Value Report (14 Feb 2017) - SXS, PEB, RWS, PDG, ALT

Tuesday, Feb 14 2017 by

Good afternoon!

I'm planning to cover a couple of today's trading updates, plus the full year results from Spectris. Feedback is very welcome as usual - especially in helping me to understand which companies are most in demand, which will influence future reports.



Spectris (LON:SXS)

Share price: 2500p (+3%)
No. shares: 119m
Market cap: £2,980m

I'll keep this brief since everything seems to be going pretty well for Spectris at the moment, after a difficult year but with an improving trend in the final quarter. Like-for-like sales finished down by 2% (they had been running at -4% prior to the final quarter).

This is a global instrumentation/controls business - giving exposure to a wide range of industrial markets.

There is currently some change afoot:

Our strategy is evolving from being the supplier of products towards the provision of complete solutions (a combination of hardware, software and services) to our customers, based on our deep application and technical expertise. As our customers focus on their core activities and seek to reduce cost and complexity, they have a greater need to outsource services to a trusted, reliable partner who is able to deliver high quality technical solutions.

Project uplift: A new project, expected to cost £45 million in one-off costs, but which will result in annualised cost savings of £35 million - a highly material amount.

Results: there was unfortunately a large impairment of goodwill, creating a discrepancy between adjusted and reported results.



Always worth investigating impairments:

The reported operating profit included a non-cash impairment charge of £115.3 million pre-tax relating to a write-down of the balance sheet goodwill and other intangibles associated with Omega Engineering ('Omega') and ESG Solutions ('ESG'). The impairment charge arose from the recent weaker trading performance due to the challenging conditions experienced, particularly in North America, and ongoing process improvement requirements at Omega and for ESG, the continued weakness in the global oil and gas markets.

Dividend: up by 5%, made possible by 113% of adjusted operating profit being converted into cash.

My opinion: 

I've always perceived this to be a very good-quality business - too large to get a good handle on without doing a lot of detailed research, but almost certainly worth considering for a diversified FTSE-250 portfolio. Diversified exposure to niche industrial services, along with a…

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All my own views. I am not regulated by the FSA. No advice.

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Spectris plc is a supplier of productivity-enhancing instruments and controls. It operates through four segments: Materials Analysis, Test and Measurement, In-Line Instrumentation and Industrial Controls. The Materials Analysis segment provides products and services that determine structure, composition, quantity and quality of particles and materials, during research and product development processes. The Test and Measurement segment supplies test, measurement and analysis equipment, software and services for product design optimization, manufacturing control, microseismic monitoring and environmental noise monitoring. The In-line Instrumentation segment provides process analytical measurement, asset monitoring and online controls, as well as associated consumables and services for primary processing and the converting industries. The Industrial Controls segment provides products and solutions that measure, monitor, control, inform, track and trace during the production process. more »

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Pebble Beach Systems Group plc, formerly Vislink plc, is a software and technology company. The Company is engaged in the collection and delivery of video and data from scene to screen. The Company's Pebble Beach Systems division is a developer and supplier of automation, Channel-in-a-Box and content management software solutions for television broadcasters, cable and satellite operators. For the broadcast markets, the Company provides wireless communication solutions for the collection of live news, sport and entertainment. The Company's products include Marina, which is an enterprise level playout automation platform for multi-channel applications; Orca, which is an Internet Protocol (IP)-enabled cloud-based integrated channel delivery solution; Dolphin, which provides multi-format integrated channel delivery solutions based on information technology (IT) hardware, and Stingray, which is a self-contained Channel-in a-Box. more »

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RWS Holdings plc is a holding company, which provides patent translations, intellectual property support services, technical and commercial translations and linguistic validation services, through its subsidiaries. The Company's segments include Patent translation division, Life science division, Commercial division and Information division. The Patent translation division provides patent and technical document translation and filing services with offices in the United Kingdom, the United States, Europe, Japan and China. The Life science division provides technical translations and linguistic validation to medical and pharmaceutical sector. The Life science division includes Corporate Translations Inc., and medical translation and Pharmaquest linguistic validation businesses. The Commercial division provides non patent technical translation and localization services. The Information division offers patent search, retrieval and monitoring services, and patent database service, PatBase. more »

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  Is Spectris fundamentally strong or weak? Find out More »

15 Comments on this Article show/hide all

alterego 14th Feb 1 of 15

RWS has issued an upbeat AGM statement, an acquisition and a placing. The shares look pricey, but they always seem to be highly rated.

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Gerry43 14th Feb 2 of 15

Any chance of taking a look at Pendragon today Graham?

