Small Cap Value Report (17 July 2017) - CLLN, PTY, DTG, TAP

17th Jul '17 by Graham Neary

40 comments 18520 reads

Good morning!

Alongside today's updates, I'm also planning to add a few comments on Dart (LON:DTG), to continue the conversation in Friday's comments thread.

Cheers,

Graham

Carillion (LON:CLLN)

Share price: 59.65p (+6%)
No. of shares: 430.3 million
Market Cap: £257 million

Carillion appoints EY to support Strategic Review

This was at 117p when I covered it a week ago, and near 200p the week before that, so today's 6% bounce is likely to be of little comfort to shareholders.

This building support services group is, as we've discussed, the UK's most shorted stock. 21% of shares outstanding are currently reported short: that's a reduction compared to the last time I checked, implying there has been a decent amount of short covering over the past week.

A large amount of short interest can be a helpful bonus when you go long of a stock, because it means there is a lot of pent-up demand from the shorters who have no choice but to eventually buy it back. In extreme cases, you can get a gigantic short squeeze as what happened with Volkswagen shares in 2008!

Long-term success still depends on being right about the company fundamentals, of course, and in particular on the company in question not going bust or diluting shareholders to oblivion while you are in it.

In the case of Carillion, an equity raise looks like it could be on the cards, although who knows how big it might be?

With unpopular decisions on the cards and on interim CEO in the hot seat, some awkward tasks are being outsourced:

Carillion, the integrated support services group, announces that it has appointed the professional services firm, EY, with immediate effect to support its strategic review with a particular focus upon cost reduction and cash collection.

Working capital and recoveries are also mentioned in a later paragraph as strategies to assist in reducing net borrowing.

CEO comment:

We are moving forward quickly with the actions outlined last week. Alongside our own efforts, EY will provide support across the business and bring an external perspective to our cost reduction and cash collection challenge. My priorities are to reduce the Group's net debt and create a balance sheet that will support Carillion going forward.

My opinion: I completely agree with using…

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andrea34

17th Jul '17

It needs Paul to give em a call and find out what's going on! ;-)

Wol

Graham, Can I second zebediah's request for your thoughts on Inland (INL). The trading update sounds very positive (they always do) but forecasts are for a significant drop in EPS over th next two years. I can't see how the forecasts and trading update can both be right.
Thanks

Howard Marx

Julian

In both 2015 & 2016, Inland Homes (LON:INL) revalued their Investment Property Portfolio creating a large credit in the P/L.

You need to remove this from the numbers to make a fair comparison with the 2017 reported profits.

Thanks Howard
That makes more sense of the Inland reported performance. So the underlying performance in those years was a lot lower than the reported results shown on the Stock Report. And the growth projected for next year looks sensible.
Julian

Golspie

Jet2 get good reviews and are well supported in the North and Scotland.

Paul Scott

Hi,

Thanks to Graham for today's report. Here are a few additional comments from me.

Elecosoft (LON:ELCO)

This software company (in which I hold a long position) has been in a nice up-trend for a year, its share price having more than doubled. I flagged it up about 4 months ago as potentially interesting, here. It develops & sells project management software for the building industry, and claims that its software is becoming more widely used.

Anyway, ELCO has issued an in-line with market expectations update today.

The update (for the 6 months to 30 Jun 2017) also says that H1 this year has delivered sales up on H1 of 2016. Profit before tax is expected to be significantly higher than H1 2016.

I am wondering if this might be a case where there's the possibility of the company exceeding full year forecasts? The shares don't look cheap, but I like that its software seems to be becoming more widely used. There is also growth coming from an acquisition in Oct 2016.

It's not a big, conviction position for me, but something interesting at the smaller end of my portfolio. It might be worth a closer look, if you're happy to pay a fairly full valuation;

Interquest (LON:ITQ)

Response to level of acceptances - this is a really bizarre situation, where the Directors (including 33.3% shareholder and Chairman, Gary Ashworth, have tried to take the company private with a low ball offer at just 42p. Apparently Luke Johnson is putting up some of the funding for the deal, which is very surprising.

