Small Cap Value Report (18 Sep) - NXR, CHRT, FWEB, RM., CLL

Wednesday, Sep 18 2013 by

Good morning! The FTSE 100 futures are indicating a flat open, at 6,580, so nothing to worry about there. Of course, small caps continue to outperform massively, with the FTSE Small Cap Index (FTSE:SMC) recently hitting a new all-time high. My preferred index for small caps excludes investment trusts, and is getting close to its 2007 highs. Although one should remember that Indices are not adjusted for inflation, or earnings growth, so they should rise over time - hence comparing a 2007 peak with a similar peak today is not really comparing apples with apples.

For the FTSE Small Cap Index XIT (FTSE:SMXX), Stockopedia calculates the trailing PER as 17.8, and the forward PER 13.8, neither of which look cheap. The trailing dividend yield is 2.4%, and forward yield is 2.7%. So in my opinion that leaves little room for disappointment. From this point on, we're unlikely to get a rising tide that lifts all boats - it will now be all about good stock-picking - i.e. avoiding companies that are going to disappoint on earnings, and not over-paying for good companies that are beating earnings expectations.

I'm also increasingly looking to top-slice successful positions, and hold some cash back so that I can pounce on some bargains when we inevitably have a correction. Things just feel too buoyant for my liking right now.



Norcros (LON:NXR) announces that it has sublet one of their legacy surplus leases, in Swindon. I looked at this issue, amongst others, in a short, independent research note on this company a little while ago. This is probably worth another halfpenny on the share price, I reckon. It's a £4m cash saving, so that's 3.6% of their market cap, multiply by 18.5p share price = 0.66p, OK so a halfpenny on the price is about right, maybe slightly more. This really means that their legacy problem leases are effectively dealt with to any material extent. Their pension deficit should be dropping nicely now too, with bond yields rising, as we're seeing elsewhere. I remain a bull of this stock, and calculate it should be priced at 25-35p, in my opinion. The lowly valuation is bizarre, but it's gradually re-rating, it just…

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Norcros Plc is a holding company for the Norcros Group. The Company's principal activities include development, manufacture and marketing of home consumer products in the United Kingdom and South Africa. The Company's segments include UK and South Africa. The Company has six United Kingdom businesses, including Triton Showers, Vado, Croydex, Abode, Johnson Tiles and Norcros Adhesives, and three businesses in South Africa, including Johnson Tiles South Africa, TAL and Tile Africa. The Company is focused on showers, taps, bathroom accessories, tiles and adhesives. In the United Kingdom, the Company offers a range of bathroom and kitchen products both for domestic and commercial applications. The Company offers mixer showers and accessories; tile and stone adhesives; taps, bathroom accessories and valves; bathroom furnishings; ceramic wall and floor tiles; kitchen sinks; tile adhesives, pourable floor coverings and tiling tools through its United Kingdom and South Africa business. more »

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Cohort plc is a holding company. The Company's segments include MASS, MCL, SCS and SEA. Its subsidiaries include Systems Consultants Services Limited (SCS) and SEA (Group) Ltd. (SEA). Its sub-subsidiaries include MASS Consultants Limited (MASS) and Marlborough Communications Limited (MCL). SCS is a defense consultancy. SEA is an electronic systems and software company operating in the defense, transport and offshore energy markets. MASS is a specialist defense and technology business, focused on electronic warfare, information systems and cyber security. MCL is engaged in sourcing, design, integration and support of communications and surveillance technology for the defense and security markets. It provides a range of services and products for the United Kingdom, Portugal and international customers in defense and related markets. The Company operates in the United Kingdom, other European Community (EC) countries, Asia Pacific, and North and South America. more »

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  Is LON:NXR fundamentally strong or weak? Find out More »

19 Comments on this Article show/hide all

trufflehunter 18th Sep '13 1 of 19

good morning
I saw vianet rise in last few days. could not see any news. what have I missed?

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dangersimpson 18th Sep '13 2 of 19

Hi Paul,

RM (LON:RM.) IMS today:

Annoyingly they commit your pet hate and don't give don't give specific guidance against market expectations. However the narrative is fairly positive:

Trading in the third quarter (Q3) of RM's 2013 financial year has continued to progress satisfactorily. Good operational performance over recent months on managed services contracts (including Building Schools for the Future) within the Education Technology division provides support for a significantly stronger second half than was anticipated at the time of the announcement of the half year results.

Good news is that net cash is growing:

Net cash at 31 August 2013 increased to £38.3m, compared with £13.2m a year earlier.

Which is good because in their interims they said:

The company has the security of very substantial cash resources and a planning exercise is being undertaken to assess the extent to which there is a surplus to the company's prudent needs. In the coming months, the Board will announce the magnitude and method of returning any surplus to shareholders.

