Small Cap Value Report (15 Dec 2015) - UTW, TSTL, CFHL, PRES

Good morning!

A fairly short report today, as I've just had news that Mum is coming out of hospital this afternoon, so I've got lots of tidying up to do at her flat, to make it nice for her return.

Utilitywise (LON:UTW)

Share price: 168p (up 20% today)
No. shares: 77.2m
Market cap: £129.7m

AGM statement - the market really can't decide whether the glass is half full, or half empty with this share. Nor can I actually, as my last comments on the company were that the bull and bear case both seemed equally valid to me, hence the logical thing to do was sell up at 195p, and sit on the sidelines.

Today's update sounds reassuring, saying;

We are pleased to announce that the Group has made a solid start to the year, with trading during the period in line with expectations. The pace of recruitment is picking up and we anticipate our position continuing to improve, as per previous market guidance, as the year progresses.

Customer numbers as at 30 November 2015 were 28,507 and our secured future pipeline was £27.7m at the same date.

Broker consensus is for 19.3p EPS this year (ending 31 Jul 2016), so even after today's 20% rise to 168p, the PER is only 8.7, which looks good value. However, it's cashflow that is the big issue with this company. As has been discussed many times before, the company's aggressive accounting treatment means that it books profits often a long time before the cash comes in.

On 27 Oct 2015 the company announced that it had significantly improved cashflow, by renegotiating payment terms with one large utilities supplier. Today, another announcement says this has been extended to a second supplier. More are likely to follow, which should be a good catalyst for the shares to recover further, perhaps?

My opinion - the shares would have made a cracking buy when they recently plunged to about 120p. I was really tempted, but unfortunately didn't have the conviction to buy, as you always worry that a precipitous fall like that is because insiders are bailing out ahead of a profit warning.

To my mind, there are just too many uncertainties around the accounts for this company, and I'm not really keen on the business model of hard selling via call centres, and the obvious conflict of interest between recommending what's best for the customer or taking the highest commission on offer. So having considered it for a while, I've decided not to revisit this share - there are too many question marks.

Tristel (LON:TSTL)

Share price: 146p (up 0.3% today)
No. shares: 42.1m
Market cap: £61.5m

AGM Statement - the company gives a nice clear explanation of what it does, being a;

manufacturer of infection prevention, contamination control and hygiene products

There is also an in line with market expectations update on trading, which again is useful in that it gives specific figures too;

"This is the sixth consecutive reporting period in which we will have achieved year-on-year profit growth. 

We expect unaudited pre-tax profit for the first half to be no less than £1.4 million, compared to a pre-tax profit of £1.1 million for the same period last year - an increase of at least 27%. The full year profit for the year ended 30 June 2015 was £2.6 million. The Board believes that performance continues to be in line with market expectations.

Valuation - the shares have had an excellent year, rising strongly. The shares are barely changed today, despite a positive-sounding update, which tells me that the market has probably now priced-in all the good news for the time being.

Consensus forecast is 5.43p EPS for this year, so at 146p the shares are on a racy current year PER of 26.9. That strikes me as a fairly rich rating for a company that is delivering good, but not exceptional growth.

Outlook - the Directorspeak today refers to overseas growth opportunities, which is probably why investors seem happy to take the rating up to a much higher level than it had previously been on;

Growth is coming from all areas of the business and we are particularly pleased with our progress in China and Hong Kong.

We are satisfied with the progress that is being made on our United States regulatory approval programme."

My opinion - I like the company, but not at the current valuation, it's at least fully priced now, possibly a bit over-priced, in my view, so this looks like quite a good point to bank some profits, in my opinion.

CityFibre Infrastructure Holdings (LON:CFHL)

Share price: 56.5p (down 2.6% today)
No. shares: 105.7m
Market cap: £59.7m

Acquisition & Placing - I was wondering why this share started falling sharply. Now we know why - a large discounted Placing has been announced today, at 50p. Existing private shareholders must be furious, as 160m new shares are being issued - considerably more than doubling the number of shares in issue, but instead of offering them to existing shareholders (which is what's meant to happen, with pre-emption rights being a key principle of company law), the whole lot have been placed with institutions, at a discount.

It's such a large issue of shares that the market price will probably gravitate towards the placing price, so private investors who bought in the market at 70-80p with no knowledge of the fact that a massive discounted placing was being negotiated at 50p, have been absolutely shafted, and are now nursing a hefty loss, and to add insult to injury are not being allowed to participate in the 50p fundraising - there is no Open Offer element included, which is awful in my view. Very bad form.

Clearly news of the placing had leaked out, because the share price fell before this announcement was made. It's a totally unsatisfactory situation, where shares remain trading, despite probably hundreds, maybe even thousands of people knowing about price-sensitive information, and some of them probably broke the law, and engaged in insider dealing.

I feel a better system is needed, with a faster system for raising funds, and share should be suspended once that process begins, because the current system is terrible. You can't help feeling that private investors are seen by the City as cannon fodder, to get share prices up, ahead of discounted placings for the institutions.

