Small Cap Value Report (18 Nov 2015) - UKM, ECK, SCS

18th Nov '15 by Paul Scott

31 comments 19644 reads

Good afternoon!

I ended up writing quite a long report late yesterday evening, which is here, covering the following companies' results or trading updates;

Cdialogues (LON:CDOG)
Idox (LON:IDOX)
InternetQ (LON:INTQ)
Lavendon (LON:LVD)
Mobile Streams (LON:MOS)
Blinkx (LON:BLNX)

In future, I will endeavour to only go out on the lash at weekends, and not on school nights! So apologies again for yesterday's delayed service.

UK Mail (LON:UKM)

Share price: 327p (down 10% today)
No. shares: 54.9m
Market cap: £179.5m

Interim results to 30 Sep 2015 - I've not looked at this company before, so am not fully up to speed on it, so this is just an initial impression. These H1 figures look poor, but given the shares are only down 10% today, this must have been previously flagged to the market.

Indeed, looking at the chart, 7 Aug 2015 is the date when the share price began to tank, and sure enough there was a trading update on that day. The crux of that profit warning on 7 Aug 2015, which was a "materially below current market expectations" one, i.e. nasty, is that teething problems had been encountered with the move to a new, fully automated depot in Coventry.

Today's interim results continue that theme, and the hit to profits is really rather bad, as the table below shows. They lost about a third of their operating profit, but due to what seem to be high central costs, this had a much larger impact on the bottom line - operational gearing working in reverse.

Therefore, the apparently strong operating margins mentioned in the narrative, are not really a very fair representation of performance, given that such a large lump of costs are classified as central costs.

In this type of situation, it's difficult to know how much of the drop in profits really is down to the temporary factors that management focus on, and how much is underlying deterioration in performance that will continue even after temporary problems are fixed. This is such a highly competitive sector. We say City…

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Leven

18th Nov '15

SCS -- last time I looked, the management that steered the business into bankruptcy in 2008 were still in charge now.

and floated for PE to exit!! I wonder what happens next...

Mrx9000

Have to disagree with you on MOS Paul...

- No director buying, just major selling in 2013
- Cash flow margin over 5 years at 1.2%
- Cash flow margin at -2%
- Beneish M Score ?

danyou

Paul, As someone who politely asked you for the Boohoo update 2 days ago -I am sorry if you feel hassled etc.
I would personally be more than happy to pay for a more detailed etc blog. No reason why you should do this all for free.
I have learnt tons from reading your daily report and really appreciate the effort.
Keep going!

fifthcolumn

Paul, why on earth are you apologising for going out on the lash and enjoying your life? You bloody enjoy yourself. Enjoy your wealth and enjoy your health. We The Unwashed will have to wait with baited breath for your posts! and bugger those nasty types on ADVFN.

Regards Nig.

jonthetourist

Hi Paul

What about making a "Reports" section of Quality Small Caps subscriber-only? Then you can share your at-length thoughts with people who have passed some sort of quality barrier, whether that is an invitation, an application, or a payment. Just a thought.

Don't let negative feedback grind you down.

Jon

Novice Investor

I guess the question is whether Paul is paid by Stockopedia for writing here. If not, then of course he can do what he likes (as opposed to doing what he likes regardless I guess).

As for his Twitter rant, I haven't seen the timing, but I'd guess fermented grapes might be a factor.

When he used to post drunken rants onTMF in the early hours, you just had to go to his sign off. It usually ended with Cheese! Lol.

Richard Goodwin

I guess that even if Paul is paid for this column, it doesn't mean that "extras" such as the trip to Manchester and interview with BooHoo are funded.

ridavies

Thanks for that. Dont follow advfn's board. Understood. Still looking forward with hope. A loyal subscriber! Over and out. Ian

jamesalastair

ADVFN seems to attract a fair number of prophets, nutters and evangelists. If I want prophets and evangelists I can always pick up my bible or join the local happy clappy folks at the local Church. For nutters, I simply go to work at school every day. ADVFN is not for me - I wouldn't let them grind you down. I read your daily report with a good deal of interest and, like several folks above, would be happy to pay for a blog. I don't know where you find the time.

Best wishes

VegPatch

Re profit warnings eg UK Mail, Rolls Royce, Tescos etc

There is a very old and incredibly accurate City saying, that would have saved me and countless others a great deal of money: "Profit warnings come in threes"

I see today that UK Mail had its second profit warning, after its first on 7th July. Recently Rolls had its second warning, Tescos is in about its third. Unfortunately this is totally normal. Management do a monthly update for the board. Realise something isn't going to plan, usually lack of sales or too much costs, often both. They wait another month to see if its an aberration. If it isn't the FD has to recut forecasts. The only problem is that the sales teams etc haven't readjusted their sights low enough and despite promising the CEO / FD they will hit the new, lower budget, they miss it again. Operational gearing works its magic and numbers are lower. After a second warning, the odds are extremely high for a third warning.

Every PM tells themselves to buy on the third warning. Trouble is that they start to lose faith- is the downturn structural not just cyclical? Can it really be fixed? There tends to be big register turnover at this point. It explains why shares can get so cheap. The danger is mistaking those companies for which the downturn is more structural rather than cyclical and avoiding them on the third warning eg Yell, HMV, UK coal,

At this point always revert to the balance sheet. How much debt has the business got ? What does the Cashflow look like? Current ratio etc. only the well financed survive deep downturns. Any doubts, do yourself a favour and sell (probably after the first warning would be best...)

