Small Cap Value Report (15 Sep 2015) - ACSO, SNTY, HYDG

Tuesday, Sep 15 2015 by

Good morning!

The first two sections of today's report are on growth companies, which are more difficult to value, because the valuation can radically alter, depending on how much growth is achieved. Hence it's easier to get things wrong! Also, investors generally tend to over-value growth, especially in bull markets, when wildly optimistic valuations have been put on many companies which have subsequently turned out to be complete rubbish (I could give examples, but the list is as long as my arm!)

accesso Technology (LON:ACSO)

Share price: 828p (down 4% today)
No. shares: 21.9m
Market cap: £181.3m

(at the time of writing, I hold a long position in this company)

Interim results to 30 Jun 2015 - please note that this company reports in US dollars.

I wouldn't go as far as saying that these figures are irrelevant, but in my view they should not be used to value the company, for two reasons;

Firstly, the seasonality is such that most of the profits are generated in H2. So the H1 figures are mainly just to reassure that things are reasonably on track. Last year the split of adjusted operating profit between H1 and H2 was 15% to 85%. So if you just double the interim profit, then you'll be way short of what the full year profit will come out at.

Secondly, Accesso won a major contract recently with theme park operator Merlin Entertainments (LON:MERL), to provide ticketing systems for all of its sites - over 100 of them, globally. Merlin is the world's 2nd largest theme park operator. This came on top of other contract wins. The nature of these contracts is that they generate long-term, recurring revenues. The Merlin contract will take 3 years to roll-out. Therefore, in my opinion the only logical way to value Accesso now that the Merlin deal is signed, is to base the valuation on 2017 forecasts. Usually I would say that is too aggressive a valuation method, looking two years ahead, but in this case I think it's entirely logical. After all, 2015 and in particular 2016 results, will include up-front setup costs, so are not going to be typical of how the business will perform once the big contract is rolled out.

So for those reasons, the shares are likely to look expensive on a superficial look, over…

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accesso Technology Group plc is a United Kingdom-based company engaged in the development and application of ticketing, mobile and e-commerce technologies, and virtual queuing solutions for the attractions and leisure industry. The Company's solutions include accesso LoQueue, accesso Passport, accesso Siriusware and accesso ShoWare. accesso LoQueue is a queuing solution that includes Qsmart, Qbot and Qband. The accesso Passport ticketing suite is built where its customers shop. accesso Siriusware provides clients with ticketing and admission solutions, and includes various modules, such as OnSite Ticketing, OnLine eCommerce, Point-of-Sale and Guest Management. accesso ShoWare offers a range of ticketing software solutions for theaters, fairs, arenas and tours. The Company's products and services support attractions in the world, including a range of paid admission operations ranging from theme parks, water parks and zoos to cultural attractions and sporting events. more »

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Cloudcall Group plc is a United Kingdom-based holding company. The Company and its subsidiaries are engaged in software and unified communications business. The Company provides a suite of cloud-based integrated software and telephony products and services under the name cloud. The Company is a full-service communication provider. The Company designs, develops and operates integrated communication services for customer relationship management (CRM) systems. The Company's CloudCall portal enables to manage organization’s call profiles, configures all settings and manages user and service accounts and access real time activity reports and call recordings. Its automatic call distribution (ACD) feature routes the callers directly to available team members in the organization. The Company’s subsidiaries include Cloudcall Ltd, Cloudcall BY. LLC and Cloudcall, Inc. more »

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Hydrogen Group plc is a United Kingdom-based company, along with its subsidiaries, is engaged in the provision of recruitment services for mid to senior level professional staff. The Company operates through two segments offering both permanent and contract specialist recruitment consultancy for the organizations. The Company's segments are Professional Support Services and Technical and Scientific. The Company recruits for roles in Professional Support Services, including legal, finance, technology and business transformation placements, and in Technical and Scientific market sectors, such as power, mining, oil and gas and life sciences. The Company's subsidiaries include Hydrogen UK Limited and Hydrogen International Limited in the United Kingdom; Hydrogen Group Pty Ltd in Australia; Hydrogen Group Pte Ltd in Singapore; Hydrogen Group Ltd in Hong Kong; Hydrogen Norge AS in Norway, and Hydrogen Group LLC in the United States, among others. more »

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

17 Comments on this Article show/hide all

CliveBorg 15th Sep '15 1 of 17

Hi Paul,

Do you really mean: "It's also worth nothing that ACSO shares were rock solid during the recent mini-panic in the markets"?