They still look cheap on a number of stockopedia metrics even after the c30% rise in the last week or so.


Danger (I hold, having bought recently when it came up on my Quantitative Value Screen)

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jjis 18th Sep '13 3 of 19

If you are looking for a cheap home for some of the cash you have raised you could check out

Which I found in a screen based on the Book Quantitative Value which is here:

Qualifies on a couple of Graham value screens - Net Nets & NCAV Bargains + Negative Enterprise Value Screen. Results today seem OK 16 to 20% growth & on track to hit full year numbers, seems to be on about 1x and a 10% yield plus above screens!

However here is the catch it is a Chinese sports shoe and clothing manufacturer listed on AIM. NOMAD is Daniel Stewart & Co. 20% founder shareholder cleared out yesterday at about 58p similar levels to others earlier in the year. Founder CEO holds 50% having bought another £1m worth in July, so at least has some skin in the game / family business. Montoya Investments (Hedge Fund?) have just declared a 6.6% stake, but cannot find who they are or what their strategy is.

Probably not negative enterprise value as £30m of cash is earmarked for new factory expansion and it seems this has been delayed a bit this year, but this would leave it on about 0.3x EV/Sales I estimate. This also seems cheap given the 28% or so operating margin.

Just wondered what you think of it if you have a chance to look at it, apart from the Chinese / AIM / dominant CEO issues anything else I'm missing?

NB. I bought some yesterday and today post the results.

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Paul Scott 18th Sep '13 4 of 19

In reply to post #77363

Hi jjis,

I would not touch any Chinese stock with a bargepole. This is because their accounts are largely works of fiction, and their entire economy just works on a basis that is unfathomable to Westerners - it's not actually Capitalism, because no transactions are really at arms length, they are all interconnected, with bad debts never crystallised. So you cannot value their companies on a Western basis.

Why do you think things like Naibu are valued on a PER of 1, and below their own net cash? It's because nobody believes the figures! Profits just pile up into debtors, and the cash balance will never see the light of day in the UK. So why value it an anything if you're not likely to ever see anything other than a token dividend? (if you're lucky).

Why would overseas companies come to the UK to List? Because AIM is pretty much unregulated, and you can do virtually anything with impunity here. So that's not really a great starting point for investors, is it?!

I just cannot see the point in taking the gamble on any of these things, and so I just have a blanket rule to avoid all of them. Just look at how many Chinese companies Listing in America have turned out to be blatant frauds - dozens of them!

The warning signs are all there, so if you ignore them, that's up to you.

Cheers, Paul.

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kevanp 18th Sep '13 5 of 19

Hi Paul

Interested to understand a bit about the trajectory of share prices following what might be interpreted as a negative announcement. It strikes me that they get marked down immediately, so no matter how quick you are you can't beat the market makers.

You say you sold out of Cohort (LON:CHRT) this morning, but had the price not already been marked down from the start of trading?

By the time I read the AGM statement, and your commentary, I must admit it was well into the trading day, and the price was down to about 181p. It's now bouncing between 182 and 185 — so it's not exactly a rout. I'm minded to hang on to mine, given that they pass five Stockopedia screens.

Best, Kevan

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Paul Scott 18th Sep '13 6 of 19

In reply to post #77366

Hi Kevan,

I know what you mean - prices can move so fast that it defeats the object of selling if you're not quick enough.

Sometimes I'll wait to see how the market reacts, because I might be worrying about nothing. Cohort was a difficult one today, as there was both good & bad news in the statement today, and the company is still quite good value, as I mentioned in the report.

My view usually is that if you're going to move, best to move first, or not at all. But each situation is different, and it depends on the seriousness of the bad news. In this case it should be fine, but I wanted to play it safe, as I'm getting nervous about the markets generally, and want some profits banked, and some spare cash to deploy on the next market downturn. So I was already leaning towards the idea of selling some or all of my Cohort, but the RNS this morning made up my mind that I'd be happy to sell and move on. Always very difficult to decide when to sell, but my view is that I nearly always sell too early, but nobody ever went bust by banking a profit!

Cheers, Paul.

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intuitive6191 18th Sep '13 7 of 19

Why would overseas companies come to the UK to List? Because AIM is pretty much unregulated, and you can do virtually anything with impunity here


Well said Paul. A point to remember for new ISA investors without previous experience of AIM.

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hedley05 18th Sep '13 8 of 19

Definitely agree re CHINESE COMPANIES listed on AIM. Just look at ACHL. Nobody seems sure if the plantations they claim to own even exist! Been there and (hopefully) learned that lesson! Steer clear witha barge-pole!