There really should be an Open Offer added on to most Placings, to allow existing holders to participate on the same terms as new investors. I appreciate that the outcome of Open Offers is uncertain, and they can flop, but in this case the Placing was underwritten, so there's no reason at all why an underwritten Open Offer could not have formed part of this deal.

Anyway, the deal itself looks quite interesting. CityFibre is buying (for £90m) fibre-optic networks currently owned by KCOM (LON:KCOM) . This greatly increases the number of UK cities that CityFibre serves, and it says that buying existing assets in this was is c.45% cheaper than building them from scratch. Also it saves time.

So a transformational deal for the company, at the expense of its private shareholders, who have been excluded from the deal, and seen their investment sharply sell off as a result. Hopefully they will get their money back in the long run.

I think this is a good example of why capital-intensive, early stage companies are really not worth bothering with. The original investors will usually be diluted so badly by repeated Placings, that it's almost impossible to make a profit from the shares if you invest at the start. Better to wait for the company to disappoint, get the discounted placings out of the way, achieve scale, and then take a look, once it's clear how the business model is likely to pan out in reality.

Pressure Technologies (LON:PRES)

Share price: 192.5p (up 6.4% today)
No. shares: 14.4m
Market cap: £27.7m

Results, 53 wks to 3 Oct 2015 - after a quick scan through these numbers, they look quite reasonable to me. Obviously profit is down heavily, as you would expect from a group with high exposure to the oil & gas industry, but the figures are not a disaster by any means.

I like the introductory statement at the start of the RNS, giving a neat summary;

Pressure Technologies (AIM: PRES), the specialist engineering group, announces its preliminary results for the 53 weeks to 3 October 2015, which are slightly ahead of expectations and show strong cash conversion as the full year benefits of acquisitions come through.

Outlook - the summary and outlook comments have interesting read-across for other resources stocks, and it still feels as if there's no particular rush to get involved in the sector;

This was a tough year for the Group due to the downturn in the oil and gas market. Substantial progress has been made in restructuring to meet the challenges of reduced revenues. With continued pressure on the oil price due to a combination of over-supply and weak demand the Board is of the opinion that any major recovery in that market will not occur before the end of the 2016 financial year. That said, we are structured to expand rapidly to meet increases in demand.

The Precision Machined Components Division and Engineered Products Division have short order to delivery lead times of between two and four months and are therefore expected to benefit very quickly from an upturn.

The Cylinder Division is expected to see a much slower return to revenues from oil and gas as it is reliant on the building of drillships and semi-submersible oil rigs for its larger orders. In the short-term these divisions continue to seek out new markets, products and services whilst at the same time focusing on cost reduction and efficiency savings.

The Alternative Energy Division has a strong pipeline of potential orders as the demand for renewable energy grows worldwide. Development of the division is important to the near-term growth of the Group and we have the resources to achieve this.

Whilst current trading conditions for the majority of our businesses remain challenging, the Group is much more diverse and better balanced than in the previous low in the oil and gas market. The Board remains confident in the medium to long-term prospects for the Group.

So rather mixed there. I don't know the company well enough to draw any firm conclusions from this.

Valuation - it's very difficult to value this company, as with most O+G related companies, as we don't really know if or when profits are likely to improve. Adjusted EPS crashed from 44.9p last year, to 14.5p this year. It's anybody's guess what EPS will be in the new year (ending 27 Sep 2016). Brokers currently forecast 16.0p, but forecasts must be largely guesswork, given sector conditions. So I wouldn't want to value the company based on current year forecasts.

You might like to take a long-term view, and assume that profits might eventually recover to former levels, adding in extra for acquisitions. On that basis, a case could be argued that the shares might turn out to be good value for people patient enough to hold for several years.

Balance sheet - net assets of £36.3m is dominated by intangibles - which have grown considerably, due to more acquisitions. So NTAV is only £7.8m.

I'm a little concerned about the group having net debt. Whilst it doesn't look excessive at £7.1m, there is also £2.5m of deferred consideration (for acquisitions) in current creditors, and a further £3.5m in long term creditors, which should really be viewed as additional debt.

There was only £791k of land & buildings shown in the 2014 Annual Report. That might have increased this year with further acquisitions, but it doesn't look as if there's much asset backing from freehold property unfortunately.

My concern is that, if there is a further downturn in profitability, then the company could find itself in difficulties, breaching bank covenants, etc. It might all be fine, but there are risks.

My opinion - at some point this share might make a nice punt, but who knows when?

Have conditions now bottomed out, or could the company experience a further downturn in trade?

On balance, I feel that there is inadequate financial strength on the balance sheet to make it worth taking a risk on it, at the moment anyway.

All done for today.

Regards, Paul.

(of the companies mentioned today, I have no long or short positions. A fund management company with which I am associated may hold positions in companies mentioned.

NB. These reports are my personal opinions only, and are categorically NOT advice or recommendations. The ethos of this site is DYOR!)