Small Cap Value Report (17 Nov 2016) - CRE, NXR, AVS

17th Nov '16 by Paul Scott

67 comments 22194 reads

Good morning!

I put on a late surge yesterday evening, and wrote several more sections, so here is the link for yesterday's full report. Please note in particular the link for attending a presentation being given by an excellent growth company Ab Dynamics (LON:ABDP) .

Profit warnings webinar

If you missed Ed's brilliant webinar yesterday, on profit warnings, here is the video link, and the eBook link.

This project has definitely made me think hard about avoiding falling knives in the future, so many thanks to the team at Stockopedia HQ that did all the hard work for us.

Creston (LON:CRE)

Recommended cash offer - the largest shareholder (28%) in this marketing group has launched a bid to take it private. The offer is 125p per share in cash + 1.42p dividend. This looks opportunistic to me, and is far from generous. It represents a multiple of only about 10 times earnings. The premium is about 35%, which is in the standard ballpark for many takeover bids.

Quite good interim results are also announced today.

Overall I think shareholders might understandably feel rather disappointed that the company is being pinched from them at a lowly valuation. On the other hand, it is a 35% uplift in price, which might have taken a while to be achieved without a takeover bid. So a bird in the hand, and all that.

Shareholders will also lose the nice flow of future dividends, as this share came with an attractive & growing dividend yield, which was about 5% as of last night. Although as stated in the bid announcement, market conditions are uncertain for marketing companies at the moment.

Norcros (LON:NXR)

Share price: 147p (down 0.5% today)
No. shares: 61.3m
Market cap: £90.1m

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

Interim results, 6 months to 30 Sep 2016 - as you can see below, the financial highlights look pleasing;

Outlook comments are also positive;

With our strong brands, leading market positions and continued self-help initiatives focused on market share gain the Group is well positioned to make further progress.

Given the encouraging performance in the first half of the year, the…

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cic

18th Nov '16

Reading through the comments on pensions I would make three points:
1) The interest rate debate focuses on the income side of the pension fund. But there is also an issue on the liabilities side - the amounts the fund will have to pay out in future is not fixed. Most final salary schemes have a built in inflation increase (admittedly usually with a limit - my pension is CPI capped at 2.5%). If inflation takes off next year as many are predicting that would be a double whammy for pension schemes - investment income going down and pension payments going up.
2) Pension schemes would normally try to match the life of the bonds they own with expected cash outflows so that most bonds would be held to redemption. If there is a perfect match (which I accept there never will be, but could be close) market yield changes would have no effect since the cash flows from a bond held to redemption is known (except in default).
3) On the plus side, pension schemes could have 30, 40 or more years to run, even after a scheme is closed and existing members ave reached retirement age, so any material favourable change (higher interest rates and lower inflation) could lead to wiping out the deficits, or even result in a surplus which could be payable back to the company at some point in the future. We may have to wait a ,long time!
Even if you have all the information about the pension scheme, there is still a huge amount of uncertainty in the macro-environment to make sensible financial analysis in the long term impossible. For me, any company that has a large DB pension scheme, even if it does not currently have a significant deficit, carries too much risk to invest in at the present time. I would not be surprised if we hear stories of some companies being unable to fund their pensions and their pension funds being unable to meet pension liabilities before too long. Just my tuppence worth.

back2value

Doh! I nearly bought AVS at 205p a few months ago, but was dissauded due to the illiquidity of the shares and breadth of the spread. Actually I allowed my (execution only) broker to influence me. That was a five-figure mistake. I then resolved to buy on Monday this week and never got around to it. Well done all holders for being bothered to follow your instincts. Life is getting in the way of my investing at the moment!

Oh well

B2V

dominic higgins

Many thanks Paul, you and one other blog sparked my interest in this share in the summer when I transferred my pension into a SIPP. I then did more research on the company, added several times after my original purchase as well as very recently on the significant dip. My portfolio went up over 10% yesterday!!!

PAUL, if you ever plan to come to beautiful Bali in Indonesia please get in touch as you have free accommodation!!
Best wishes
Dom

rhomboid1

I'm delighted with AVS & would like to kid myself that I'd have found It using the finally tuned nose of a truffle pig & my inmate Benjamin Graham like capacity for spotting value. In truth I read the Fountain Rd disposal RNS, clicked onto Stockopedia and SCVR and the result was already a great performer BEFORE the takeover RNS!!

So Paul many thanks you de man ..etc !

davidf

Paul

I would like to add my own thanks on AVS - it was your post Brexit article on potential shares that flagged this one up to me. Your conviction ("this one should double", or along those lines), the Stockopedia rating and then Roland Head's analysis kept me from completely selling my holding after an already good gain before this event.

Is there a list of your other conviction shares? I know this is fraught with the danger in getting unwarranted brickbats, but what will I do with my AVS proceeds?

One other question, how does the share sale work in practice; will I find one day my shares have gone and I have cash in it's place?

Thanks again Paul (also for BOO and Globo-not)

N Harley

Great work on AVS - my first purchase using the system, and what a result!! The next one now please? Happy days

1James1n1

Paul,

Many thanks for bring Avesco (LON:AVS) to my attention and more broadly for your excellent daily reports and also creating a lively, intelligent and engaged discussion forum. The thought and detail that goes into your reports continues to amaze and impress me. Thanks!

James

P.S. The SCVR social is a great idea, but not sure you'll be in a fit state for a week or so after with all the drinks delighted readers will be buying you! :) A risk worth taking perhaps!