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kevanp 18th Sep '13 9 of 19

In reply to post #77370

Hi Paul. Appreciate your response. I guess what I was really trying to understand is how you manage to sell a holding after an announcement, before the price has been marked down, because surely that will happen virtually instantly. Is there any way of avoiding that initial fall, or do you just accept it? Case in point: may I ask what price you managed to get for Cohort, which appears to have opened with a bid of 185 or so?

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brigandchief 18th Sep '13 10 of 19

Where in your crystal ball do you see any word about SID? One could write some Shakespeare about this one,
Oh Sid, Oh Sid, where is my Sid, we pine away for you Sid!?

Cheers David

And PS, what is the fund you advise?

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Paul Scott 18th Sep '13 11 of 19

In reply to post #77375

Hi Kevan,

Here are the trades for this morning for Cohort (LON:CHRT).

As you can see, the first trade was at 07:59, and was a sell, as were the next 3 trades for 1,000 each, so the MMs began running for cover at 08:03. It had bottomed out by 08:30.

So in this case, it was the people who acted in the first 3 minutes who got the best price.

It was a very mild situation, i.e. only a small worry over H2 timing of delivery of contracts, so it wasn't a situation where it was imperative to sell at all. It looked to me like there might be a 5-10% correction on the price, so I was happy to sell first thing. But if the price had already dropped 5-10%, then I wouldn't bother selling in this situation, as the downside risk had by then been priced-in.

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Paul Scott 18th Sep '13 12 of 19

In reply to post #77378

Hi brigandchief,

I don't know any more about Silverdell (LON:SID). I'm pretty disgusted with the way it's been handled though, and it makes you realise how in reality private shareholders have zero power or influence over companies we invest in. (but I don't hold any shares in SID personally). The lack of communication is just appalling.

As regards the Fund that I provide research services to, I cannot discuss that here, as my various activities have to be strictly ring-fenced, by agreement of all parties. So just drop me an email or private message if you would like to discuss.

Cheers, Paul.

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cig 18th Sep '13 13 of 19

In reply to post #77363

Naibu has been extensively debated at our host's former home. Summary: good luck :-).


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kevanp 18th Sep '13 14 of 19

In reply to post #77379

Paul, many thanks again. It's interesting to be able to view the individual trades. That rather answers my question about the movement of the price.

I have, since posting earlier, discovered that you can get that information from ADVFN, at least for a few minutes a day, unless you pay for a premium account. As I don't think of myself as a 'trader', I'm not sure it's worth the minimum price of £13.16 a month.

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jjis 18th Sep '13 15 of 19

In reply to post #77383

Thanks for that Cig certainly a can of worms and thanks to Paul for his clear & speedy response. Seems the general consensus is that this one is a scam, which as Paul says is what the rating is telling you. It is probably a binary bet could either go to £1 or 0. On reflection perhaps I'll chuck them out for a quick profit - not my normal style of investing but probably safest in this case. But now as if to highlight the black & white binary nature of this one I see that Hargreave Hale & presumably the highly regarded Giles Hargreaves have just announced as 6.5% holders!?

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Paul Scott 19th Sep '13 16 of 19

In reply to post #77389

Hi jjis,

Yes indeed, I also spotted today that Hargreave Hale (one of the smartest fund management small cap outfits) popped up with 6.5% today. They're not daft, so who knows, maybe it might be alright after all? Mind you, plenty of other very smart investors have been caught out with Chinese stocks. So it's still not for me, at pretty much any price. Each to their own. Why take the risk when you don't have to?

Cheers, Paul.

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shanklin100 19th Sep '13 17 of 19

Hi Paul

On a slightly different tack, I would like to say how much I value your daily reports.

I don't always agree with your views on individual shares, eg. FCCN and THT, but greatly value the fact that you have a clear value based framework for your daily analysis and your analysis is almost always (ZIOC might be an exception) consistent with that framework. This means that you invariably identify issues, be they positive or negative with respect to BS strength and cash flow, which is very helpful.

Best wishes, Martin

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Smudge 19th Sep '13 18 of 19

Good morning Paul!

It must be Thursday..... Have 2 cups of strong coffee.

Your morning musings ahve become essential reading for me. Keep it up.

Best regards,,

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Paul Scott 19th Sep '13 19 of 19

In reply to post #77399

Hi shanklin100 & smudge,

Really appreciate your kind remarks, thanks! It's good to hear that people find my musings interesting, and hopefully they add value, even if we don't agree on some stocks.
I enjoy writing them, although covering so many companies is a real struggle, as I tend to be constantly flitting from one thing to another & your head gets so full of numbers that it's spinning on its axis by the end of the day LOL!

Cheers, Paul.

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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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