Small Cap Value Report (17 Feb 2014) - DQE, ESSR, GTC, RBN, CRA

Monday, Feb 17 2014 by

Good morning! Thank you for the late surge in donations for my spring charity fundraising, which is a dual purpose one this year - I ran the Brighton Half Marathon yesterday, but am also abstaining completely from alcohol for 3 months. So far so good on both fronts! We were incredibly lucky with the weather, and to everyone's amazement, after being battered by storms for what seems like an eternity now, Sunday was a glorious sunny day here in Brighton (and hopefully was where you are too).

I sauntered along for about 6 miles, but then the remaining 7 miles was a bit of a nightmare. I'd not done anywhere near enough training, and it really showed. So whilst I improved on last year's slow time of 2:23, by doing 2:15 this year, it was a backward step from the 2:09 I managed in last autumn's London Parks run. So the target for the next one is sub-2 hours. Thanks again for your generous donations to MacMillan Cancer Care, and the Sussex Beacon, and donations can still be made here, if you wish.




DQ Entertainment (LON:DQE)

A couple of friends have told me this one is cheap, although most friends won't touch it with a bargepole (same with me), as it's Indian and displays the classic signs of having questionable reported profits. The main classic sign is very simple - excessive Debtors. The Balance Sheet nearly always shows where the bodies are buried, and it amazes me that so few investors properly scrutinise them for warning signs.

Profit can be manipulated to report pretty much whatever you like, but the evidence of manipulation will stick out like a sore thumb on the Balance Sheet, with usually quite obviously inflated Debits (i.e. Debtors, Stock, Intangible Assets, but not Cash! [because cash is so difficult to fake]).

DQE is an Indian animation company, which looks amazingly cheap on a PER basis, but has the classic problem of enormous Debtors. Think about it logically. If you invoice your customer, and they still haven't paid a year later, then something is wrong. Either the product/service hasn't been provided at all (i.e. a totally fictitious sale), or perhaps the amount charged is being disputed by the customer (i.e. the invoice has been inflated beyond what the customer regards as…

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Getech Group Plc is a United Kingdom-based company, which provides geological services, reports and data to the petroleum and mining industries to assist in their exploration activities. The Company's segments include Multiclient products and services, Consultancy projects and All other segments. Its Multiclient products and services segment includes Globe, which is its live Geographic Information Systems (GIS) Earth platform; Gravity and magnetics, which offers global databases; Multiclient regional reports, which include reports on various exploration areas, and Multi-Satellite Altimeter Gravity Programme, which is a three-year study covering gravity data for the continental margins of the world. Its Consultancy projects include Consultancy and licensing rounds, under which the Company provides technical support and advice to the Mozambique government, and GIS software and services, under which, the Company, through Exprodat Consulting Limited, offers Exploration Analyst Online. more »

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

16 Comments on this Article show/hide all

ridavies 17th Feb '14 1 of 16

Very good, helpful and saves me looking at this company ever again! Mug I sometimes am, always a mug I am not.

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iwright7 17th Feb '14 2 of 16

In reply to post #81390


Any comment on Getech (LON:GTC) who have today issued a subdued H1 trading update, but an "in line" for the year expectation. SP -29% drop this morning may put into value territory?


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Paul Scott 17th Feb '14 3 of 16

In reply to post #81392

Give me a chance, it's only 9:39! I'm working on Getech now.


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Mark Midmore 17th Feb '14 4 of 16

Paul, SHFT have come out with a profits warning although the book value seems to underpin the share price. They have a £350m order book and it maybe this is the low point. Interested in your view. Thanks. M

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diamondback 17th Feb '14 5 of 16

Reference your view on "Indian Companies" one I hold is OPG Power Ventures which has issued a trading update today......I presume you get loads of requests like this but have you a view on this one? if so, I would very much like to hear it. Very low PEG... but your reading of the accounts often brings up enlightenment for me !

