Small Cap Value Report (17 Sep) - POR, NPT, BDI, NGR, BGO

Tuesday, Sep 17 2013 by

Good morning! It was the monthly investor evening called "Mello" last night, in Beckenham, and I have to say what a pleasant evening it was. I really do strongly recommend that people based in the South East try to get along to these evenings, as it's such a pleasant crowd of regulars, who are very welcoming to newcomers. Last night I did the first presentation, then it was the turn of NetPlay TV (LON:NPT), who gave us a very thorough briefing on their recent strong results.

My main issue with Netplay, and the reason I sold my shares after just a couple of days of holding them, was that a friend alerted me to the significant negative impact on their earnings which is likely to happen when the UK Govt changes the tax regime for online betting companies. I felt this was somewhat glossed over in the presentation last night, and has the potential in my view to harm the share price once investors latch onto the impact of the tax changes. Some of that impact can be mitigated, and the company explained their strategies for that, but it's still a nasty headwind, and for that reason I won't be revisiting this one until I'm clearer on how the earnings figures are likely to look from 2015 onwards.

That said, Netplay are cushioned by a very strong Balance Sheet, with lots of net cash, and arguably the low current valuation (once you strip out cash) already factors in some reduction in earnings in the future. Sorry to sound negative, and thank you to the Directors for giving up their time to explain the company to investors. It's always very interesting to meet Directors and hear them explain the business in their own words.




Turning to this morning's announcements, Porvair (LON:PRV) has issued a positive IMS, covering the nine months to 31 Aug 2013. They say that revenue in constant currency was up 13%, and that profit before tax is now expected to be ahead of expectations. Excellent stuff, although they needed to be doing well, to justify a valuation that had really become very stretched. I couldn't fathom why the market took it as high as 200p back in the spring, but much to my amazement it…

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NetPlay TV plc is a United Kingdom-based online gaming company. The Company operates various interactive gaming services under an Alderney gaming license. The Company operates through two segments: Business-to-Customer (B2C) and Business-to-Business (B2B). B2C consists of various online products and ancillary income. The brands operated in this division are, and These brands operate online gaming and betting products. B2B relates to the online marketing, product development and technology business. The Company allows its customers to interact with its games on various platforms, such as television, Internet, mobile and tablet from a common integrated wallet. Its SuperCasino offers slot machine games, live dealer blackjack and baccarat, card games, a selection of casino table games, video poker and instant-win arcade games. Its Jackpot247 hosts games in the Playtech Latvian studio and their online casino games. more »

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Porvair plc is a specialist filtration and environmental technology company engaged in the development, design and manufacture of filtration and separation equipment. The Company's operating divisions include Metals Filtration and Microfiltration. The Metals Filtration Division designs and manufactures porous ceramic filters for the filtration of molten metals, principally aluminum. The Microfiltration Division designs and manufactures a range of filtration equipment for application in aerospace, energy, bioscience, water and industrial applications. It is developing a range of products, including the products for the manufacture of turbine blades, solar panel manufacture and energy storage. It operates Microfiltration division through its subsidiaries, Porvair Filtration Group, Seal Analytical and Porvair Sciences. It operates Metals Filtration Division through its subsidiary, Selee Corporation. It has plants located in the United States, the United Kingdom, Germany and China. more »

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11 Comments on this Article show/hide all

ChangFai 17th Sep '13 1 of 11

Vianet spread, another that is ridiculous this morning.

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rmillaree 17th Sep '13 2 of 11

Thanks for the Netplay update Paul.

Regulatory risks should not be underestimated by shareholders - as its almost a situation akin to Mining/Oil stocks where the governments can slap on any taxes or licences they see fit - and they generally will do when they need the cash.

The problem most Governments also have is they are either too greedy or don't understand the industry - a small piece of a large pie is better than nowt - the one exception being the old "per bet" betting tax that was abolished by the UK years ago - great decision that one (UK has been fairly generous to Gambling companies but is this about to change?) . UK PLC will right royally be shooting themselves in the foot if they introduce a tax based on turnover rather than profit - or if they tax to high a % of those profits when the company can simply locate overseas.

I learnt a valuable lesson years ago with Partypoker who were trading in US but based overseas and technically (according to the WTC) doing nothing illegal - however that didn't stop the US Government arresting Directors and seizing funds - the warning was there in the announcements though that something may happen and it did. A similar situation has happened to many other Gambling companies - therefore extreme caution is sensible.

