Small Cap Value Report (16 Sep 2016) - IGP, TUNG
Good morning!
Good news today that MPs are going to investigate executive pay. I'm going to give some thought to this, and write a letter to them, suggesting ways in which this problem can be tackled. It really is sickening, and a scandal, how many companies are plundered by their Directors for unjustified & excessive personal gain.
This link to the Govt's website shows the members of the relevant committee. So maybe some readers can also write to them, with your suggestions for tackling board room greed?
This appears to be a topic close to Mrs May's heart, so let's hope something meaningful is actually done.
Intercede (LON:IGP)
Share price: 61p (down 33% today)
No. shares: 49.2m
Market cap: £30.0m
Trading update (profit warning) - this company supplies identity & credential management software. They're not having a very good year (ending 31 Mar 2017);
The Company announces that it has had a slow start to the current financial year and is continuing to experience delays in the receipt of anticipated MyID license orders from both new and existing customers.
Consequently, trading for the year to date is below expectations and the prior year.
The Company still has a strong pipeline of MyID license opportunities and is continuing to make good progress in pursuit of its short to medium term strategic objectives.
However, the Board recognises that revenues for the full year are now likely to be lower than last year's record sales of £11.0m.
This is quite a big miss. Stockopedia shows brokers consensus as £14.3m revenue this year, and £18.6m next year, so those can safely be thrown out of the window now.
This probably means the company is likely to be loss-making this year, judging by the historic numbers.
Broker update - I've just received updated figures from FinnCap, which indicates a big drop in profitability. They only refer to adjusted EBITDA, but have lowered expectations from breakeven, to a £2.4m loss this year.
Also, the net cash expected at year end has dropped from £4.7m to only £2.0m. So the comfort blanket of a cash pile is rapidly being burned up.
My opinion - looking back at my previous reports on this company, I've consistently said that it's too difficult to value. There are no reliable profits, and it's always promises of jam tomorrow. I find that shares like this nearly always go wrong, and end up being over-valued by the market on hope, then reality bites and they come crashing back down to earth. Why take the risk?
Note that in recent years it only made a profit in 2014, but lost money in 2013, 2015, and 2016 (and probably 2017 too). On the positive side, it's got cash in the bank, and no debt.
Too speculative for me. Also, I think you would need sector knowledge, to assess if the product is any good, and how it stacks up against competition, etc.
Tungsten (LON:TUNG)
Share price: 64.25p (up 0.8% today)
No. shares: 126.1m
Market cap: £81.0m
AGM statement - trading update - another jam tomorrow stock, which has hugely disappointed to date. The latest update tries to sound positive, but I can't see anything positive in the figures it mentions;
"We are confident in our ability to achieve the performance objectives we have set for ourselves for the current financial year, principally revenue of at least £30 million, an EBITDA loss of between £12 million and £14 million, and cash in excess of £20 million at 30 April 2017. We continue to expect Early Payment financing levels to double, with material increases in this revenue from FY18."
My opinion - At least there seems to be enough cash to keep going for some time to come, but the losses are still enormous.
The company said in its last full year results that it's "on track to achieve monthly EBITDA breakeven in 2017". Personally, I just don't believe that is likely to actually happen. The company has been wildly over-optimistic in the past, and fallen a long way short of forecasts, repeatedly. Experience has taught me that when this pattern is established, it usually continues.
I think this company needs to stop promising jam tomorrow, and instead get on with actually delivering it.
I'll try to update with some more sections later today, am too tired to write any more right now.
Regards, Paul.
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27 comments
Brainjuicer (LON:BJU) announced its set of H1 results yesterday showing +ve growth and operational gearing. As interesting is its comment that its business has swung to the higher margin System 1 type market research.
"It's enormously gratifying being back to double-digit growth. The business is now almost exclusively Juicy (our pioneering System1 research methods) and quantitative, enhancing our distinctiveness and ability to scale and grow revenues ahead of costs"
In this June trade mag Brainjuicer (LON:BJU) appears to be "guaranteeing" that its "Juicy" System 1 advertising will be effective, which is bound to bring in more business, albeit at a higher BJU cost risk:
http://www.adobomagazine.com/global-news/brainjuic...
