Small Cap Value Report (19 Aug) - KENZ, C21, OPM, QPP

19th Aug '13 by Paul Scott

29 comments 26092 reads

Good morning! I'm kicking myself for having sold out of Kentz (LON:KENZ 472p) too early, as it has announced this morning a "highly conditional and unsolicited proposal" was received from Amec regarding a takeover at 565-580p.

Readers here will be well aware of what good value Kentz shares are, as it was flagged in my morning reports three times, on 3 May and 17 May at sub-400p, and again on 26 Jun. Readers who agreed with me, and bought the shares at that time, are already almost 20% up, and I suspect are likely to get another decent boost today on the rejection of the 565-580p takeover approach as it "undervalued the company" and has hence been rejected by the Board. So that both underpins the value at 472p per share, and could drive a higher takeover bid now the company is in play perhaps?

(Edit: I see Kentz shares are up 22% today, to 580p, which is great news for holders. Unfortunately, I forgot to include this one in Paul's Value Picks, which is a pity, as it was clearly a suitable candidate based on my Blog entries referred to above, but never mind - entries won't be altered or added retrospectively, as that would be wrong).

We're looking at a reasonable open, with the FTSE 100 futures indicating a rise of 19 points to 6,508.

I see the CEO of 21st Century Technology (LON:C21 6p) has fallen on his sword, which is probably a good thing given the profits warning and collapse in share price in the last fortnight. I picked up a few of these at just over 5.5p last week, as it seemed to have stopped falling, and if they drop again today then I might pick up some more. The Chairman says this morning that they are looking for a new CEO, and that:

We continue to pursue a number of exciting business leads and look forward to providing further updates in due course."

It strikes me that C21 is too small to be separately Listed, and has too lumpy sales, so this might be the ideal time for a larger competitor to put in a takeover approach for it.

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corrsfan

19th Aug '13

I was surprised to see QPP fall after the results, but then again i didnt read them anywhere as close as paul did.
Im in decent profit, and tbh am tempted to sell most of it, as much like yourself i just wish theyd be 100% transparent when they annouce things. though they are getting slightly better at it.
also ive no doubt theyll get to 40p/share if they do a consolidation as is burried away in the bits about listing on ftse 250. i just hope thats not what is meant by the share increacing ;).

DJLJ23

REF QPP, Loans to other parties,
I seem to remember reading that these loans typically occur when a party is working with QPP to see if they are a good fit with QPP, if QPP subsequently acquire the company, presumably they get taken into account in the purchase arrangements.

intuitive6191

The strange case of Quindell rumbles on.

So £93 million pounds worth of business has apparently been concluded but not invoiced? The turnover for 6 months to end of June is only £163 million. Crikey.

No wonder insurers are quick to sign up with Quindell. Its a massive boost to their cashflow having such a generous supplier.

Hopefully when the insurers eventually receive their invoices they dont decide to query them - or worse still refuse to pay.

cig

Is the small free float (3%!) not a problem for MDM Engineering (LON:MDM) ?

tkb123

Cig, I have a similar concern regarding MDM Engineering (LON:MDM) - would be interested in Paul's (and others) opinion. It is the only thing holding me back from increasing my holding.

jlo

According to Stockopedia the free float for MDM is 99.7%

Murakami

Hi, we've double checking that as it seems to contradict the information given here on the company website - http://www.mdm-engineering.com/im/shareholder.asp - I'll post any resolution here once available.

kenobi

20th Aug '13

Yes sorry Paul, I meant to say after you flagged kenz.

Glad to see this value report is going well, very much enjoying reading your insights,

Kind regards

K

mjd

v interesting piece on QPP. it's not a straight fwd situation.

you draw an analogy to Accident Exchange. in Quindell's defence, Accident Exchange was increasing the size of average insurance claim, so essentially working against the insurers (which is what ultimately brought them down). whereas, if you believe mgmt, Quindell is trying to reduce the average claim size and taking a more collaborative approach with insurers.

i think the 4.8mth debtor days number comes from trade receivables (77.6m) + other receiveables (57.3m) and dividing by the 6mth revenue (167.3) and multiplying by 6mths. So 134.9/167.3 x 6mth = 4.84mth.

one way or another, in a couple of years' time i'm sure QPP will make an excellent case study.

it_trader

Yes Stockopedia is wrong. The free float is around 97.5% although there is an additional 7% associated to nominees accounts which 'could' be deemed as additional to the free float.

It depends upon your strategy. In this case it is a solid company paying a growing and substantial 6.3% dividend backed up by a number of influential strategic shareholders who won't appreciate this being cut. They will also ensure they are strong and carry more wait in demanding a premium subject to any acquisition approach.