So next time a warning appears out of the blue, especially in the current low nominal growth environment, be very nervous. Have expectations really been reset low enough? What happens if things get worse? Is the balance sheet solid enough?

And remember : (unfortunately) Profit warnings come in threes.

jonesj

Hi Paul,

I much rather your model of journalism to that offered by some of the mainstream media.
With some of those publications, it seems they have to comment on multiple companies to meet the print deadline every week, with a corresponding drop in the quality of the analysis & comment.

In contrast, what's written here has some considerable thought put into it. The articles seem to benefit from your finance experience and the fact you're not pressured into writing cr*p to meet print deadlines.
If you want to write hardly anything on quiet days & occasionally go out on the lash and write the article late, to me that's much better than other places where people fill a page with anything to meet a deadline.

Jeff
Disclosure: Long on Boohoo...... (pus others)

Damian Cannon

19th Nov '15

Excellent reminder VegPatch. I'm definitely coming around to the idea that it's better to sell first and ask questions later when it comes to profit warnings (even if you are booking a loss) as it's easy to believe that it's all just a temporary blip. Even better I think that money released like this should be recycled into companies which have just put out a profit surprise (for want of a better word) even if their share price has reacted accordingly. Better to reward a winner rather than a loser.

Damian

Rusty2

Re Tesco (LON:TSCO), yes 3 profit warnings but share is still above the low at first one around 164p, also the share did bounce up after each one, so you could have made a tidy profit. Some cos with profit surprises the share price has not gone up at all, see Inland Homes (LON:INL).

For sure selling on warnings and buying on surprises doesn't always work (especially in the short term) but it makes sense to me that I should increase my holdings in companies that are doing better than expected and reduce them were business is getting worse.

Sounds good in theory. Looking at the surprise earnings screen it has not performed very well though: http://www.stockopedia.com/screens/earnings-surprise-screen-31/

So would you sell Amino Technologies (LON:AMO) and Solid State (LON:SOLI), and buy Inland Homes (LON:INL) and Air Partner (LON:AIR),?

ed_miller

Paul,

Critics of you, Tom Winnifrith etc, and shorting in general are living in a state of ignorance. Many will see the light when they have lost enough money and been suckered into enough frauds. Of course, that doesn't excuse rudeness and trolling, but I should think that many will eventually see the light and come to regret their behaviour. Those that don't can get stuffed.

An army of us come here to learn and benefit from your insight every day. And I for one stay away from bulletin boards.

Thanks and regards,
Ed Miller

That's an interesting screen herbie47 - I haven't looked at it previously. It seems to have performed very poorly in Europe and reasonably in the UK but with some volatility. I imagine that some additional filters, such as a high StockRank, would help perhaps.

As for "So would you sell Amino Technologies (LON:AMO) and Solid State (LON:SOLI), and buy Inland Homes (LON:INL) and Air Partner (LON:AIR),? " I think that yes, broadly speaking, I would do exactly this. Obviously each profit warning is different, and in some cases they are a real one-off (such as with Dart last year), but I've been fooled too many times in the past to believe management over-optimism.

Interesting, well I do hold those 4 shares and I was considering doing the opposite. Start with Inland Homes (LON:INL), yes the profits this year look very good but they delayed the results to inc. a large land sale, but EPS forecast for next year is -59%, also debt has gone up but land bank has not increased much, bought some houses to let, not sure that is a good move, so I may take my profits soon. Air Partner (LON:AIR) I have held this share for some time but it just seems to go up and down, profits were ahead of forecast but shares did not go up, thinking of selling. Amino Technologies (LON:AMO) reading elsewhere many think this will recover, Naked Trader has bought some, Simon Thompson (Investors Chronicle) covers this, so I think I will hold. Solid State (LON:SOLI) I'm not so sure about, will have to do more research, but I did sell some at 810p. Problem with earning surprises is it a one off, many companies have a good year but then next year fall back, see Inland Homes (LON:INL), Sprue Aegis (LON:SPRP) and Renishaw (LON:RSW).

20th Nov '15

Not sure why I got a thumb's down?

Anyway Solid State (LON:SOLI) is up 7% today and Inland Homes (LON:INL) is down 4%.

TMFMayn

28th Sep '16

UKM

"There are the remnants of a family-run firm here. Non-exec chairman Peter Kane founded the firm and he and his family continue to own at least 50% of the shares. Mr Kane turns 70 next year and I wonder if he's ever thought of calling it a day, especially as there are no younger Kanes on the board. I would have thought this business would be an obvious target for a larger rival in a sector where economies of scale and size can be important. "

Here we go:
http://www.investegate.co.uk/deutsche-post-ag--0h3q-/rns/recommended-offer-for-uk-mail-group-plc/201609280700100392L/

440p per share recommended bid in cash from Deutsche Post. Up about 35% from the 327p referred to in the SCVR above.

And no, I did not buy any.

Small Cap Value Report (18 Nov 2015) - UKM, ECK, SCS

UK Mail (LON:UKM)

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Paul Scott

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