It looks like the deal is in real trouble - which is good news. I don't like to see a fundamentally sound company being bought out on the cheap, via an opportunistic bid from the very Directors who have caused the share price to fall, with their poor stewardship of the company. The correct response to a low share price, is to work harder & smarter, thereby rebuilding profitability, and ultimately the share price. It tells you a lot about Directors, if their response to poor performance, is to try to nick the company on the cheap.

Acceptances for the deal are at 49.61%, not enough to get it through. Bear in mind that includes the large shareholding of Ashworth & related parties, plus some Institutional irrevocables. As today's RNS makes clear, outside shareholders holding only 6.92% of the shares have agreed the deal. That's a resounding thumbs down.

What a shambles, to have the only independent Director, and the company's broker, rejecting the offer;

As previously communicated in the circular posted to shareholders on 15 June 2017, the Independent Director, who has been so advised by Panmure Gordon, recommends that InterQuest Shareholders do not accept the Offer and take no action on the basis that it materially undervalues the Company.

I don't see how this offer can succeed, unless the Directors greatly increase the offer price. So it looks as if outside shareholders might be able to scupper this deal.

The position of the Directors now looks untenable, and I think a clear-out of the Board is now necessary. This share is a good example of how a dominant Director shareholding can become a bad thing, if they abuse their power.

Conviviality (LON:CVR)

I had a quick skim of the results for y/e 30 Apr 2017 from this supplier of drinks to wholesale and its own franchised chain of retail outlets. You might recall that this company expanded considerably, by buying a large drinks distributor.

Adjusted EPS of 21.0p seems to be slightly ahead of the consensus of 20.6p shown on Stockopedia.

The rest of the results statement looks quite good. The combination of the two businesses seems to be going well. Drinks businesses are much about scale - as price discounts from manufacturers are driven by volume.

It's not really my kind of thing - a rather weak balance sheet, and overall a low margin business, but it might be worth a look for readers who like the sector. The full year divi is up 33%, a very strong increase, to 12.6p, so that's a yield of 3.8% on today's share price of 332.75p. Not bad - as a rise of that size implies that maybe future divis could also be higher?

Stockopedia likes it, with the computers calling it, "Balanced - mid cap - High flyer". The StockRank is good, at 82.

I hope readers find it useful, with me adding some extra comments after Graham's articles. If people like this format, we might do more of it in future - it seems a lot better than doing 2 separate reports.

Regards, Paul.

Graham Neary

Good points and thank for the info Ian & Andrea. I added a section on Taptica International (LON:TAP) to the report.

Cheers

seadoc

Thanks Paul,

The format works for me, might give you a few more hours duvet time. Conviviality (LON:CVR) I held a few, but sold as delivery drivers, well at least just over the border in Wales, were less than enthusiastic. A hard choice as the numbers still look good and why give up a senior position (senior wine buyer?) at John Lewis unless you were 100% sure of the future as CEO of Conviviality (LON:CVR) ?

Regards,

Seadoc

AstonGirl

I would call that the best of both worlds

simoan

18th Jul '17

Paul,

The trouble is your thoughts on companies not highlighted by Graham in the main article will not show up when you hit the Discuss button on the StockReport. So you'll be relegated to being one of us plebs :)

All the best, Si

iwright7

Graham,

More background - There is a interesting review of Taptica International (LON:TAP) on the Research Tree Blog:

https://www.research-tree.com/...

From Wikipedia (2015 Data)

Taptica has developed an application that analyzes cell phone users' behaviors, spending and how the previous relate to demographic data such as age, gender and location. Taptica sells advertisements based on complete transactions, such as registering for a game. The platform also enables city-specific user targeting, a feature that increases the effectiveness of ad campaigns. In 2015 Taptica claims to have stored 200 million smart phone user profiles on its platform, with more than 100 data points on each user, in order to provide a precise picture of user behavior to advertisers.