Without the dividend such a small float would be disadvantageous agreed however, and not my usual strategy. The 5 major shareholders takes the risk off a little too.

PhilHofGrowYourDough

Agreed about the screens and Kentz. I bought in back in late February and I'm sat on a tasty 53% gain. I've found so many high quality companies that I wouldn't have sifted out without the screening mechanisms.

You can see more of my selections here http://www.stockopedia.com/fantasy-funds/philhs-fund-4060/
I hold all of the shares in my fund, plus some others.

Thanks again stocko

deucetoace

MDM are committed to paying out at least 50% of earnings in dividends. The projected yield is based around the fall in EPS. It's not a matter of shareholders objecting to a cut in dividend. The policy is, for a change, very clear.

snickers

MDM's website says 'Shares not in public hands 97.94%'. Six institutions hold 87%, the two largest called Pipestone Capital. So 767,000 are in public hands. There were about 27,000 traded today in 13 trades. It looks like anywhere between zero and 30,000 a day, but the odd day with a million+, so I wonder what that 767k means, or public hands?

rick

"Six institutions hold 87%"

Shares held by institutions are "free float". The institutions are at liberty to sell/buy whenever they want unless some other arrangement has been entered into. Only shares held by management/founders/in trust/ or in lock up are not free float as far as I know.

22nd Aug '13

Shares not in public hands now 98.5% on the website... so most of the turnover could be one insider/large investor hoovering the remaining public shareholders (before a sale?) This is possibly consistent with the cap (flat line) at 180p from December to May which looks like a single buyer.

In practice a large strategic holding is not that easy to sell and it's far fetched to consider it at parity with tiny stakes that are really readily tradable. Ultimately the precise definition of free float is what the index vendor or market regulator decides it to be.

I haven't found AIM rules directly, but if they're anything like the FTSE AIM indices rules shown here in section 3.5:

http://www.ftse.co.uk/Indices/FTSE_AIM_Index_Series/Downloads/FTSE_AIM_Index_Series_Rules.pdf

it's broader than your definition.

25th Aug '13

We've been discussing the MDM free float number with Reuters who have in turn been discussing it with the company. We/Reuters define Free Float as being Total Shares - Treasury Stock - Shares held by Strategic holders/entities.

Strategic entities means that the shares are held by Government Agencies, Corporations, Holding Companies and/or individuals. This is where the shares are held with the intention of gaining market share and/or having control over the company, the idea being that, generally, strategic investors do not primarily intend to earn short term gains from the shares through an increase in share price unlike, say, investment management companies.

Issued shares for the company MDM is 37,459,107 and treasury shares is 200,000. Further to the latest company update as of August 21st 2013, the shares held by Strategic investors in MDM as defined by Reuters above are as follows:

9.0 Trust - 8,912,282
Pipestone Capital Inc - 7,021,864
Emirate Investments Limited - 6,287,060
Alchemy Holdings Limited - 2,208,960
Mark R Summers - 599,444
William A Nairn - 75,000
Victoria Fur Traders Ltd - 10,000
Pascoe (Steven) - 8,200

As a result, the total shares strategically held are 25,122,810 and the free float is 37,259,107 - 25,122,810 = 12,136,297, or 100 - 67.43 = 32.57%.

Obviously this number depends on the methodology employed, and this is just one possible methodology but hopefully it helps to clarify the approach used.

See:

As ever, please feel to raise a ticket via the Green Help & Feedback on the right with any follow-up data queries.

26th Aug '13

Strategic investors do not primarily intend to earn short term gains from the shares through an increase in share price

How do Reuters know this - have they asked them? I would suggest that its not possible to assign motives to a shareholder on the basis that they have a large shareholding. Even if a strategic investor did have long term intentions it could change. Its all very vague.

The acid test from a small investors point of view is whether the directors of the company own or control more than 50% of the shares.

27th Aug '13

I wondered the same. In the MDM case, the bottom 2 (or 3) are not even "large" by any stretch of the imagination...

Hi Cig

You quite right - some of these shareholders are small. Its all very subjective and not very precise in my view.

The main problem I have is that Free Float is presented as some sort of absolute figure by the industry and when we dig a bit deeper it turns out to be something vague, cobbled together with diiferent interpretations and opinions. It shouldnt be like this.

You may recall an exchange on this board regarding Quindell shareholders and how the major shareholders apparently differed depending on which data was used. Factor this extra variable into ithe equation and a Free Float figure as it stands could be virtually useless.

Small Cap Value Report (19 Aug) - KENZ, C21, OPM, QPP

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Paul Scott

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