Small Cap Value Report (17 Mar 2016) - SKP, CLL, QRT

Thursday, Mar 17 2016 by
42

Good morning!

An interesting Budget yesterday from George Osborne. I won't cover that here, as there are any number of other places where summaries and analysis can be found.


SkyePharma (LON:SKP)

Share price: 427p (up 3.3% today)
No. shares: 104.8m
Market cap: £447.5m

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

Results y/e 31 Dec 2015 - sparkling results were published yesterday for this, "expert oral and inhalation drug development company". Pharmaceuticals is a sector I normally avoid, unless the figures are easy to understand, which they are in this case - SKP has ticked the right boxes to be considered a good GARP (growth at reasonable price) share for some time. It's one that I've written about here 10 times before.

Pre-exceptional EPS rose from 17.5p in 2014, to 25.1p in 2015. Even after recent rises, the shares don't look particularly expensive to me, at a PER of 17.0 times, although there are lots of moving parts with this company's accounts - e.g. milestone payments, etc. So it really needs more in-depth analysis which is beyond my pay grade in this sector.

I've always thought SKP would, sooner or later, make a bid target, and that's what's happened:

Recommended merger - also announced yesterday. The boards of Vectura (LON:VEC) and SKP have reached agreement on an all-share merger, whereby SKP shareholders will receive 2.7977 Vectura shares for each SKP share. There is also a partial cash alternative.

Personally I'm not at all happy about this. I don't want Vectura shares! I want to keep my SKP shares. So it will be interesting to see how the shareholder vote goes.

With any luck, this not particularly good merger deal might smoke out a proper bid (at a decent premium) for SKP.

EDIT: A further point that I forgot to include before, is that all-share mergers can be problematic. The trouble is that often there is part of the acquired company's shareholder base that doesn't want shares in the acquirer. So they sell in the market. That can cause a terrific overhang of shares, which can last a very long time.

I noticed this happen when Matchtech (LON:MTEC) bought Networkers Intl in Apr 2015, and the share price has never recovered - even when MTEC puts out good news,…

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Cello Health plc, formerly Cello Group plc, is a United Kingdom-based healthcare and consumer strategic marketing company. The Company is engaged in providing market research, consulting and direct marketing services. The Company provides a range of biotech, diagnostics, devices and other non-healthcare clients. The Company operates through two segments: Cello Health and Cello Signal. The Cello Health Division provides market research, consulting and communications services principally to the Company's pharmaceutical and healthcare clients. The Cello Signal Division provides market research and direct communications services to the Company's consumer facing clients. The Company delivers its services from office networks in the United Kingdom, the United States and Singapore. more »

LSE Price
127p
Change
0.4%
Mkt Cap (£m)
134.7
P/E (fwd)
13.0
Yield (fwd)
3.3

The Quarto Group, Inc. is an illustrated book publishing and distribution company. The Company is engaged in creating content and publishing books from a diverse portfolio of imprints. The Company operates through segments, including Quarto International Co-Editions Group; Quarto Publishing Group USA; Quarto Publishing Group UK, and Quarto HK. The Quarto International Co-Editions Group segment creates illustrated books that are licensed and printed for third-party publishers for publication under their own imprints. The Quarto Publishing Group USA segment creates and publishes illustrated books in North America and sells co-editions of them internationally. The Quarto Publishing Group UK segment creates and publishes general non-fiction and illustrated books in the United Kingdom market. The Company’s books are sold in approximately 50 countries and in 39 languages. more »

LSE Price
71p
Change
 
Mkt Cap (£m)
14.5
P/E (fwd)
n/a
Yield (fwd)
n/a



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


20 Comments on this Article show/hide all

WarrantStar 17th Mar '16 2 of 20

Hi Paul,
I'm a holder of SkyePharma (LON:SKP) and have mixed feelings about the merger. I think the shares may have risen more yesterday without the merger due to the very good results they just released. On the other hand, Vectura also looks pretty good, and I'm sure that there will be a lot of synergies between them.
The merger looks like a done deal to me with both companies recommending it and big shareholders in both companies supporting it.
Is there any particular reason that you don't want Vectura shares?

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Damien84 17th Mar '16 3 of 20

Hello Paul

Finsbury foods (FIF) interim results yesterday looked good and have taken a small position. If you have time please could you take a look through them and share your opinion?