Kind Regards

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iwright7 17th Feb '14 6 of 16

In reply to post #81393


Thanks for Getech (LON:GTC) thoughts - I was'nt trying to hasstle for an instant reply. I agree with your reading of their position and have sold on the 1st profit warning, rather than travel hopefully.

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bsharman 17th Feb '14 7 of 16

I may be crazy but i'm thinking about investing in Debenhams again as a turnaround situation. Any thoughts?

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Paul Scott 17th Feb '14 8 of 16

In reply to post #81396

Hi Diamondback,

I don't normally report on overseas companies Listed on AIM, because they are usually crocks, and I hardly ever invest in any of them, because it's just an investment graveyard from my own experiences (I lost a lot of money on an Israeli CCTV company a few years ago), and from seeing how many of these things eventually fail, often in dubious circumstances. I can only remember ever making a profit on one overseas AIM Listed company, last year - Pilat Media Global (LON:PGB).

So it's more a case of me just reporting on the odd one, occasionally.

You have to ask yourself why it is that small companies on the other side of the world, come all the way to London to List their shares on the AIM market? In my view it's because AIM lacks any meaningful regulation or safeguards, the NOMAD system is a joke, and there are no consequences whatsoever from ripping off UK investors.

Therefore it attracts a lot of wrong 'uns. The same can also be said for some UK companies that List on AIM, but at least with them it's easier to meet the key management, kick the tyres, visit the company's premises, etc. You can't do that with overseas companies - do you even know that the company exists? It's funny how the phone stops being answered & everybody suddenly forgets how to speak English when you try to get in touch with an overseas company that has got into trouble. I've been in that situation, and you feel very helpless. Whereas if it's a UK company, you can get in the car & and visit them to find out what's going on! You can find out about the Directors' reputations, etc, which can't be easily done with overseas companies unless you have some local contacts.

Why spend your time searching through a sea of dross for the odd decent company? That's how I see foreign companies Listed on AIM. Whereas there are maybe 300-400 decent quality UK companies Listed on AIM, so it's worth investigating them. The foreign ones (not just Chinese or Indian, all of them!) are mostly junk in my view.
They usually come here on a bandwagon, looking for gullible investors. The shares are promoted via financial PR, and UK investors buy them whilst the sellers are usually insiders from the home country, happily banking the gains in hard currency, from what are all too often essentially just a worthless piece of paper.

They will then probably de-List a couple of years down the line when the valuation is on the floor & everyone has realised that the shares were more a vehicle to part UK investors from their money, than anything else. Just look at how few of them pay dividends! There's a reason for that - because all too often the reported profits aren't real!

All just in my opinion, do your own research as usual.

Regards, Paul.

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davidtalbo 17th Feb '14 9 of 16

Hi Paul

I agree that buying sound companies after profit warnings can be a sensible strategy that leads to finding stocks in which to invest at sensible prices. However, I point out that there should be no hurry to invest after a profit warning.

I believe James Montier did some research which showed stocks continued to fall in value for around 100 days after a profit warning, on average. In my experience stocks do generally continue to fall, certainly for a month or so, as disappointed investors eventually decide to sell.

If you look at Hyder Consulting, this has started to exhibit this price pattern. After the initial fall last week following the profits warning, the stock has now fallen in price by a further 4.5%. The fact that there is generally no hurry to invest following a profits warning also give time for further research.

Best wishes.

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bsharman 17th Feb '14 10 of 16

In reply to post #81396

Hi. I think that Paul is being a little bit harsh and there are some fantastic foreign companies listed on AIM - OPG and Amerisur being two that in my opinion are well run businesses with exciting potential and backing by some very astute investors such as Giles Hargreave. I agree that it is harder to find the better foreign run companies however. OPG is growing rapidly and meeting the shortage of power in India by building new power stations. I really like their business model. I did own these from 45p but recently sold out after the rise to 75p and will look to get back in if the shares fall back down to about 65-70p.. Paul - Well done on the half marathon yesterday - you had perfect weather for it - when are you going to run the London marathon?