Or maybe finger trouble again? I don't want to stereotypo you!

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Paul Scott 15th Sep '15 2 of 17

In reply to post #106482

Whoopsie! Thanks for pointing out, I have now corrected. Amazing how just one letter can completely change the meaning of a sentence. Trouble is, spellcheck doesn't pick up errors like that.

I do proof-read these articles, honest! But the odd thing does slip through the net, as the trouble is, I know what I meant to type, and my brain reads it that way. Maybe I should get a secretary & dictate these articles?! lol


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unwise2 15th Sep '15 3 of 17

Hi Paul, apart from the balance sheet another thing I don't like about ACSO is that all the forecasts look like they are for adjusted earnings. 2014 results were 18.5c reported and 30.8c adjusted EPS, I suspect reported earnings for 2015 and 2016 will be a lot lower than the forecasts, if these figures were used the P/E would be far higher. ACSO over the past few years has bought up companies to enhance earnings, is seems cheeky to expect investors to take into account any addition earnings these purchases have added and then expect them to completely ignore the cost of amortization. I know this isn't a real current cash cost but as you have pointed out intangibles are over $70m, it would seem there are going to be several more years of amortization creating a drag on earnings, I would find it easier to look past reported earnings and focus on adjusted if I thought amortization was coming to an end in the next year or two.

Additionally H1 adjusted EPS is only 4.37c, to hit the 45c forecast they need to earn 40c in H2, last year H2 adjusted EPS was ~26c so they need 50%+ growth. If they miss forecast full year EPS the SP could fall back heavily.

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iwright7 15th Sep '15 4 of 17

Paul - You mentioned not everyone will have access to the 2017 forecasts, so won't necessarily understand that the valuation does stack up against likely future earnings on contracts that are already signed. 

Is there a website source you use for the ASCO 2017 forecast and/or better still broker commentary about forward forecasts?  Thanks Ian 

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Paul Scott 15th Sep '15 5 of 17

In reply to post #106485

Hi unwise2,

Yes that's right, the treatment of amortisation is indeed material to the earnings forecasts. That's a personal judgment each investor has to make. Personally I am completely happy to disregard amortisation of goodwill, as it's a (pointless IMO) book entry that has no real-world impact on the cashflows generated by the businesses once acquired.

The treatment of share-based payments, and capitalising development spend, etc, are more problematic, as those are real costs.

There's a note from Numis, I think, which offers two alternative treatments of these costs at accesso Technology (LON:ACSO).

Whichever way you look at it, ACSO ain't cheap. But in my view, it is reasonably priced based on where the business is heading, and on already contracted business.
It's also the type of company that could attract a blow-out takeover bid at some point - in the US companies like this can reach stratospheric valuations.

Therefore when a company is displaying characteristics of this kind, which growth investors might even call a superstock, then conventional valuation metrics can go out of the window for a while. So don't be surprised if this expensive share gets considerably more expensive.

Regards, Paul.

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Paul Scott 15th Sep '15 6 of 17

In reply to post #106489

Hi Ian,

This isn't going to be a very satisfactory answer I'm afraid, but getting hold of broker notes is often very difficult for PIs. The best route is to ask your stockbroker, but because many people use cheap online brokers, that service isn't available. It's one of the reasons I don't mind paying more to use a proper broker, as they can get me the odd broker note on request, on pain of death not to forward it on to anyone else (as research is often jealously guarded by the firms who produce it).

Also, for me personally, as I effectively have a financial journalist hat on when writing these reports, then the PR companies & brokers are often keen for me to see the latest research, but again I'm not supposed to pass anything on. But it does help me give accurate valuation figures in my reports here.

There is a crazy regulatory rule also that PIs are not supposed to be allowed to read broker research, which is surely something we could lobby Govt to get changed?

Stockopedia gives the broker consensus EPS estimates though, where they are available, although obviously that doesn't give the granular detail on how those estimates are arrived at, so it's a rough guide. Although broker EPS estimates are usually worked out on the same adjusted profit basis as the company itself presents. Not always though, as some brokers make other adjustments.

