Small Cap Value Report (18 Jul) - NWKI, OSG, DTG, CMH, FUTR, JDG

Thursday, Jul 18 2013 by

Good morning. It's a busy morning for results & trading statements, so let's start with a share that's been on my watch list for some time, Networkers International (LON:NWKI). Their trading update today seems to be OK. The key bit is that they confirm expectations for this year (ending 31 Dec 2013).

The market cap is £31.5m at 36p per share, and they have reported a reduced level of net debt, at £6m (which is an invoice discounting facility). The interim dividend has been raised from 0.6p to 0.7p.

Stockopedia shows the current year EPS forecast as 4.7p, so that puts them on a PER of about 8, which looks reasonably good value, although that rises to about 10 if you factor in the net debt. With an economic recovery now seemingly underway, that doesn't look a demanding valuation at all for a company that should see a cyclical uplift in demand from now on. So it might be worth a look.

Altthough fee income being 8% down against H1 last year does concern me a bit.




The FTSE 100 is forecast to open in a few minutes, down 11 points at 6,560, so nothing too dramatic there.




Next I've been looking at results from OpSec Security (LON:OSG), for the year ended 31 Mar 2013. It's a £32m market cap (at 40p per share) security company which specialises in anti-counterfeiting technologies, both physical and online. Revenue is up from £38.3m to £51.7m, although that has been driven mainly by acquisitions. Only 6% of the growth is organic.

Adjusted operating profit rose from £2.3m to £3.7m. Adjusted EPS rose from 2p to 5.7p, which doesn't look quite right to me, and from what I can gather the EPS figure has been flattered by a Corporation Tax credit, so that does not look a reliable figure for valuing the business on a PER basis, from what I can gather.

You would need to adjust the EPS fgure for a normalised tax rate first, before relying on it as the starting point for a valuation.

I also don't like the fact that they report £6m cash in the headline figures, but actually have substantial debt of £17.3m, so overall have net debt. The presentation of…

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Dart Group PLC is a leisure travel and distribution, and logistics company. The Company is engaged in the provision of air travel organizer licensing (ATOL) licensed package holidays by its tour operator, Jet2holidays Limited, and scheduled leisure flights by its airline, Limited ( It distributes temperature-controlled and ambient products on behalf of retailers, processors, growers and importers in the United Kingdom. It operates through two segments: Leisure Travel, and Distribution & Logistics. The Leisure Travel business focuses on scheduled leisure flights by to holiday destinations in the Mediterranean, the Canary Islands and to European Leisure Cities. The Distribution & Logistics business includes the operations of Fowler Welch-Coolchain Limited, a distribution and logistics services provider. Its temperature-controlled operations are in Spalding in Lincolnshire, Teynham and Paddock Wood in Kent, and Hilsea near Portsmouth. more »

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12 Comments on this Article show/hide all

PhilH 18th Jul '13 1 of 12

Hi Paul,

I hope you have time to look at a great set of results from Dart (LON:DTG), who have beaten forecasts and who have invested in new aircraft to expand their offering.

Phil (still long on Dart (LON:DTG) )

Professional Services: Sunflower Counselling
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PhilH 18th Jul '13 2 of 12

Hi Paul,

Thanks for the write up on Dart.
I spotted them back in November when they released their half year report using a screen I built on Stockopedia.
I was also already in easyJet (LON:EZJ).

For me, it was a no brainer, as the weather was the driver for me. The more it rained, the more confident I became. Scores of Brits were going to be desperate to get some sun, plus lots were going to want to come to the UK after seeing the London Olympics.
I got in @ 98p

I took a huge chunk of my stake of EasyJet off the table in Feb, conscious of the risk. The remainder is currently showing a tasty 173% gain.

I actually sold out of Dart in the run up to the interims in April, trousering a 38% gain.
After the interims and with the rain continuing I bought back in May @ £1.88 as to me it was still satisfied a lot of what I look for ... High Quality, Value, Growth and Momentum.

I take on board your comments about the unpredictability of the airline industry. Perhaps this was a golden opportunity, as Dart was a high quality company trading on apparently low PE, the conditions were ripe for growth in their field and the stock had momentum. Given your concerns, the change in the weather and that H1 is always weaker than H2 I'll tighten my virtual stops and ride the trend for as long as it lasts.

Once again thanks for your analysis, it's much appreciated.