PS - Paul it is an excellent example you are setting to other investors about paying close attention to downside risk - if you have doubts about the company exiting early can save your shirt (or house/holiday/wife/mistress - delete as appropriate). Of all the mistakes i have made in the past ignoring potential Elephants that i knew were in the room - has probably been the main one.

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Paul Scott 17th Sep '13 3 of 11

In reply to post #77317

Hi rmillaree,

Good post. I particularly agree with this bit:

"PS - Paul it is an excellent example you are setting to other investors about paying close attention to downside risk - if you have doubts about the company exiting early can save your shirt (or house/holiday/wife/mistress - delete as appropriate). Of all the mistakes i have made in the past ignoring potential Elephants that i knew were in the room - has probably been the main one."

Absolutely right. If something crops up in my research that fundamentally changes my view of the situation, I will just sell instantly. No emotion, no agonising over the loss incurred, just ditch them & move on. The worst thing to do is to hope for the best, and watch the price just gradually slide down. If something's wrong, then you want to be first out of the door, not hovering around near the door waiting to see whether it turns into a stampede or not.

Regards, Paul.

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rumplestiltskin 17th Sep '13 4 of 11

Totally agree, and realizing that you are in a zoo in the first place comes in quite handy, along with knowing what all the other animals are as well, but that's called experience isn't it?

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Beginner 17th Sep '13 5 of 11

Just a wee shout for NATURE (LON:NGR) (as usual!). They had a fatal fire and explosion at their Gibraltar facility a couple of years back, and it has been out of use since. Negotiations continue into re-establishing it. As the business has done well without this I am very impressed. When it comes back on line (probably in a year or so) profits could increase by 30% or so. I also note there is recent repeat businesss from the MoD, and mention of a possible dividend to come. This might be a better shout than the simple numbers suggest. ( I have a very small holding here).

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Ramridge 17th Sep '13 6 of 11

Hi rmillaree
Very sound advice that needs to be re broadcast from time to time. On the principle of "make sure your losses are small and winnings big", I closed my position on Netplay yesterday at a small loss.
On a general note, the small cap market is really moving into the stratosphere, Definite signs of the old fever. It is taking me a lot of will power to sit on my hands!
Regards, Ram

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RicGains 17th Sep '13 7 of 11


I hope you don't mind me putting across the opposite view across from the Mello event last night.
I understand your central tax concern. This comment is actually a very bullish view on Netplay, but to accept your point first - This tax is a very easy win for a government, no one will be rioting in the street over a tax on online gaming! Pasties maybe, but not online roulette. I acknowledge that fear and it is my #1 risk investing in an mainly UK based online gaming company. A sizeable chunk of my share pot is in Netplay, so please do take this with as much salt as you would like, and I acknowledge confirmation bias and so on.


I fear that you might have missed a key point here.

This company is growing. Fast.

Netplay is growing net revenue at something like 30% yoy at the moment. The cash pile is growing fast and they have managed EPS growth of 44% looking at the interims, plus the dividend blah blah.

As you point out, the problem is the government are proposing a 15% GROSS revenue tax.

Let's do a quick model and do it on the back of the envelope. In return for tolerance of my truly cack handed analysis, we'll be highly conservative, so that if you find a gaping hole in these calculations readers (as is likely!), I can say "Yeah, but these are very very conservative forecasts".

Gross Revenue grew by 33% last year, but let's slash that to less than half - and forecast 15% growth, going forward, to the top line. In return, to keep things simple, I'll ignore the increase in player incentives (free money they give to punters to encourage them to put down some of their own - this is why Netplay have started to focus more on net revenue, ie revenue net of this free money which can distort the top line).
I suspect player incentives will be reduced come the tax changes anyway.

So we'll forecast Gross Win of 36.4 this year, 42m in April 2015, 48m April 2016. That's GROSS gaming win, not net revenue. The government is going to take 15% of this from December 2015.

CEO Charles Butler suggested last night that they feel they can mitigate over half of the 15% top line tax because:

- They ditch the TV studios and cost centres in the Channel Islands, they just don't need them any more. 
- The new contracts with broadcasters and affiliates mean those companies are forced to take their share of the tax hit, because contracts are on a revenue share agreement and deal with the tax first.

Let's be conservative and assume he's too optimistic and Netplay only manages to swallow 6 of the points rather than 8. So it affects the top line by 9% (15% - 6%). 

April 2014 - 36.4m, April 2015 - 21+19 = 40m (second half taxed), April 2016 - 43.68m.

Punch those numbers into a spreadsheet with broadly similar percentages of net revenue and EBITDA etc etc and even on a hugely conservative model you get well over 2p in 2015, and something like 2.4p in 2016.