P.P.S. Congratulations on your Fantasy Portfolio (Beam Me Up Scotty) delivering just over 100% gains in under 2 years!

For anyone wondering you can sell all you like at 6.36 in the market which strikes me as very reasonable value

is the general consensus here that it's a done deal and a competitor bid is unlikely? I'm considering selling into the market now but would appreciate comments either way. I'm a 'bird in the hand type of guy' by the way. I've never been in a takeover situation so this is all new to me.
approx when would we likely see the payment if all goes through ok and one holds unti lthe end?
Thanks in advance for any assitance here.
Regards
Dom

iwright7

I will sell my Avesco (LON:AVS) today after 9.30am when the markets are in full swing. It does seem that AVS was a bit of a special situation: cheap, good momentum and quality. The other special part was the CT division which almost certainly would have be worth a lot more as a standalone operation, rather than as part of a bigger group.

So I now thinking, "Where do I invest the AVS cash?" and are there other AVS type, high scoring SR companies whose share price has been held back by one or 2 poorer performing divisions? Ideas please? Ian

FoolishBen

Many thanks Paul, I'm not sure words can express how happy I was when I woke up this morning and logged into my brokerage account to see a 195% profit on AVS.

iwright7
one angle might be to look at other AIM companies (i focus on AIM) that do a lot or most of their business in the US, have a strong niche or are a market leader, and where a US company might wish to buy it. SOM is one example in my view.
It is approx 17% cheaper for US companies to buy UK listed companies due to the current USD/GBP rate and debt is still very cheap of course if needed to fund the purchase.

for the record, I'm a holder in SOM and like the company, its niche market and management a great deal!

good luck!
regards
dom

dom,

Yes Somero Enterprises Inc (LON:SOM) is my now my 3rd biggest holding and I see its up again this morning - Still too cheap I think. I need another pick though - Too many eggs in one basket and all that. Ian

grumpy5

Paul,

Can I add my thanks re AVS? One point worth noting: congrats to the advisers, partic finnCap, as there appears to have been no pre-deal leakage. The price just went ballistic yesterday.
G5

Ramridge

No I didn't invest in Avesco (LON:AVS) but hearty congrats to the fortunate bunch who did !!! Well done.

fwyburd

I've been fortunate to have had two stocks subject to takeovers in the last few months, AVS and PFL. Thank you Paul for bringing AVS to my attention. But a cautionary note to AVS holders: I sold my PFL stake on the original takeover announcement at 164p but 6 weeks later there was another bidder at 184 and the shares then rose to 194. Its possible the AVS is a done deal but its also possible that another bidder may emerge.

financeguru2000

Over the moon.

Many thanks to the team for bringing this stock (£AVS) to my attention.

Double thumbs up to Paul as well.

gus 1065

Hi fwyburd,

I was also in Premier Farnell (LON:PFL) (as well as Avesco (LON:AVS) ). It's been quite a good year for M&A activity as I've also seen portfolio held takeovers of Home Retail (LON:HOME) , Cable & Wireless Communications (LON:CWC) , Journey (LON:JNY) , Hydro International (LON:HYD) , ARM Holdings (LON:ARM) £BPI , SkyePharma (LON:SKP) and Lifeline Scientific Inc (LON:LSI) .I suspect this is the result of cash burning a hole in the pockets of profitable companies, very cheap long term debt for those with the capacity to borrow and favourable currency movements (i.e. £ devaluation) that is making UK Plc relatively cheaper, especially where the target company has substantial overseas revenues in strong foreign currencies.

On the specifics of the Premier Farnell bid, this came following a profit warning the previous year and disposal of a chunky subsidiary making it a cheap and clean acquisition with a strong market position. At the time of the first bid, I recall the share price went up to and above the bid suggesting the market thought a second bid might come along (and then went above the second bid anticipating an even higher counter offer). In this case, the 650p offer seems to be at a knock out 125%+ premium such that a second offer seems unlikely. I think this is borne out by the market bid for Avesco (LON:AVS) being at the 630p level. This said, you never know what might come along ...

Best,

Gus.

Wimbledonsprinter

The recent sharp decline in Topps Tiles (LON:TPT) (which I am long) is probably not a great read across to Norcros (LON:NXR) 's UK business (ex SA). admittedly, there are real differences with Nocros doing a lot of manufacturing, having a wider product range and selling into new builds - but there still should be considerable end market similarities. Topps seems to have passed the April to Sep period with reasonable like for like growth but the market seems worried about the outlook and the fx impact for 2017. Full year results for Topps Tiles (LON:TPT) come out on 29 Nov - while this year's results have been effectively pre-announced - the focus will be on current trading and outlook. £NXR's UK business, if I understand correctly, had actually a 5% decline in LFL sales (April to Sep), with poor performance at Triton and Johnson Tiles. Headline UK revenues only grew because of acquisitions (Croydex and Abode).

JustCurious

There's a factual error in the Norcros comments. The payments to the pension scheme are not a flat £2.5m pa but £2.5m indexed with the CPI inflation index. This may not materially influence the analysis, but 5% CPI would mean the payment was £2.625m, not £2.5m.

(Almost certainly there will be a 0% floor on the indexation too, so the payments can only be higher than £2.5m, not lower).

Small Cap Value Report (17 Nov 2016) - CRE, NXR, AVS

Profit warnings webinar

Creston (LON:CRE)

Norcros (LON:NXR)

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Paul Scott

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