Small Cap Value Report (14 May 2014) - PURI, COMS

14th May '14 by Paul Scott

10 comments 12594 reads

Good morning.

PuriCore (LON:PURI)

This company has been discussed a lot lately, as it's the one where the share price suddenly dropped 25% due to a clumsy seller of 1m shares, who appeared to dump them through Peel Hunt at 25p a couple of days ago. That block of shares seemed to have cleared by yesterday, as I was told by several people that they had tried to buy in size, but couldn't get filled.

The company has issued an IMS this morning, but it's nothing to do with the share price movement, it's following the same timing as last year, when an IMS was issued on 17 May 2013, also covering the company's Q1 performance.

The key part of today's IMS says;

Revenue for the Group decreased 2.9% to $10.6 million (6.4% at constant currency) in the first quarter of 2014 (Q1 2013: $10.9 million), as higher recurring revenues were offset by delays in capital orders. Cash and cash equivalents were $3.9 million as at 31 March 2014 (as at 31 December 2013: $3.4 million).

It's good to see that the cash balance has increased by $0.5m since the year end. Note that this is a net cash balance, as there is no debt here - the Balance Sheet was restructured in early 2013, and debt was eliminated.

A small reduction in turnover for Q1 sounds consistent with the outlook statement published with their calendar 2013 results published on 24 Apr 2014, which said;

Consistent with market expectations, revenue is expected to soften in the short term as we balance declining revenue from capital equipment and grow consumables and other recurring revenue.

On their endoscopy product, the commentary sounds positive to me;

The (6%) decrease (in turnover) was due to delays in capital orders and planned heavier sales in the second half of the year in anticipation of the launch of the new state-of-the-art endoscope washer disinfector, RapidAER^®. During the quarter, the Endoscopy business completed final testing of and received CE marking for the new product. Market acceptance of RapidAER has been favourable, and sales orders are already in hand with shipments planned to commence in June.

The statement overall is rather unsatisfactory, in…

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jakedog2

14th May '14

Paul
Ref Puri core - forward PER of 13. I do not think it is cheap at that ratio when as your graphic shows, it has not made a profit in the last 5 years.

There are profit making companies (granted not as many as there was this this time last year) out there on a lower PER & paying a dividend.

So i'm struggling with risk reward even at this depressed price.

Thoughts appreciated
JD2

FREng

IMS today. No forward guidance. No use of the "confidence" word.

Paul Scott

Hi JD2,

I find that the PER is pretty useless when companies are at, or near breakeven, because it is so volatile and can give meaningless results.

With PuriCore (LON:PURI) there is an opportunity for the company to grow into something much bigger, and if it does that, then the valuation could be 5-10 times the current price. That's what interests me, not whether it's on a PER of 5, 13, or 75 next year.
It has contracts with 5 big supermarkets, and if that rolls out further internationally, then you could see the product revenues really start to build. IF that happens, then the market will dramatically re-rate the shares, and put it on a growth company rating, anticipating a big rise in profitability. There's no guarantee that will happen of course, it's just a possibility.

It's not for everyone, but personally I like the potential here. No idea if it will deliver on that potential or not. We'll just have to wait & see. It's more a growth, than a value investment though.

Cheers, Paul.

GrindertraderUK

Paul,

Thanks for the comment on COMS. It is a very popular BB stock especially on the London South East board, and the PI's are really pushing the stock value high. But the CEO is also suggesting share price targets of over 30p by the end of the year!

So much speculation on this stock with the high volatility of the BB .

I really respected your opinion on this

johnrosier

Hi Paul,

I recently bought a small initial stake in Coms plc and my write up on Stockopedia is attached.

http://www.stockopedia.com/content/coms-plc-has-the-market-provided-a-good-entry-point-83244

I reckon it was very overpriced when you last commented on it but at around the 6.0p level I reckon it will not be far off 1.0x sales for the current year ending January 2015.

Hi Paul,

Thank you for the explanation & the rationale behind your thought process
JD2

Mark Tughan

I can echo Paul's sentiment on situations where companies have successfully made the transition from story stock to substantial business - even if the path has been bumpy.

I backed a tiny company called sprue Aegis in around 2000. It was a bit of a one product wonder and it bumped along for a while without gaining much traction. When I saw from their accounts that a fund raising was fairly inevitable, I contacted the company to learn more. As a result of meeting the team I was re-assured and ended up investing significantly, both in a private placing, and by market purchases. This was around 2006. My money ostensibly went in to help the company develop a US presence, ostensibly with a new JV partner (DuPont no less) and the irony is that this adventure still came to nothing and DuPont even sued for their money back! But I was still impressed with the management, the wider business proposition, and progress on other fronts the company was making.

Cut to today and Sprue Aegis has recently listed on AIM with a market cap or around £90m. My average purchase price was 20p and the SP today is 225. I did sell some at 50p and 60p to help fund my business but as a result of this investment, I have just had to seek the "individual protection" for my pension that preserves the old £1.5m lifetime limit!

A 10 plus bagger, that is also paying a 6p divi - that's a 30% yield to me at my 20p cost.

This is what can happen if you can identify the right company - even a former serial disappointer, but one that has over time validated it's business plan, is well run and is in the right (growth) sector and markets. Sprue was listed on ISDX (formerly Plus, formerly Ofex) so there was persistent and long standing undervaluation and poor liquidity, but gradually the team there built a decent business, growing consistently, starting to pay a (rising) dividend. An unsolicited and opportunistic takeover offer was a further catalyst in the eventual re-rating and move to AIM but it was happening anyway - that's what probably prompted it!

So I am a fan of PuriCore, for largely the same reasons as Paul. It's relatively early days but this ticks many of my boxes. There is another "former story stock making good" candidate that I have been following and buying that announces results this week, and if Paul decides to discuss it , I will join the debate for sure.

Edward Croft

Sprue has been a great win for many subscribers here. We highlighted it here as a top ranked stock over a year ago at about 80p - it's now at 225p. Well done 10-bagging it !
http://www.stockopedia.com/content/sprue-aegis-bid-a-win-for-sound-investment-methodologies-72915/

kevanp

Hi fredericktug — or may I call you Fred?

By comparing PuriCore (LON:PURI) with Sprue Aegis (LON:SPRP) you make a very good case for the former. I too have done well from my Sprue investment — albeit from a more recent, higher base than you.

I'd love to know what Puricore was up to eight years ago, when you made your significant investment in Sprue. Then the Puricore price was around 800 — a sort of reverse 25-banger!

I'm attracted to the areas in which Puricore operates. If only I were more convinced of the practicalities of a £17m market cap company with 160 employees working on perishable food in US supermarkets, endoscope decontamination in UK hospitals, and prescription wound care in the US. Staggering potential I'm sure — if only someone can pick up the ball and run with it.

More research I feel.

Best, Kevan

GavinT

15th May '14

Kevanp has a point.

Puricore's operations seems to be in geographical hodgepodge. Why perishable food in the US and endoscope decontamination in the UK? Were they not able to sell perishable food in the UK and endoscope decontamination in US?

I am guessing this has something to do with an acquisition a few years back without the promised commercial synergy?

Small Cap Value Report (14 May 2014) - PURI, COMS

PuriCore (LON:PURI)

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Paul Scott

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