Thank-you

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Ramridge 17th Mar '16 4 of 20
3

Re. Cello (LON:CLL) The use of 'headline' numbers is annoying because there is no agreed convention as to what a headline figure should be, and so companies then make up whatever definition that suits them.

In this case, they have have defined headline earnings to mean EBITDA less amortisation and depreciation.

They then go on to provide a "headline" eps of 8.39p. A totally meaningless and misleading figure (against a diluted eps of 3.44p). Just a clumsy subterfuge to puff up the numbers.

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rouleur1 17th Mar '16 4 of 20

Paul. Do you fancy taking a look at Safestyle? (SFE)  Cracking little company who do one thing really well. Finals today are noteworthy.


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ExpectingValue 17th Mar '16 5 of 20

Despite Quarto's rise over the last couple years I think it is as good value as it has ever been. The debt reduction should give investors comfort, and of particular note is the performance of new books. Their model always has been to produce books which have longevity and drive sales long beyond the first year of publishing, and the group is getting better at tracking and ensuring this value is created.

They continue to grow publishing organically and have a very resilient niche (illustrated, large format), as well as a geographically and functionally diverse range of products.

The clean-up of the shareholder register earlier this year, and the resignation of two of the activist investors on the board, bring to an end one chapter of the group's history. I think in this new chapter, people begin to realise that this is a solid, high-quality, cash generative business, not one fighting to clean up its balance sheet. The set of challenges it brings is different, too - now, as Paul notes, there is more discretion on what can be done with capital, and more of a discussion about what the correct allocation is.

I think the current price still under-rates a good business. I hold.

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herbie47 17th Mar '16 6 of 20

I agree with Paul about SkyePharma (LON:SKP), its not a sector I usually invest in, I was keen on SkyePharma (LON:SKP) but have no desire to own Vectura shares, I thought it was a done deal so I sold out on today share rise. Mergers do not always go well but seems Vectura have done a good deal though, a takeover would have cost them rather more.

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paraic84 17th Mar '16 7 of 20

In reply to post #124090

My own view is SFE is starting to look expensive although I agree it seems like it is well-managed as a business. It's now priced at 15 times 2015 earnings.

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herbie47 17th Mar '16 8 of 20
1

In reply to post #124090

I don't like how they operate.

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Casabanker 17th Mar '16 9 of 20
10

I have been watching Norcros (NXR) closely as the share price has fallen from around 200 to around 165. The most recent reports have suggested improved earnings and a possible EPS of 23p. Indeed the interim dividend was raised from 1.8 to 2.2. Since the reports, South Africa has suffered an economic downturn and NXR has a third of their business by value there. No RNS has been issued so I took the liberty of telephoning the Company and spoke to the CFO. After asking him about current conditions, he agreed that their overall earnings were in line with expectations and if they were adversely affected, the Company would have to warn the market.

I was already a shareholder in NXR but decided to buy some more on two recent occasions.

In addition, an RNS has been issued yesterday announcing that Miton now hold 17.5% of NXR.

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ajbowden 17th Mar '16 10 of 20

Hi Paul
Any comment on Bill Adderley, Dunelm Dunelm (LON:DNLM) founder building up a stake in French Connection (LON:FCCN)
From yesterday RNS Adderley's WA Capital has now built up a 6% stake
http://www.investegate.co.uk/french-connection--fccn-/rns/tr-1--notification-of-major-interest-in-shares/201603161216383080S/
He will likely be looking to have an input into the direction of firm.

I have a small holding in Dunelm (LON:DNLM)

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JohnEustace 17th Mar '16 11 of 20

In reply to post #124090

I agree that I don't like the way their sales teams work - at least the ones that have knocked at my door. I would never buy from them and in this case that stops me buying into the company.

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Novice Investor 17th Mar '16 12 of 20
4

Two posts numbered 4..interesting..

