Small Cap Value Report (18 Sep 2015) - SCLP, SSTY, CDOG

Good morning!

It's very quiet for announcements today. Apparently there was some hullabaloo last night over something said by a Fed spokesperson about if/when interest rates might rise a tiny amount. It's descending into farce if you ask me, so I just ignore all that as background noise now. Bottom line is this - we know interest rates will go up a small amount, at some point, but in all likelihood will remain historically very low probably for quite some time yet. That's all I need to know.

Inflation

Although I do wonder about inflation. At some point inflation will return - especially once the price of oil rises again. Also, the pressure to increase wages, not just for Minimum Wage, but the domino effect as people higher up seek to maintain their differential above lower paid workers, is a building inflationary issue. So to my mind this means we should at least mentally prepare for higher inflation, and higher interest rates.

That might trim equity valuations in the short term, but of course longer term, equities (and property) are the best hedges against inflation that you can get, as earnings should rise during inflationary periods. Cash and bonds are the worst, as they usually erode in value at times of higher inflation - I remember seeing my Granny's savings of about £5,000 in the 1970s seem like a fortune at first, but by the 1980s it was peanuts, due to a few years of compounded high inflation. The trouble was, she saw the interest as income, and spent it, not realising that inflation was rapidly eroding her capital.

Therefore I remain fully invested in reasonably-priced equities, and think that's the best long-term position to take, if you're prepared to ride out market volatility without panic, and if you don't need the money any time soon.

It's worth thinking about a company's pricing power too - i.e. can they push through price rises in periods of higher inflation without seeing demand tail off? That may not always be the case.

Scancell Holdings (LON:SCLP)

Share price: 28p
No. shares: 225.0m
Market cap: £63.0m

Results y/e 30 Apr 2015 - nearly five months to produce results! It's not as if that time was spent reconciling their sales ledger, as it's a zero turnover company.

The loss after tax (which includes the benefit of R&D tax credits) was £2.4m, and with only £3.1m cash remaining, it only has enough in the tank to continue funding operations into maybe late 2016. So expect the collection tin to be out & rattling again some time in 2016 probably.

My opinion - I don't invest in zero turnover companies usually, as it's like searching for the needle in a haystack. Nearly all of them disappoint, and have to do multiple fundraisings, diluting holders repeatedly at lower prices.

I hope this company's treatment for cancer is a success, but unless you have the necessary scientific expertise, then I don't see how investors can possibly assess the company's chances of success.

Safestay (LON:SSTY)

Share price: 59.2p
No. shares: 34.2m
Market cap: £20.2m

Completion of acquisition (Edinburgh property) - as expected, the acquisition of a building in Edinburgh has completed, to be added to the company's growing portfolio of upmarket hostels.

As I've mentioned before here, the concept is great, and the sites are profitable. However, I've sold my own shares recently, because my main concern is that this roll-out requires fresh equity fundraises every time they add on a new property. These will obviously be at a discount, so it prevents the share price gaining any traction.

I'd rather buy discounted shares in the next Placing, rather than holding the existing shares and waiting to be diluted again.

Generally speaking, roll-outs are some of the best investments around. However a roll-out only works for shareholders when it's self-funding. So most retailers self-fund their own growth from recycling internal cashflows into new sites' shopfits, and often have a payback period of under two years. That's a terrific business model, and can produce staggeringly good returns for shareholders, which is why early stage roll-outs (eg. £CRAW ) look so expensive in the early days - because investors are anticipating future growth, and shouldn't see much, or any, dilution.

Safestay doesn't fit this model. It actually requires huge capex to buy & fit out sites which only then generate a fairly modest return. So not only does it need to take on a lot of bank debt, but it also has to do repeated equity fundraisings.

It's dawned on me that this really isn't a very good business model for existing shareholders. So although I think it's a good concept, the shares are not for me any more.

Cdialogues (LON:CDOG)

Share price: 287p
No. shares: 6.2m
Market cap: £17.8m

Trading update - this sounds like a profit warning;

The Company will announce its interim results for the six months ended 30 June 2015 on Monday 21st September in which it expects to report that revenues of €5.3M and EBITDA of €1.6M will have been achieved.
The Company has continued to develop its operations during the final third of the year, focusing on extending its customer network and accelerating subscriber growth.
However, whilst the momentum achieved to date has been pleasing, some projects which were due to commence in the final quarter of the current financial year have been delayed, due to decisions taken by the MNOs regarding the potential start date. As a result, the Board now anticipates that the Company will generate revenue and EBITDA in the second half of the current financial year similar to that achieved in the first half, as outlined above.

It's good that the company has quantified the likely outcome of both H1 and H2.

Looking back at the company's 2014 results, the figures look good revenue of E9.9m, and profit before tax of E2.6m. It seems to be linked to Greece, so great caution is necessary - as they tend to like capitalising a lot of costs, and not collecting in cash.

However, in this case intangibles are fairly modest, at E749k, and whilst Debtors looks high at E3.95m (40% of the year's revenue), the company does seem to have some genuine positive cashflow, from what I can make out.

So it looks as if revenues have more or less stalled at an annualised rate of E10.6m in 2015. EBITDA of E3.2m for 2015 looks as if it would translate into about E2.7m profit before tax, if the same amount of costs are capitalised as in 2014 (E0.5m).

My opinion - it's overseas & AIM, so that's a general bargepole rule for me, unless it has a long track record & pays divis. I'm particularly suspicious of Greek companies, as they like to be creative in their accounting.

Also, the trouble with mobile marketing companies is that their life cycle is so short. They can make bumper profits for a short period of time, then the market moves on, and leaves them high & dry - as happened with Blinkx (LON:BLNX) for example. I reckon people float them to provide a profitable exit route for founders, in the full knowledge that profits are probably not going to last long. So why be the mug that takes the other side of the trade?

Right, got to dash. Have a smashing weekend & see you back here on Monday morning!

Regards, Paul.

(of the companies mentioned today, Paul has no long or short positions.

A fund management company with which Paul is associated may hold positions in companies mentioned.

These reports are just Paul's personal opinions only, and never advice or recommendations)