Following a report conducted by the company, showing that native ads give better results, Taptica integrated them into its platform. Taptica claims to be the first company to combine optimization for direct marketing and real-time bidding, a feature that will reportedly allow advertisers to conduct targeted campaigns. The company's portfolio has almost 1,000 publishing partners and 250 brands that are engaged in gaming, internet radio, travel and retail industries.

Taptica works on a no sale/no income model, which must be very attractive to their big name advertisers. Their Big Data collection may yet turn them into a Gorilla in their sector. Ian

cig

It´s too easy to miss if you put your additional report in the discussion thread and you get lost into all the trivial comments we make every day. Not everybody follows the comments all the time.

Maybe at some point Stocko should do you a dedicated section of the site, where you enter reports (and daily macro commentary) as discrete items and you let software collate it into various formats like daily reports, etc. It would allow various other enhancement (segregated per-item discussion threads, author attribution, maybe snippets from the stock report on a side panel, etc).

It is the best of both worlds to get input from both Graham and yourself Paul, as you tend to cover slightly different companies and have your own slants on analysis. Is it not possible just to add your additional inputs at the end of the articles that Graham writes (and vice versa) with the company codes tagged in the heading? As someone else said, if your input is buried only in the replies then some people might miss it.

michele68

I agree with cig that your added report could easily be missed if it is within the discussion section.

anfitrion

Hi seadoc,

I'm actually very curious about the feedback you got from Conviviality drivers. Would you mind sharing a bit?

Thanks!

Anfitrion,

I had good advice from children, nephews and nieces about bargain booze, did a bit of investor research, cheap cider, unbranded vodka and strong beer and invested just over two years ago. In Feb, Paul or Graham questioned the gearing and having doubled my money I sold half. The intention being to sell the rest but the sp kept climbing so held on.

I was walking the dog and the path was blocked as the beer got trundled into the cellar. I waited while the guys finished and dropped the hatch and got thanked by the driver. Poor guy may have just been having a bad day (and the local 'spoons had just reopened so he could be right) but he made a big fuss of the dog and when I asked about new bosses he passed a comment along lines of "they have no idea". HGV drivers who can park on a busy high street should not be crossed! It reminded me that I was planning to sell and did so, early June, annualised return over 25 months, just over 50%.

Just that, but I see sp has climbed back to my selling price in June so I may be wrong. I am moving from any cyclical, edgy shares into boring, minimal debt "bond equivalent" and Conviviality (LON:CVR) despite the high and raised dividend misses that by a mile and as rates go up I think they may struggle by being on the wrong side of equation. Just my view and I no longer have any financial interest.

Regards,

Seadoc

Thanks, Seadoc. That is helpful. I love those sort of "street checks", although you have to take them with a pinch of salt as few workers speak highly of management.

I actually started looking at Convivialty as a potential short on the UK consumer crunch and after doing some proper research I'm pretty bullish on their prospects as the leader and consolidator of UK drinks distribution.

"I actually started looking at Convivialty as a potential short on the UK consumer crunch and after doing some proper research I'm pretty bullish on their prospects as the leader and consolidator of UK drinks distribution."

I think your first idea is the better but it is certain that you will be right on at least one of those views.

Regards,

Seadoc

ridavies

20th Jul '17

I support your additional comments thanks. You are unlikely to be missed by me with your additional comments. You state at the top of the next day report by whichever of the 2 of you is doing it that there is a simple link. It is quite easy to scroll down through the self described 'dross' from other commentators (I dont agree with the dross by the way - I find most of the comments very useful). Keep it up please.

7th Aug '17

Another acquisition announced by Taptica International (LON:TAP) today and their house broker has lifted their target price (again) by +15% to 500p. Onward and upward! Ian

Small Cap Value Report (17 July 2017) - CLLN, PTY, DTG, TAP

Carillion (LON:CLLN)

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Graham Neary

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Elecosoft (LON:ELCO)

Interquest (LON:ITQ)

Conviviality (LON:CVR)

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