Small Cap Value Report (15 Nov) - CGS, MTEC, PYC, AGA, BQE, OFF

Friday, Nov 15 2013 by

Good morning! Interim results to 30 Sep 2013 from Castings (LON:CGS) look pretty solid to me. Turnover rose 9.1% to £65.9m, and pre-tax profit rose 5% to £9.6m. Note the strong profit margin there, at 14.5%. Their Balance Sheet is very strong, including net cash of £25.8m. It's an engineering group, based in the Midlands.

Basic EPS drops out at 16.89p for the half year, so assuming no seasonality then that doubles up to about 34p EPS for the full year. Therefore at the current share price of 432p it is priced on a PER of about 12.7, which is probably about right in my opinion.

Broker consensus forecast is for 36p EPS this year, and 39p next year, so they look to be trading slightly below that currently. The dividend yield looks reasonably attractive at just under 3%.

The problem here is that the outlook sounds uncertain. The company comments today that, "it is impossible to forecast the outcome for the remainder of this financial year", due to new EU rules on product. I don't like the sound of that one bit, so unfortunately such uncertainty rules it out for me.




Recruitment company Matchtech (LON:MTEC) issues an AGM trading update. It says that they are trading in line with expectations. They say that demand for recruitment "continues to grow ... as the UK moves further into recovery mode". Turnover was up 13% in Q1.

EPS for this year is forecast at 34.3p, for the year ending 31 Jul 2014. So at 565p the shares are not cheap, on a PER of 16.5. I cannot see any upside on that price, as the shares seem to already price in a cyclical recovery. There is an attractive dividend yield of about 3.5% though.




Results from tiny £2.5m market cap Physiomics (LON:PYC) look awful - turnover of only £240k, and an operating loss of 548k for the six months to 30 Jun 2013. They have almost run out of cash, with only £179k left at 30 Jun 2013, which at a burn rate of almost £100k per month will in all likelihood have gone by now. They refer to financing being tight, and look to have agreed some sort…

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Castings P.L.C. is an iron casting and machining company. The Company caters to both domestic and export markets. Its segments include Foundry operations and Machining. The Company has over three trading operations, including Castings (Brownhills), William Lee Limited and CNC Speedwell Limited. Castings (Brownhills) supplies spheroidal graphite (SG) iron castings to a range of manufacturing industries from its mechanized foundries. William Lee Limited supplies SG iron castings from its foundries in Dronfield, Derbyshire. CNC Speedwell Limited is a machining operation primarily focused on the prismatic machining of iron and aluminum castings from its sites in Brownhills and Fradley. It produces ductile iron castings, SG iron castings, austempered ductile iron (ADI) castings, Simo castings and nickel (Ni)-resist castings up to approximately 40 kilograms in weight using over four Disamatic molding machines and approximately three horizontal Green Sand molding machines. more »

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Gattaca plc, formerly Matchtech Group plc, is a human capital resources business dealing with contract and permanent recruitment in the private and public sectors. The Company operates through two segments: Engineering and Technology. The Engineering segment comprises Barclay Meade and Alderwood recruitment consultancy brands. The Technology segment includes the Connectus recruitment consultancy brand. The Company is a provider of specialist recruitment services to the engineering and technology industries, both in the United Kingdom and internationally. The Company offers three core solutions: Contingent Workforce Solutions, Permanent Recruitment Process Outsourcing (RPO) and Total Workforce Solutions. more »

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Physiomics Plc is engaged in the provision of outsourced systems and computational biology services to pharmaceutical companies. The Company is focused on the development of Virtual Tumour Clinical, to directly predict optimal regimens for human clinical trials; Cardiac tox prediction service, to predict unwanted toxic side effects of drug candidates in the drug discovery process, and Drug combinations database, for researchers and clinicians to access literature data on pre-clinical and clinical regimens and their effects. Its services include Target Validation, Mechanism of Action Studies, Lead Selection, Clinical Pharmacokinetic/Pharmacodynamics (PK/PD), EASYAP/Cardiac Toxicity Service, Virtual Tumour Preclinical and Virtual Tumour Clinical. It offers a services and technology for predicting cardiac toxicity. It also focuses on offering offer Model Based Drug Development (MBDD) services, which include Population PKPD analysis of clinical data and Back-translational analysis. more »

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  Is LON:CGS fundamentally strong or weak? Find out More »

14 Comments on this Article show/hide all

Fangorn 15th Nov '13 1 of 14

Morning PP,

Any idea why SEE rose so spectacularly yesterday? Up 18% odd.

On another note I see Quindell engaged in a £200m(1.32bn shares @ 16p) to fund working capital requirements post acquisition spree.

Quiet day in many other respects.

Chaars F2

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djpreston 15th Nov '13 2 of 14

Hmm, that's a bigplacing by QPP and at a very decent price. "working capital" hmm, doesn't help my concerns re cashflow.

