Small Cap Value Report (16 Mar 2015) - NIPT, AO., CNKS, BRY, TRB, RCN

16th Mar '15 by Paul Scott

11 comments 18263 reads

Good morning! A reminder that it's Mello Beckenham tonight, with some places still available, David tells me. The theme tonight is high yield investments, with various briefings from people familiar with particular niches, e.g. P2P, high yield bonds, shares, etc. More details & booking info here.

Premaitha Health (LON:NIPT)

Patent infringement proceedings - not a company that I'm familiar with - it seems to be a blue sky drug development company. The shares are down 34% today on a worrying announcement about proceedings being issued against the company for alleged patent infringement. I don't like the sound of this, so will be steering even more clear than I normally would for blue sky. My biggest losses are always on the blue sky stocks, and it's better to just avoid them altogether, in my view. The failure rate is absurdly high.

AO World (LON:AO.)

Share price: 180p
No. shares: 421.1m
Market Cap: £758.0m

Director sale - there are two announcements from electrical goods etailer AO World this morning, one being a standard form to disclose that the Chairman, Richard Rose, last week sold 5,583,475 shares in the company at 180p each, banking a whisker over £10m. Lucky him!

However, the company has, in my opinion, made a mistake in issuing a second announcement where they try to put a positive spin on something that is quite obviously very negative, saying;

He only has 723,443 shares left, so the truth is that he sold 88.5% of the shares he held! Doing so after the shares had already dropped a lot, is clearly sending a signal that he thinks there are better places for his money. Trying to put a positive spin on that is ridiculous, and in my view has backfired.

My opinion - I currently have no position in this share, but am considering whether to open a new short on this one, having recently closed my existing short after the big recent plunge. In my view this stock remains significantly over-valued. It's a very low margin box-shifting operation, via a website. There is loads of competition. So why the premium valuation?

Whilst CEO John Roberts is an utterly brilliant PR man, and spins a wonderful story about great customer service, etc., the reality is that applying great customer service (which…

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MichaelFBS

16th Mar '15

AO World (LON:AO.) To the day I die I will not get it and it's like. They sell washing machines for #@*£'s sake and Stockopedia shows a PE of 1,236. Just Google "Washing Machine" and the first 6 results are:

Currys
Argos
John Lewis
Tesco
Amazon

The competition is intense and I would rather be invested in any of the above than AO including Tesco!

Finally to end this rant, AO World (LON:AO.) trades at a PE of over 1,000 and Apple Inc (NSQ:AAPL) at 13. I would short as well if I knew how and PaulyPilot hadn't told me I shouldn't!

Sully8786

Hi Paul,

The red flag re Cenkos Securities (LON:CNKS) for me is the fact that it's the Nomad for Quindell (LON:QPP).

The RNS releases that it's presided over are beyond belief. Indeed, I emailed the CEO to this effect. Unsurprisingly, he hasn't responded and as such they're on my barge pole list. Shame as everything else looks good....it only takes one bad apple though.....

Regards,

Sully.

Thegrimester

Premaitha Health (LON:NIPT) actually announced the start of sales of their new product this morning and shares were up nearly 10%. The news of the alleged patent infringment hit and they then fell 40% plus (32p to 16p in one day!). They are clearly suing at the point they think the company is about to make some money.

I feel like someone has stolen my cake, just as I picked up my fork to eat it! Anyway onwards and upwards

Ramridge

Cenkos Securities (LON:CNKS) In case you haven't seen it, an RNS was released late this morning :
"
The Company notes the recent press speculation concerning the possibility that one of its corporate clients, Haversham, may make a substantial acquisition, and that Cenkos would be supporting Haversham with the fund raising associated with such a transaction. Should the fundraising associated with the reported transaction take place, it could have a material impact on the Company's revenues and pre-tax profits relating to its financial year ending 31 December 2015. "

Ignore my note above. Paul is clearly referring to the same note.

Edmund Shing

IMHO, Cenkos Securities (LON:CNKS) already integrates both the Quindell (LON:QPP) exposure and the 2014 financial results, which everyone thinks was a one-off. at 9x P/E and high dividend yield plus lots of cash on the balance sheet, it seems that the risk/reward is skewed on this share to the upside.