I see there is a BJU System 1 US orientated Webinar next week that may be worth watching:
https://attendee.gotowebinar.com/rt/59548322078933...
System 1 is often referred to as our "Reptilian brain" which is fast, instinctive and emotional. It's the thinking most of us do when making investment and other buying decisions. System 2 on the other hand is slow, deliberate and systematic and the type of process traditionally used for focus group testing. So the BJU premise goes that traditional focus group thinking (System 2) may not reflect our normal buying behavior. Think of the whacky TV ads you remember - Maybe they are right?
Disclosure: I brought Brainjuicer (LON:BJU) yesterday at its 52 week High after System 1 and System 2 evaluation! Ian
The comment that MPs have their "snouts in the trough" is mistaken and Paul is right. The vast majority are honourable and do great dork for limited reward.
If you want to influence this committee about executive pay then the only way to do this is not by writing to the committee members but by contacting your own MP and asking him Or her to contact the committee members on your behalf. And if you swagger into your MP believing them to be corrupt and overpaid then they will properly think you a hostile idiot and you will get nowhere.
Agreed, maybe it needs an innovative broker looking for a USP (supported by PIs) to disrupt the status quo?
Not that I disagree in principle as many executives are grossly overcompensated, but how ironic that MP's are investigating given they have had their snouts in the trough for so long!
pastybap,
I totally disagree. MPs are only paid about £70k, plus some expenses, which were always in lieu of salary, so say £200k tops. Compare that with the incompetent idiots we have running uk plcs earning many multiples of that.
Which job would you prefer? £70k to be an MP, and take loads of abuse from the public, or £1m+ to be a figurehead in a plc?
We need to pay MPs MORE, to attract some suitably qualified people to the roles. and pay greedy bastar d company directors LESS.
Regards, Paul.
We need to pay MPs MORE, to attract some suitably qualified people to the roles. and pay greedy bastar d company directors LESS.
…………………………………………
I guess you're right. they pay them more in America. And with a population of 250m you get to choose between Trump and Clinton. And the winner will probably be the one still alive in November.
Delighted that at long the Prime Minister is going to investigate The Great Unwashed
Bear in mind that the institutions are investing our money - funds, pensions etc
I wonder how they would react to stakeholder pressure? Asking the institutions why they didn't sort out Vislink for example, or BP - and not being satisfied with being brushed off. Bearing in mind that one of the reasons you may be reading this is that you're unwilling to pay excessive fund manager salaries to people who are often closet index huggers....
Gable is a good example - allowing a CEO to be paid £1m a year to preside over a disaster........
It's often because the pension companies are also listed and they don't want anyone commenting on their own pay!
Thanks Paul, much appreciated.
JohnEustace - Having your shares in a nominee account does not prevent you voting but it does mean a little more effort to do so via your broker. You can do this with a letter of representation at the AGM and I believe you can also vote via proxy. I have done the former on a couple of occasions.
Paul - any chance you will be covering BJU interims today? The last time you reported on them, I appreciate you said you would avoid this company in the current macro environment but the figures reported today and the outlook statement remain promising and the house broker has raised their target price today to 550p. I have a small position in BJU.
Cheers
Simon
Hi Simon,
I've had a quick skim of today's results from Brainjuicer (LON:BJU) and the headlines look good.
Will dig a bit deeper, and hopefully do a section on it this evening.
Regards, Paul.
Talking of jam tomorrow,any thoughts on AVN,Paul ?
Re AVN
Year / profit (loss)
2010.....($3.05m)
2011.....($15.4m)
2012.....($21.1m)
2013.....($47.7m)
2014.....($87.2m)
2105.....($73.1m)
2016E...($76.8m)
2017E...($49.9m)
Losses from 2010 to 2015 =$247.55m. Since then the average number of shares issued has more than doubled and the company is straddled with debt of $480.7m. Expected further losses over next 2 years are $126.7m.
Why would you even consider investing in this wealth destroying company?
