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

Monday, Oct 14 2013 by

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.…

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SRT Marine Systems plc, formerly Software Radio Technology plc, is engaged in the marine technology business. The Company's principal activity includes development and supply of automatic identification system (AIS)-based maritime domain awareness technologies, and derivative product and system solutions for use in a range of maritime applications from safety and security to fishery management and environment protection. AIS is a mesh network radio communications system technology specifically designed for the marine domain, and it uses a combination of global positioning system (GPS) and high frequency radio to enable real time, simultaneous data communication between multiple, independent entities providing information, such as identity, GPS position, speed and other customized data. It offers a range of AIS products and maritime domain monitoring system solutions, which also fuse other maritime sensor technologies, such as radar, closed-circuit television and communications. more »

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Tristel Plc is a United Kingdom-based manufacturer of infection prevention and contamination control products. The Company's technology is a chlorine dioxide formulation. The Company operates through three segments: Human Healthcare, Animal Healthcare and Contamination Control. The Human Healthcare segment is engaged in the manufacture, development and sale of infection control and hygiene products, which include products that are used primarily for infection control in hospitals. The segments products are marketed under the brand, Tristel. The Animal Healthcare segment relates to manufacture and sale of disinfection and cleaning products into veterinary and animal welfare sectors. The segments products are marketed under the brand, Anistel. The Contamination Control segment addresses the pharmaceutical and personal care product manufacturing industries. The segments products are marketed under the brand, Crystel. Its manufacturing facility is located in Newmarket, Cambridgeshire. more »

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YouGov plc is a United Kingdom-based data and analytics company. The Company's segments include Custom Research, Data Products and Data Services. Its suite of products and services include syndicated data products (YouGov BrandIndex, YouGov Profiles, YouGov Pulse and YouGov Reports); data services, including the YouGov Omnibus, and Custom Research. The YouGov Cube, its connected data library, supports all of its products and services. YouGov BrandIndex is a daily brand perception tracker. YouGov Profiles is its tool for audience profiling and segmentation for use by brand owners and the agencies. YouGov Pulse is its real-time online and mobile behavior tracker. YouGov Pulse enables brands and agencies to capture real-time and actual online consumer behavior across laptops, smartphones and tablets. YouGov Report showcases its connected data. YouGov Omnibus finds out people's opinions, attitudes and behaviors. YouGov Custom Research conducts quantitative and qualitative research. more »

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  Is SRT Marine Systems fundamentally strong or weak? Find out More »

17 Comments on this Article show/hide all

Techno Trousers 14th Oct '13 1 of 17

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

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Paul Scott 14th Oct '13 2 of 17

In reply to Techno Trousers, post #1

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.

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mteller 14th Oct '13 3 of 17

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

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zoolook 14th Oct '13 4 of 17

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

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Chrisfarrell21 14th Oct '13 5 of 17

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

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Crusty 14th Oct '13 6 of 17

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.

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purpleski 14th Oct '13 7 of 17

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.

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Bezhe 14th Oct '13 8 of 17

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?)

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Katewarren 14th Oct '13 9 of 17

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 !

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Paul Scott 14th Oct '13 10 of 17

In reply to Bezhe, post #8

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.

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Geoffclark 14th Oct '13 11 of 17

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

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Paul Scott 14th Oct '13 12 of 17

In reply to Geoffclark, post #11


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.

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Leven 14th Oct '13 13 of 17

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!

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Paul Scott 14th Oct '13 14 of 17

In reply to Leven, post #13

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.

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BrianGeee 15th Oct '13 15 of 17

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'.

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Monty9 16th Oct '13 16 of 17

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.

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Paul Scott 20th Oct '13 17 of 17

In reply to BrianGeee, post #15


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.

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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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