This is despite this conservative model suggesting:

- Growth HALVES from what they are doing at the moment. Unlikely given a huge increase in marketing spend and having some of, what they claim, are the some of the best retention rates in the industry. (This isn't independently verified). Players recruited now, will pay dividends for many months to come. 56% of net revenues come from players they first got through the door over 6 months ago.

- They only manage to mitigate 6 points, not 8 as he thinks is likely. (Ie over 50% of the total).

- No decrease in player incentives.

Personally I think growth may accelerate not decelerate, but you may have better insight.

What sort of numbers are your models based on?

My own private models are not as highly pessimistic, naturally! I assume growth neither increases or decreases, and therefore am optimistically forecasting EPS numbers way way above those in the above model.

I should also mention:

- 15% from next December is "worst case scenario". Personally I suspect it will happen promptly, as it's an easy earner; but the tax could be delayed. The industry is lobbying for 5% because of the very real risk of a sort of online black market, so George also could potentially compromise at 8, 10 or 12.5%. Not very likely in my view, but it could be a nice surprise. However, I would also accept that what's to stop a government raising that tax in time. It's a risk. 

- The large cash pile - expected to be circa £16m in six months, which gives Netplay plenty of firepower to acquire a smaller player, to ramp up marketing, or more likely, to invest in overseas markets.

-  Future growth plans. "The Netherlands" seems to the board's next move. I'm not overly excited about  this, Holland hardly has a huge population, but diversification and increasing the footprint means long term they are less at the whim of just one government's tax policy. Italy was also mentioned.

I could also talk more generally about EPS growth, the moat they have with the broadcasters, potential for special dividends and likely very progressive dividend policy, plus acquisitions etc etc - but we'll keep to the topic.

I'm not an expert, just a humble private investor, so would be delighted if someone could pull all this to pieces.

But, could you run us through your models, because my highly conservative above one suggests that of course it will be a drag on earnings, but the earnings are likely to be so strong that you don't really notice. 

In my opinion, this tax just means "Very Good" growth rather than "Absolutely Sensational" growth.

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fek47 17th Sep '13 8 of 11

Hi RicGains,

A very detailed analysis and interesting counter-view to Paul's opinion, so thank you.

I took a small-ish position in NetPlay TV (LON:NPT) yesterday, which I'm comfrtable about sticking with for the time being. I *suspect* (though this is based upon nothing more than a feeling in my waters, as my grandmother would have said!) that the SP will edge up towards 25p by the end of this year, at which point I may have another look at whether or not to continuing holding, given the encroaching tax charge.

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cig 17th Sep '13 9 of 11

In reply to post #77317

If you account for externalities a small pie might be a good thing in this instance, gambling is a wealth destroying industry if you account for the opportunity cost of what both the clients and suppliers could achieve in the time they currently waste on this unproductive nonsense. Arguably aggressive regulation or taxation is likely to just take it offshore and not to make the pie disappear, but it does make some domestic workers more available for productive jobs.

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Paul Scott 17th Sep '13 10 of 11


Thank you for the alternative view on NetPlay TV (LON:NPT), always good to have alternative views aired. I won't respond in detail, as I don't really look at it like you do. All I see is a tax charge that would seriously damage profits, if it were imposed now. Talk of mitigating it is just muddying the water in my opinion. So I don't feel I can value the business on current earnings, before the tax is imposed, and I don't know the business well enough to feel that I can forecast its figures with any great accuracy.

Going back to NATURE (LON:NGR), I have just noticed that they are one of the 3 companies presenting at the next Equity Development Investor Forum next week, on Wed 25 Sept. So if you would like to attend, then contact Hannah at ED. I shall be going, as usual - am really enjoying all the networking & meeting up with all the usual suspects at these events, plus usually making new friends too. Link is here for anyone interested.

Cheers, Paul.

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RicGains 29th Sep '13 11 of 11

In reply to post #77334

Quick extra thing to add to this post:

- I'm trying to get a definitive answer on whether the government will be taking the 15% off the gross or net revenue line (or some other line!). My initial thoughts, from reading the government documents, that it was off Gross Gaming Win, but upon further research it looks like it is likely to be off the net revenue number. Doesn't make much difference to the "fag packet" models I quoted, nor the legitimate concerns, but worth pointing out. I also tried calling HMRC and didn't get much sense out of them - so would love someone to clarify this. I'd say it actually looks like net revenue.

There's a detailed article someone's written on the Elite Trader website looking at charts etc, which is worth a read for those interested. Not a chartist myself, but each to their own!

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


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