Hi AlanJenkinds2,
I can't mention Avanti Communications (LON:AVN) in the main report, because I opened up a small short position on it today.
It is displaying strong signs of being in serious financial trouble. I remain of the view that the equity is probably worth nothing.
The bonds are the problem. They can't afford to pay the interest now, so are trying to make PIKs, by issuing more bonds in lieu of interest. This looks like a death spiral to me. The only solution is a debt for equity swap. As debt ranks ahead of existing equity, then the bondholders will probably be able to all but wipe-out existing equity.
I don't believe their sales forecasts, as they've been over-optimistic before, and are fighting for survival now.
Regards, Paul.
Obviously - because the majority of MPs are all looking to the future, when they hope to be asked to be directors or executive directors and join the gravy train.
Executives pay needs to be looked into with such huge amounts being paid to directors and not justified in some cases for the work they actually do.
With the 2 shares discussed with excellence again today,,both down heavily, I would like to suggest that at least one share with a good percentage up for the day. This would help to keep us in a better positive frame of thought for the day.
EAH has shot up today quite dramatically, up 19.3%
Thanks again Paul for your superb write up..
MP's will investigate executive pay, but then do nothing about it - "its for the market to decide" they will say
John - it would make no difference. Nominee holdings are a tiny percentage of overall shareholders, and no one cares what we think.
It could at least make a difference for micro caps but, as you say, not for large caps. It should nonetheless be rectified for all PLCs - it's an important principal, if not a definitive solution to modern-day robber barons.
On the topic of executive pay and making management accountable, a big issue for me is that most of us who hold our shares in nominee accounts have no voting rights as the shares are not in our names. I read a ShareSoc note that said the UK and Ireland are the only advanced countries in the world where this applies.
Reforming this would be a big step to restoring the discipline that management work for the people who own the business.
Naturally the fund management industry all say this would be difficult to do and they would needs lots of expensive work on their IT systems etc. and would doubtless need need to set up lots of working parties and consult it to death but it seems the rest of the world makes it work so we should not continue to tolerate the status quo.
John
Retail investors own 10% of Equities, Institutions 90%
So ultimately the institutions (and lobby groups such as the NAPF & PIRC) that are responsible for oversight of corporate governance
Brokers can vote nominee shares based on beneficial holders' instructions, so nominee shares are not as such the problem, it's just that punters don't seem to care that much so it's usually a neglected part of the brokerage offering (some brokers don't bother, others require clunky manual instructions, etc). If people voted with their feet and moved their holdings to brokers with the best proxy voting system, that'd be sorted quickly...
If dividend payments can find the right owner in nominee accounts, I don't see why it cannot be easy for nominee accounts holders to exercise their votes. After all, when we had paper certificates we got the voting slips, and it is ridiculous that using the internet we have been dis-enfranchised.
dendyver,
I have nominee accounts with Barclays and Halifax. Both send me ALL accounts and statutory paperwork. I get notices of AGM's etc together with proxy forms, sae's to return them. I also get a letter of representation stating my holding so that I can attend in person, speak and vote. All I had to do was ask. There is no charge from either broker for this service.
I do not feel disenfranchised in any way.
What I am more concerned about is whether shares in my nominee account get "lent out" to hedge funds etc to short that Company and thus depress the value of my shares. Does this happen - what can I do to prevent it?
Good point John:
What I am more concerned about is whether shares in my nominee account get "lent out" to hedge funds etc to short that Company and thus depress the value of my shares. Does this happen - what can I do to prevent it?
Yes, it does happen. I remember being so concerned about this in 2008, that I wrote a letter to my broker, insisting that they didn't lend out my stock. In the end I "dematerialised" it, to use the hilarious Dr Who-esque phrase, into certificated form, just to be certain they hadn't lent my stock out to shorters.
It doesn't make any difference in the end though. If you're desperately trying to thwart shorters, and are geared, then you're almost certainly going to be wiped out, as I found out, the hard way.
My book, when it eventually comes out, will point out all these things. When the market turns ugly, you have to kill your gearing FAST, before it kills you.
Regards, Paul.