Fund Management: European Wealth
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Paul Scott 15th Nov '13 3 of 14

In reply to post #79160

Indeed, that is a very big Placing for Quindell Portfolio (LON:QPP). Just reinforces the fact that it doesn't generate any cashflow, and all the profits just pile up as debits on the Balance Sheet. I'm amazed that they got a £200m Placing away at a good price, as there has been little Institutional interest in the company before (very few >3% Instis for a company of this market cap).

My view on Quindell remains the same. There are far too many red flags here to make it investable for me.

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mrmodha 15th Nov '13 4 of 14

Good point around pension deficits, and this may be a silly question so forgive my ignorance but apart from balance sheet showing the obligations, where can you find more detail if not included in narrative?

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Paul Scott 15th Nov '13 5 of 14

In reply to post #79162


The place to check for pension deficits is in the Annual Report. These are available online now, on the "investor relations" section of companies' websites.

I don't read the whole thing usually, but will check the notes to the accounts, especially the detailed notes on pension funds (where the company has a defined benefit pension scheme).
You will often find that the actuarial deficit is far larger than the deficit disclosed on the Balance Sheet, which seems crazy to me.

Overpayments are negotiated between a company and their pension fund trustees, to gradually close the funding gap. In the case of AGA, those overpayments are absolutely colossal, and will absorb all the company's profits & cash for about the next ten years. That's hugely material to the valuation of the shares, yet is blithely ignored by many investors & commentators!
So they are over-paying for the shares, by ignoring a highly material liability.

Pension deficits should shrink as interest rates rise, but increased longevity has caused a lot of pension fund liabilities to increase to levels that were unthinkable when those schemes were put in place.

Regards, Paul.

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mrmodha 15th Nov '13 6 of 14

Thanks Paul the explanation around process helps.

I have been reading through the Annual Reports, it just seems that the information provided is rubbish!

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cig 15th Nov '13 7 of 14

In reply to post #79164

There is a (small) bull case for pension deficits: if the pension assets are dominated by equity, and you get a equity bull market with say +50% over the next 2-3 years, and the discounting rates remaining flat on the liabilities side (so many ifs!), then you will get vanishing deficits and leveraged earnings growth. It's like a far-off call option on the FTSE bundled with the operating company. That said personally I don't like buying derivatives from oven manufacturers.

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Camtab 15th Nov '13 8 of 14

With regard to Quindell. I accept your point re cash generation but when you have any business growing at the pace this one is cash is always a problem. Don't we run the risk here of missing a company which is cutting cost in a business dependant on margin. It has some of the characteristics I like. The team hold a lot of shares, they are taking on quality names in the sector, the old model was broken and relied on back handlers, they are bringing the co to the main market, they are starting to pay a dividend. As you always say do your own research and I have but I just cannot make my mind up on this one which suggests I should stay away.......yet the PE and Peg look compelling?


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trhere 15th Nov '13 9 of 14


Perhaps Stockopedia could bring attention to the issue of pension deficits by including a ratio in the balance sheet section of the stock reports - maybe scheme liabilities: market cap? Granted the actuarial and accounting deficits differ, but if the gross scheme liabilities are big compared to market cap that's probably a good indicator suggesting closer investigation.

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sars15 15th Nov '13 10 of 14

In reply to post #79164

AGA are due to pay nothing this year or next and 4 million in 2015 as deficit repayments. There will then be due another actuarial review which is most likely to reduce the payments from then on. I cant see how this can be described as colossal? See HY 2013 for detail.

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Paul Scott 15th Nov '13 11 of 14

In reply to post #79170

Hi Sars,

Last time I looked, AGA had deficit payments of about £90m due over approximately the next 10 years, which will probably consume all their profit & cashflow, leaving nothing for dividends.

So really the shares are a gamble on the pension deficit shrinking & reduced overpayments being negotiated in future. To my mind that is a helluva risk to take on, when the shares are not particularly cheap even if the pension issue is ignored.

Regards, Paul.

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MrContrarian 15th Nov '13 12 of 14

No comment on Michelmersh Brick Holdings' success at The Brick Awards 2013? They won five out of only 15 categories.
No Best Brick or Best Supporting Brick though. I feel the Brick Development Association are missing a trick here. I like their slogan though- "Think Brick"
Michelmersh Brick Holdings (LON:MBH)

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sjw 15th Nov '13 13 of 14

Surely "Are You Bricking It?" would work even better as a slogan

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corrsfan 15th Nov '13 14 of 14

I hold both PYC/QPP
on the surface of it the figures do look rubbish for PYC however the deals they have secured have only just been signed, so not yet fed through to the balance sheet. Granted it will still be making a smaller loss but at this point one other contract will make it profitable at the same run rate. its a tiny amount ive got in this anyway if it does go wrong.

QPP : so far so good, its not tanked probably as its been sold off to instis and they are banging a drum about more deals to be announced before its year end late jan. (the rumour mill says zurich?)

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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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