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Ramridge 14th Feb 3 of 15

alterego - I had a good look at RWS Holdings (LON:RWS) this morning. I like the acquisition as it seems to be on modest multiples. However as you say, RWS's ratios suggest the shares are over-priced. I calculated that any positive impact from the acquisition would still make the shares over priced IMO.
So reluctantly I did not buy any.

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sharw 14th Feb 4 of 15

Pebble Beach Systems (LON:PEB) is worth a mention. On January 16th Paul Scott referred to "the idiot in charge (Hawkins), who has run this company into the ground". Today it has been announced that he has been given the order of the boot. Alleluia.

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Bonitabeach 14th Feb 5 of 15

In reply to sharw, post #4

Be careful what you wish for - he may just have made for the exit with his payoff before the administrators walk in.


No position.

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Graham N 14th Feb 6 of 15

Thanks very much, I'm covering RWS and PEB and will also check if I can add something on PDG.

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bestace 14th Feb 7 of 15

RWS Holdings (LON:RWS) has always looked expensive, yet their revenues and profits continue to grind higher and higher each year with the share price following.

There's no arguing with the quality metrics here and they have a decent track record on acquisitions. This latest acquisition seems to fit the mould with healthy margins, they are paying what seems to be a reasonable price with dilution held to a minimum. I also like that they are diversifying away from the patents business.

I'm happy enough to continue holding for now.

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tabhair 14th Feb 8 of 15

In reply to Bonitabeach, post #5

The most recent annual report says he is entitled to 12 months salary, which means another £360k goes out the door for a company that is already in breach on banking covenants. That is a real kick in the teeth for suffering shareholders.

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alterego 14th Feb 9 of 15

re RWS, Graham you asked if the growth was all due to the size of the market. The answer is partly yes as the number of patent applications is growing each year but there's competition for translation services from less qualified suppliers and machine based translation. My understanding is that RWS is highly regarded for its accuracy and reliability. Most of its staff are graduates and quality is paramount when dealing with large multinationals who will not tolerate sloppy work. Who do you turn to when you need a patent translated into multiple different languages for all the territories your corporation operates in? They also own and operate a searchable database of more than 47m patent families which is a pretty unrivalled source of data going back to 1990.

Andrew Brode is the driving force behind the company and owns 41% of the stock so he's clearly got a huge amount of skin in the game. I like the fact that RWS are very selective in the way they grow the business as the track record demonstrates. I'm inclined to believe the broadening into life sciences will pay off.

I've had a holding in RWS since 2010 when the SP was under 60p and although I always think the p/e might be overcooked, I've resisted the temptation to believe it.

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Gostevie 14th Feb 10 of 15

Hello Graham,

I have no personal knowledge of such things, but a friend of mine who is a recently retired Patent Attorney told me that Companies like RWS Holdings (LON:RWS) could face a threat from the new European Unitary Patent:

I stress again, no personal expertise in this subject.


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LongbeardRanger 14th Feb 11 of 15

In reply to Gostevie, post #10

Hello Steve,

yes, this is an issue RWS have been drawing attention to for a while. You can find discussion of it in their most recent annual report. They anticipate "minimal revenue loss in FY17" and say something a bit more vague relating to 2018 and beyond. To be fair to them, I dom't think this is evasiveness - I think they genuinely don't know what the effect will be.

The acquisition of CTi last year and now LUZ this year means that, while RWS' biggest source of revenue is still patent translation, it's not as dominant a source of revenue as it once was.



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alterego 14th Feb 12 of 15

RWS and the European Unitary patent issue boils down to the desire to have a single patent which applies in multiple countries. It sounds sensible but the evidence so far is that large corporations do not want to risk a system that is untested while they have the option of individual patents they know have legal resilience. As with many things, better the devil you know.

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LongbeardRanger 14th Feb 13 of 15

In reply to alterego, post #12

Yes - especially so where the cost of the individual parents are low in the context of their potential value.

I do expect the unitary patent to gain traction over time, but I don't think there will be sudden mass take up of it.

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jonesj 14th Feb 14 of 15

Purchased RWS in 2010 for £2.57.
They rose to over £8, then had a 5:1 stock split.
Current price is £3.55.
So effectively 6.9x original purchase cost.

I continue to hold, but whether I should do that at the current valuation is another question.

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samanddee 14th Feb 15 of 15

Any chance of covering Melrose Industries - not small cap but one that seems to get little attention and had a stellar year or so. Is this another one to price on PEG perhaps?

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About Graham N

Graham N

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified and hold an audited, FTSE-beating investment track record.  Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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