NI

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rhomboid1 17th Mar '16 13 of 20
1

Standout performer for me today was Capital Drilling (LON:CAPD) http://www.investegate.co.uk/capital-drilling-ltd--capd-/rns/full-year-results/201603170700083361S/

"
Long term production contracts are a strategic focus for the Group due to the unique level of stability and visibility they provide within a sector beset by uncertainties. Currently over 70% of Group revenue is derived from long term contracts. Combined with the recent success of the Group’s new Lean Operating Model, targeting the exploration and delineation sectors, Capital Drilling is well placed for growth in the years ahead.
The Group’s financial position is its strongest since listing on the Main Market of the London Stock Exchange in 2010. Management’s strict focus on cost and capital discipline has resulted in record free cash flows being recorded in the past three years, increasing to $14.4 million in 2015. These cash flows have enabled us to de- gear the balance sheet and pay our first dividends since inception in 2004. A total of $4.0 million was paid to shareholders over 2015, while gross debt reduced to $5.1 million, with closing net cash at $8.3 million, versus net debt of $0.4 million in 2014.
In line with the Group’s solid financial and operating position the Board of Directors have declared a final dividend for the 2015 period of 2.5cps (US$3.4 million), payable in May 2016, representing a 32% increase on the 2014 final dividend."

So a near 10% yield and returning to growth and profit this year, I'm a happy holder and bought a touch more when the price fell back this pm. The stockopedia score is 98 so I guess I'm not too wrong to be holding.

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LovelyLovelyGorgeous 17th Mar '16 14 of 20

In reply to post #124108

another £1M in value buy went through today so watch out for another announcement

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gus 1065 18th Mar '16 15 of 20
2

In reply to post #124136

Interesting developments here. May be just a simple PA investment by Adderley, but could also be an interesting tie up. French Connection (LON:FCCN) offloads its loss making retail units and long term leases ahead of schedule to Dunelm which is still expanding its network, especially into the SE. Dunelm (LON:DNLM) then gains access to French Connection (LON:FCCN) branding and merchandise while French Connection (LON:FCCN) rolls out its brand license through Dunelm stores throughout the UK. Win win all round (and my French Connection (LON:FCCN) shares go up too). Maybe adding 1 plus 1 and getting 5 but stranger tie ups have happened in UK retail recently.

Gus.



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TMFMayn 18th Mar '16 16 of 20
1

FCCN

It's a shame Paul has missed FCCN's results, as he has decent sector knowledge and it is one of his higher conviction holdings (at least going on his SCVR-based fund).

Anyway, the appearance of Will Adderley, the son of Dunelm's founder, on FCCN's shareholder register is probably the best news FCCN shareholders have enjoyed for years.

We could all be adding 1 plus 1 and getting 5 here, but Adderley has vast retail experience and connections, and could buy FCCN with 'loose change' (he owns 30% of Dunelm, a stake worth almost £600m) .

The issue with FCCN is founder/42%-owner Stephen Marks is now past it (at least going on FCCN's dismal results since 2007-8) and no-one has had the inclination/power to turf him out. Adderley could (or should!) be just the man to make it happen.

FCCN does have a 'home' retail operation selling fancy tables and furnishings, which I always thought was upmarket when compared to Dunelm. But maybe there is potential for Dunelm to sell tea-towels etc in FCCN's Oxford St store? Who knows. At least Adderley has been a buyer this week and sees something in FCCN's stock.

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herbie47 18th Mar '16 17 of 20

In reply to post #124148

I see French Connection (LON:FCCN) are down 12% today, any idea whats going on?

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gus 1065 18th Mar '16 18 of 20

RNS just out that WA Capital have increased their holding beyond 7%. The plot thickens...

http://www.investegate.co.uk/french-connection--fc...

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grumpy5 18th Mar '16 19 of 20
1

Re FCCN it's the appearance of Christos Angelides as a NED that excites me. For many tears he was the star behind Next's product selection, and I am wondering whether the fat old nutter Marks is lining him up as a successor.

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TMFMayn 18th Mar '16 20 of 20
1

FCCN

Grumpy5 -- yes, I have overlooked his appointment as an NED. Some digging shows he was Group Product Director for Next for at least 10 years until 2014, when he left for Abercrombie & Fitch.

Guardian said when Mr Angelides left for A&F, that he was the "power behind the throne" at Next.
http://www.theguardian.com/business/nils-pratley-on-finance/2014/jun/10/next-christos-angelides-abercrombie-replace

Anyway, Bloomberg says he was fired from A&F in late December last year:
http://www.bloomberg.com/news/articles/2015-12-22/abercrombie-executive-angelides-is-fired-removing-ceo-contender

Mr Adderley then declares a notifiable FCCN holding in early January, and Mr Angelides then turns up as a non-exec this week. Coincidence?

I now wonder too whether Marks is lining up Mr Angelides as a successor. That must be the case, surely...!

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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 Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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