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cycle 17th Feb '14 11 of 16

Hi Paul, I know this is slightly off topic but it is related to foreign companies. Given how incredibly strong sterling is at the moment and how weak the dollar is, do you think there's a case to be made for investing in US small caps on the basis that at some point there's going to need to be a correction between the currencies and that the US recovery might be lagging a little behind ours so that there are more bargains there?

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Paul Scott 17th Feb '14 12 of 16

In reply to post #81401

Hi David,

Yes indeed, very good point that it usually pays to hold fire after a profit warning, as the price often drifts lower for a while.

Although I think an average may obscure the reality that it depends on what type of market you're in. In bull markets the down period is much shorter than in a bear market. I've been in situations in a bear market, where it can take a 6 months+ for the share price to even stabilise. Whereas in a bull market, you can see the down period be very brief, and confidence starts returning almost straight away.

The one that surprised me most recently, was Volex (LON:VLX). They put out what I thought was a dreadful set of figures, with the dividend cancelled, net debt had rocketed, the turnaround was a hope only, with no sign of it actually happening. They were also now clearly going to be in trouble with their bank covenants too & needed to raise money. So the shares should have been pole-axed, by at least half.

Yet management did a series of presentations, and successfully managed to convince investors that everything was fine, and the share price fully rebounded to where it was before, and has stayed there, despite the fundamentals having dramatically worsened. Bizarre, but there we go.

So I think we should acknowledge that a crucial factor is how management are regarded by the City. If they talk the right talk, and convince the right Institutions, then a share can shrug off a profit warning that might otherwise have done major damage to the share price.

It's difficult for us PIs to measure that of course, as in reality the share price will be highly dependent on how a handful of major buyers/sellers react to newsflow.

Regards, Paul.

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Metier9 17th Feb '14 13 of 16

Hey Paul,

I would be interested to hear if the Chinese companies (naibu mainly) mention anything about the Jin Jiang (Quanzhou) clothes and shoe companies at the Mello presentation tonight. I used to live in Quanzhou for 4 years. I can't attend tonights meeting though.

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foxy1959 17th Feb '14 14 of 16


I think the RBN deal is even more significant than you suggest since £1.1 m of the half yearly profits were an exceptional gain on sale of property for which £4.4m was received after the reporting period. Most of that cash plus debt will pay for the polish acquisition to bring in £2m pre tax profit. debt is held against freehold property so should be cheap in the current climate. I would hope there will be some synergies reducing costs. The increase in sales staff mentioned in the half year report and the figure of £24m revenues which excluded the acquisition suggest increased business too. I bought back in today having sold a few weeks ago to buy Craw

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muckshifter 17th Feb '14 15 of 16

I'm going to take your comment about large family holdings in the piece you wrote about Essar as a sort of backhanded response to my query on Friday about Caffyn. It is very similar to my own view anyway, but thanks.

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JTG 17th Feb '14 16 of 16

In reply to post #81403

Hello cycle. I'm not Paul, but feel able to comment a bit as I have just bowed out from a private UK-based international manufacturer where we created a US subsidiary. We traded in £, € and US$, always in recent years hedging our forward exposure to smooth the trends. Did well from those hedges recently, but we put them in place as a lesson from when the £ was actually strong, $2/£1, on 2006/7. $1.67 is just two cents over our long-term average. £ has increased solely because of speculation that we will raise interest rates sooner than the the other major developed economies, but, strengthened by reassurance of our GDP recovery, I believe there is every prospect that it will continue to travel upwards, certainly against $. The pattern of history is one of swings, so be careful. I think probable it will go over $1.70, and if so, the target with be $1.75.

Separately, the US market is generally overvalued. Make sure you only go for value 'anchored' stocks like Paul!

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 Are LON:DQE'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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