Small Cap Value Report (14 Oct) - SRT, TSTL, YOU, MCB

14th Oct '13 by Paul Scott

17 comments 20908 reads

Good morning! It's going to be a quiet week for me this week, as I'll be home every day in Hove, so we'll be back to early starts here every day. As opposed to constant trips to London for company meetings in the previous 3 weeks, which was informative, but takes up a lot of time.

I'm currently engrossed in the trading statement webcast from Software Radio Technology (LON:SRT), a £36m market cap technology company providing marine tracking beacons. What an excellent innovation from such a small company, to communicate so well with investors and analysts by the CEO giving a briefing by video on the internet, accessible to all. You can even ask questions live. Excellent stuff! I'm very much supportive of this kind of initiative, which levels the playing field so that increasingly private investors are also getting the same quality of information as Institutions, which is how it should be.

After all, it's private investors who set the share price, and create the liquidity in the shares, and narrow the bid/offer spread. So companies & their advisers that ignore us, are not really thinking.

SRT has an excellent story to tell, and it all sounds very interesting, but it's too speculative for me. I generally like companies that are already producing good, sustainable profits, and are reasonably priced. Rather than, as in this case, companies that promise to make profits in future, but where the share price requires you to pay up-front. You need to do a lot of research for this type of growth company, to be sure that the likelihood of them hitting profits targets is high enough to justify being asked to pay up-front for it with a toppy rating. Even then, things can go wrong, so it's not for me.

Where there is a large speculative element to a company's valuation, then personally I feel happier with a sub-£20m market cap. Happier still nearer to £10m market cap.

I should also add that SRT today announces a small acquisition of a company called GeoVS, which has developed 3D marine imaging software. The £955k purchase price has been satisfied by the issue of 3,083k new shares in SRT. Although it doesn't add any earnings at this stage, just costs, expected to be £400k in H2.…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Techno Trousers

14th Oct '13

Paul
What happened to you adding the current price that companies are trading at within your reports? You started a while back and seems to have been dropped again? It's very useful when trawling back over previous reports and in determining the price movement. Not essential, but would be good if you could add in?
Love your reports, I read them every day and miss them if ever there is a day without!
Thx, TT

Paul Scott

Hi TT,

It was too much of a ball-ache to insert the share prices manually, because the £ XYZ format creates the company name & ticker automatically, so it meant that I then had to go back into each article & amend them all manually. There's so much else to remember each morning, I just found it one step too much & kept forgetting, despite a note on my screen, etc.

I nearly always mention the share price in the text anyway, and it only takes a second to glance at the chart to see what the share price was on that day anyway.

I've asked Stockopedia if there's any way then could automate it, so fingers crossed there.

Cheers, Paul.

mteller

Hi Paul

Just for info, I believe Tristel are doing a results presentation tomorrow for investors. At London Captial club, 16.15pm, organised by Walbrook PR (contact lianne.cawthorne@walbrookpr.com)

zoolook

Ball-ache? is that a technical term :-)

Chrisfarrell21

Cracking bit of learning there for a Monday morning, cheers Paul.

Crusty

I gave up on McBride a while ago. Their niche of manufacturing and supplying private label (own brand) cleaning and washing materials, undercutting the giants, seemed very appealing and should be very profitable. However, it seems to me that the huge advertising budgets and the margins offered to supermarkets have all but driven cheap brands from the shelves. After all, if you can make 50% on a large range of superficially competing products then why stock a cheapo? Eastern Europe where McB is doing well does not yet suffer this type of consumer exploitation. It will.

MichaelFBS

As Chrisfarell says very informative and very educational and as Techno Trousers said I always read your reports and really find them, interesting and educational.

The other thing about all this nonsense with adjusted figures is what does it say about the management. On the one hand they play around with the figures (which if one does the research can be seen through) and yet they expect the private investor to entrust their money to them.

Thanks Paul for the insight.

Bezhe

Those with a few grey hairs (or none at all) will remember the forerunners of exceptional items - extraordinary items and acquisition provisions. They became discredited because of abuses - recurring annually etc - and were eventually knocked. Exceptional items were supposed to be included before arriving at EPS but obviously, this "adjusted" result mess is taking things in the same direction. Keep up the pressure to make it unacceptable. (Incidentally, do the auditors have no say in these things?)

Katewarren

Sounds as if, in some cases, the adjusted eps has become a form of legal trickery designed to "pull the wool" over the eyes of potential investors. Thanks Paul for your detailed analysis. I agree that a new Accounting Standard is required. In the meantime we can vote with our wallets and refuse to invest in such companies. Perhaps when you do "name and shame " we private investors might like to send the " investors section" of their company website an email saying why we will not be investing in their company ! ..........just a thought !