But I admit to owning some Cenkos Securities (LON:CNKS) shares already, so am quite possibly biased!

imranawan

With reference to Cenkos Securities (LON:CNKS), I note that the AA IPO contributed almost half of revs in H1 2014. There's a large amount of operational gearing in the business which they acknowledge. The balance sheet looks very good, and divis seem to well covered. I note the SP has been very volatile since the interims were published last September. Like Paul said on the face of it, the company looks attractive, but the results can be lumpy, so I think I'll sit on the sidelines and see how this develops.

Totally agree with your comments. For the term "washing machine" on Google they appear on page 2 when searching for this term, although they seem to be investing heavily in Google PPC. For them to have a presence on page 1 of the results page for the term "washing machine" its costing them 76p per click! If they're doing this across multiple product categories (which I suspect they are - given the level of competition), this will be increasing costs further.

jonesj

I bought some new appliances 18 months ago.
Two from John Lewis and one from Appliance City (who also had good customer reviews).

The retailer branding is so undistinctive I had to check the e-mails to confirm that I hadn't used AO World. Other generic retailer names include "Appliancesdirect".

I can see Amazon getting benefits of scale in their market. If I am buying small ticket items, any other retailer has to undercut Amazon by a very large percentage for me to bother registering my details with the smaller company.
When it's a £700 appliance, if another .COM is 5% cheaper than another AND gets good reviews, I will buy off them.

I see no reason at all for AO World to command a high PE.

Carcosa

17th Mar '15

(a) how likely this deal is to happen, and (b) what size the fees for Cenkos would be?

In answer to (a): I consider the phrase from Haversham Holdings Plc saying it is in “very advanced discussions” on a deal involving a possible reverse takeover (of British Car Auctions, the used-car dealership) as being very positive. That and the fact that Haversham listed on AIM only last November with the stated aim to "to acquire and manage substantial companies and businesses in the UK and European automotive, support services, leasing, engineering or manufacturing sectors." as being consistent with the recent press speculation. Bearing in mind that British Car Auctions (BCA) is owned by a US private equity company and last autumn, they pulled a planned flotation of BCA, citing volatile equity markets. Therefore I think it is safe to say that all parties have a desire for this to go ahead.

With reference to your second query, the press have been stating the proposed deal to be valued at £1.2b. Cenkos raised £1.4b for AA which represented 62% of the total capital raised by Cenkos for the year. This new deal is slightly less than that but how that translates into Cenkos remains unknown. From the Cenkos RNS they stated "it could have a material impact on the Company's revenues and pre-tax profits relating to its financial year ending 31 December 2015." so unless they are veing cavalier with the announcement it has to be taken at face value.

One other point is that the Haversham fund major shareholders include Aviva (5%), Schroders (5%), Invesco (29.5%) and Artemis (10%). Invesco also have a 15% shareholding in Cenkos which makes that a positive IMO.

As regards the Cenkos/QPP 'scandal' I just saw it as a wonderful opportunity to help lower the CNKS share price for me. I see the whole affair as 'fluff' with no serious impact on CNKS business.

Stripping out the AA business the company is actually on a PE of ~11 which is still low IMO and with a stonking dividend available as well. Business is certainly 'lumpy' but with new offices opened up in Liverpool and the likelyhood of a second large 'exceptional' fundraising exercise for Haversham perhaps these 'exceptional' deals will become increasingly frequent(?)

Brilliant Leader

Hi Paul

Re: your comment on BRY and your preference for software companies to move to a SaaS model. I have no position in BRY but I do work in the sector. Companies with a license model have to be very careful in moving to a SaaS model because in doing so, they are:

a) Losing maintenance income
b) Taking a smaller proportion upfront which in the short-term affects sales
c) Can be vulnerable to takeover if they try to transition too quickly

Once companies have made the transition from license to SaaS they are, quite rightly, rated higher but in making the transition they need to get there gradually (over 3-5 years). if I were looking at a company like BRY, I would be digging into their transition strategy - it ain't easy.

Cheers
Simon

Small Cap Value Report (16 Mar 2015) - NIPT, AO., CNKS, BRY, TRB, RCN

Premaitha Health (LON:NIPT)

AO World (LON:AO.)

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Paul Scott

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