Regards, Paul.

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Aislabie 15th Sep '15 7 of 17

From reading the results this morning I too have been wavering between bull and bear on Synety (which I hold), your thoughts are exactly those that concern me. I also believe that it will be close, but another fund raise is (regrettably) more likely than not. If they do avoid it, and achieve breakeven cash flow, then I think the shares will be unleashed in 2016. But until we know, this isn't going anywhere.
I also am a bit concerned about talk of management incentive plans at this stage. This is not a team that can afford to be greedy.

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Paul Scott 15th Sep '15 8 of 17

In reply to post #106493

Hi Aislabie,

In fairness, the Synety (LON:SNTY) mgt incentive plans are long-standing arrangements, and with hindsight have been counter-productive, since I think they incentivised management to do a dash for growth, and in doing so they ran out of cash & had to dilute themselves more than planned!

It's often the case I think, that elaborate incentive plans can incentivise the wrong type of behaviour, with unintended consequences.

I don't think you can say with certainty that the share price will go nowhere until breakeven. I think an out-perform trading update say later this year, or early next year, could be a strong catalyst for a re-rating, then a small Placing on the back of that would be fine for existing holders.

The main worry & downside risk, is under-performance, and another emergency fundraise at what, 40p say?

Regards, Paul.

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Braam53 15th Sep '15 9 of 17

You have an opinion on the Seeing Machines Caterpillar contract?
I believe Caterpillar will pay Seeing Machines $17,5 million over 4 years and will market Seeing Machine products will work together to develop new products
This was announced yesterday I believe

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Paul Scott 15th Sep '15 10 of 17

In reply to post #106497

Hi Braam53,

Yes I saw the Seeing Machines (LON:SEE) contract yesterday, but was too busy on other stuff to report on it here. Also, they seem to have reported news with Caterpillar so many times now, that it's difficult to be sure what is significant, and what isn't!

I'd like to see more traction with other transport applications - coaches & trucks is the area I'm hoping could be "the big one" for the company.

Regards, Paul.

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Cockerhoop 15th Sep '15 11 of 17

Regards SNTY

'but already our customers are experiencing a more tailored and improved pre-sales, sales and on-boarding journey'

Anyone who can write the above should not be trusted IMO!

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mikehunt 15th Sep '15 12 of 17

BEAR: Any bets at what price the next Synety (LON:SNTY) placing will be? I'm going for 40p!!

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Paul Scott 15th Sep '15 13 of 17

lol Cockerhoop,

Yes, I know what you mean! Synety (LON:SNTY) Directors do like their trendy management-speak.
There was a fair bit of it in today's RNS, and the Conf Call, but never mind.


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sbotting 15th Sep '15 14 of 17


Regards Synety (LON:SNTY)

Where can I listen to a recording of the conference call that happened today?

Do you have a link


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unwise2 15th Sep '15 15 of 17

In reply to post #106491

Thanks for your thoughts Paul. I fully realize that ASCO could go from expensive>very expensive>extreme>absurd, but its not the kind of thing I would want to rely on. Also in addition to the things I've mentioned I'm not very impressed with the direction of net cash/debt over the past few years even after taking into account that its H1.

On the subject of broker notes and PI's it is legal for PI's to look at broker notes if they qualify as sophisticated investors or are high net worth individuals. A quick google will explain who qualifies, from memory the bar is fairly low in the U.K, I think its £250,000 in liquid assets over the past 12 months (I think its $1m in the U.S).

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Hmcg 15th Sep '15 16 of 17


Any thoughts on netplay's results today?


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jimbobjames2002 15th Sep '15 17 of 17

Hi Paul, love the bull v bear conversational piece for SNTY - That's almost exactly the same conversation I had with myself in my stupor at 7am this morning! (Internal conversation I hasten to add) I sold out before the last placing but still like the growth prospects for the company - maybe I'll wait until that next theoretical placing comes along before being tempted to jump back in, just to be on the safe side.

As a tangential point, those kind of bull v bear arguments are incredibly useful IMO. Being able to mull over the pros and cons (even inside ones own head!) can add alot of clarity and personally its stopped me from making what could have been some very bad decisions in the past.

Cheers, James

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 Are LON:ACSO's fundamentals sound as an investment? Find out More »

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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