(I hold DTG & EZJ)

Professional Services: Sunflower Counselling
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patrick9092 18th Jul '13 3 of 12

Hi Paul,

DITTO to you saying you sold out of Dart to early.....I held from 78p for quite a time and nothing happened so like you I got impatient and sold......we live and learn !!!!

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PhilH 18th Jul '13 4 of 12

Hi Patrick,

That must be really frustrating.
That's why I'm interested in value stocks that are showing momentum especially in the current bullish market conditions. By having funds sat in static stocks, you're in effect losing out to the market.

Best of luck

Professional Services: Sunflower Counselling
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snickers 18th Jul '13 5 of 12

Hello Paul.
Can I ask, is the use of invoice discounting a red flag for you at all? Or is it a normal/necessary method of finance in certain types of business? It's an expensive method, is it not, more expensive than bank debt..?
Thanks if you can enlighten me.

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Chris12nz 18th Jul '13 6 of 12

Hi Paul,

A lot on today, but I think the netcall trading update was encouraging. They have lots of cash in the bank and seem to be on a growth path. Sound like they will beat expectations.


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hedley05 18th Jul '13 7 of 12

The latest acquistion by JDG turns a profit of 2million plus per annum. With the company trading on a PER of 15 or abouts before this business is digested into JDG, will this not add 30million to the market cap, or £5-6 per share - making my target 18-20£

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Paul Scott 18th Jul '13 8 of 12

In reply to post #75314

Hi hedley,

Don't forget to take off Corp Tax! Earnings are stated post-tax, whereas profits are stated pre-tax. So that makes a 20-25% difference approximately.

There's quite possibly a bit more upside on Judges Scientific (LON:JDG), but I suspect the big gains have been made, so in percentage terms it's not of interest to me. The danger is that, when you've done very well on a share, you get complacent, and carry on holding too long, and lose sight of the fact that the rating is quite high, and the percentage gains from today's price are not good at all.

Whereas personally I think it's better to recycle big gains from winners into very cheap things with bigger potential percentage upside. Easier said than done of course!

We all fall in love with our big winners, everyone's done it. But that massively clouds your judgement about when to sell, as we're all human & enjoy the glory of having done well on something.

Cheers, Paul.

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Paul Scott 18th Jul '13 9 of 12

In reply to post #75296

Hi Chris,

I ran out of time today, as there were so many things to look at, but did have a quick look at Netcall, and it does seem interesting.

Cheers, Paul.

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snickers 21st Jul '13 10 of 12

Still interested in invoice discounting (mentioned in the article when discussing Networkers NWKI) as a red flag.. Here are some quotes from .

Pricing for asset-based lending products varies ... Where the credit control function remains with the company (invoice discounting), costs will be lower than those that apply to factoring, where the finance provider pursues late payments... Charges are typically split into two parts: a discount (or interest) rate and a service charge. For invoice discounting... the discount will be the Base Rate plus 1-4%, while the service charge .. between 0.1 and 0.5% of turnover. For factoring, where the finance company effectively provides outsourced credit control to the client (and so has more effective risk control), the service charge will typically be 1-3% of turnover. Factoring is frequently the service offered to small business clients. Domestic invoice discounting has a turnover about ten times the size of the market in domestic factoring.

invoice discounting and factoring... These forms of finance are sometimes regarded with a degree of suspicion since it is felt that companies that need to sell their trade receivables may be suffering cash flow problems, which can be an early warning sign of distress. This explains the importance for many customers of confidentiality... suggest the number of companies using invoice discounting and factoring is shrinking..

Early-stage businesses: can asset-based lending, such as factoring and invoice discounting, could be used to provide more finance to early-stage businesses and so aid their growth... The ABFA reports that this form of finance is already used quite commonly with early-stage businesses in certain sectors, such as recruitment.

I think Staffline don't use it, but Harvey Nash do, and NWKI; recruiters all. Staffline ('s share price) has done very well recently, the other 2 haven't. Is this financing the reason? Are the above quotes fair?



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Monty9 21st Jul '13 11 of 12

Fraid invoice discounting is a red rag for me. Expensive, very time consuming. If you had a reasonable amount of working capital you surely wouldn't.

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Monty9 21st Jul '13 12 of 12

As a happy holder of (too few) JDG I am in no mood to sell. Certainly the deals will cost more in earnings as the deals get bigger, but surely the value of JDG will also increase as targets'  value increases - the equation remains about the same. For me the interesting factor is how long Messrs Circurel and Cohen remain in the driving seat; no sigh of quitting yet though.

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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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