Hi Bezhe,

Your historical perspective ties in with my recollection too. When I began my accountancy training in the early 90's, I recall that Extraordinary Items (which had been widely abused), and over-provisioning for restructuring, were being outlawed by new accounting standards. FRS3 I think it was.

But since then, exceptional items crept in, and then companies seemed to just make up their own definitions, with them recently settling on non-recurring, or adjusted items, presented in the narrative to the results. Brokers have been persuaded to run with these adjusted figures too, so the overall result now is that in some sectors where it's abused greatly (especially software companies), the market is really over-valuing a lot of companies because the EPS figure being used is a greatly inflated figure that adjusts out a lot of costs which must be accounted for.

YouGov was a pretty shocking example this morning, Globo has accounts that greatly exaggerate real profit (if there is any?) in my opinion, and also has the red flag of very stretched debtors.

So there is clearly a cycle here - companies abuse accounting standards increasingly, until a new accounting standard is required to tighten things up again. Then companies spend the next few years conforming, until some clever dick comes up with a way to get round the new rules, then others gradually follow suit.

So I wonder what the accounting standards people have got planned in this regard? Something obviously needs to be done.

In the meantime, I wonder if Terry Smith is free to write another book about all these accounting tricks? Maybe I should write a book on it?! There are enough topics to fill a book - adjusted earnings, excessive Director remuneration, overseas companies Listing on AIM because it's unregulated, Chinese companies & their fantasy accounts, the weak Nominee system that disenfranchises many shareholders, Placings which hand discounted shares to Institutions and by-pass private investors, and those are just the ones I can think of off the top of my head.

Regards, Paul.

Devlishcunning

Good afternoon Paul,
What have you done to upset spaceandpeople?

Geoffclark,

LOL nothing! I've also been scratching my head as to why the share price at Spaceandpeople (LON:SAL) has come off so sharply, since there has been no news from the company. Must just be the ebb & flow of buyers & sellers?

Still someone dumping shares in a nice company at a low valuation just creates a buying opportunity for those of us who've done our research & have some spare cash on the sidelines ;-)

There are always bargains to be had in small caps, even when the market overall is frothy.

Cheers, Paul.

Leven

Hi Paul - there is plenty of material for a book there! I would also love to have a read of your unpublished chapter for Free Capital if you'd be willing to share it? Thanks!

Hi Leven,

I might have a serious think about the possibility of writing a book on what's wrong with the markets & accounting practices at the moment. After all, it was the making of Terry Smith when he wrote "Accounting for Growth" back in 1992. Getting bad practice publicised widely is the first step to improving things.

As regards the chapter on me in Free Capital, which didn't make it into the final book, I've probably already said too much about it, so it might be worth querying it with Guy Thomas, after all he wrote the book. My chapter wasn't about crowing about how well I'd done in the good years, but I used it as an opportunity to warn people of the dangers of what could go wrong through hubris, the dangers of excessive gearing through Spread Bets, and other dangers such as lack of liquidity in troubled markets, and how to survive a market meltdown such as 2007-8.

Such a pity that it didn't make it into the book, but the publishers only wanted success stories, not roller-coaster stories. That's all very well, but I actually think showing people how to avoid the dangers is more important than giving examples of success. If you protect the downside, then the upside tends to look after itself.

Cheers, Paul.

BrianGeee

15th Oct '13

The biggest problem with Adjusted EPS figures is that Bloomberg and Reuters use them in preference to the real figures, no matter how reasonable or unreasonable the adjustments.
BTW, I thought 'Exceptional' had now been replaced by 'Significant', but it makes no difference if management have created the new category of 'Adjusted'.

Monty9

16th Oct '13

On the same subject, the mention of EBITDA sends me immediately to the Depreciation and Amortisation lines in he P&L. Of course EBITDA is relevant when buying a business for £1 from an administrator / liquidator - someone else has already paid for the capital.

20th Oct '13

Brian,

Absolutely, I agree. To my dismay I've found that broker forecasts seem to all accept without question the management definition of adjusted EPS, and hence calculate forecasts on the same basis. This means that forecasts often have to be taken with a pinch of salt, or at least drilled down into to find comfort into their reasonableness.

There is a risk that whole sectors of the market could become significantly overpriced, if this trend continues, since people will be paying a PER of say 15 times grossly inflated EPS, meaning that in reality they could be paying a PER of 50 or more, without even realising it! That's the sort of stuff that sows the seeds for a crash.

Regards, Paul.

Small Cap Value Report (14 Oct) - SRT, TSTL, YOU, MCB

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

17 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...