Small Cap Value Report (19 Dec 2014) - NGR, OSG, PRW, IDEA, RGD

19th Dec '14 by Paul Scott

16 comments 15816 reads

Good morning! It's been another remarkable V-shaped rebound by the US markets in the last few days. This pattern just keeps recurring - i.e. a market sell-off, then an immediate and strong rebound all the way back up again. Although I'm wondering what will happen eventually when this pattern stops working? Maybe a more serious sell-off? Although with the US economy now being heavily boosted by the lower oil price, it's difficult to see why US equities would sell off in the face of a recovering economy. Who knows? I can't help feeling that this bull market is looking stretched though.

The US markets might be powering along, but there's no sign of a bull market in my neck of the woods, in UK small caps. We're still firmly in the doldrums, with AIM teetering only a few points above its lows for the year, and FTSE Small Caps also looking soft, here's the latest chart of both;

So if you only invest in small caps, then you've probably had a fairly rough year.

NATURE (LON:NGR)

Share price: 10.5p
No. shares: 79.3m
Market Cap: £8.3m

This company is an absolute disaster area, in my opinion.

Profit warning - yet again it has disappointed. It's got to the point where I don't think you can value the company on future expectations at all, as nobody (least of all management) seem to have any idea what trading is going to be like.

On the positive side, there is a £1.1m (initial revenue, so presumably with scope for more?) contract win in Norway announced today, for Nature's water & sludge treatment units.

Everything else is negative, the key paragraph saying;

That's bad. "...materially below current market expectations" is nearly always enough to trigger a 30%+ fall in share price, and sure enough these are down about 35% today.

My opinion - with its operations mainly linked to the oil industry, it's bound to see continued difficult trading. The loss in H1 was about £1.0m, so a similar loss in H2 means that the full year results are going to look awful.

There was about £2.4m in bank debt on the Balance Sheet when last reported on 30 Jun 2014, although at that time it was more than offset by £3.0m in cash. My worry is that if the cash is now depleting, then will the bank…

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Metier9

19th Dec '14

Maybe the small caps are just showing where the FTSE100 will end up at the start of next year! I noticed in this recent V my small caps have had very little movement.

Gostevie

Hi Paul,

I've seen Andreas Drenthen, CEO of NATURE (LON:NGR), present a couple of times at investor seminars, and he is impressive. Expert in his field, economics doctorate, and speaks with great enthusiasm about his company. Earlier this year he was full of optimism about NGR and having spoken with him over drinks afterwards I almost (but thankfully not quite) invested.

Absolutely no doubting his good faith and sincerity but it does, for me, highlight how careful one has to be not to be swayed into investing by enthusiastic and charismatic CEOs without first doing the usual research and analysis as far as one can.

Kromek (LON:KMK) was another example I can think of. The price actually spiked the day after a very impressive performance at an Equity Development seminar, only to slump a couple of months later on a profit warning.

Steve

bsharman

Hi, Perhaps as investors who attend such presentations, we should have a >48 hour rule. Don't ever invest in something after hearing a presentation for at least 48 hours! I also attended the Kromek presentation and was incredibly impressed. I have only just bought a few in the last couple of weeks (a year on from the ED presentation).

Paul Scott

Hi Ben,

I absolutely agree with your 48hr rule.
There is often a very strong urge to buy a stock after seeing a management presentation. However, I find that after a couple of days mulling it over, I'm usually glad that I didn't buy any!!

The other key question to ask is WHY are management keen on presenting to private shareholders. Some genuinely want to build a relationship with the PI community, as they recognise that we create liquidity & set the price.
Others however have more cunning motives - i.e. they need us as the cannon fodder to buy the shares, get the share price up, as either a Placing is coming, or an Institution wants to exit! Or management want to cash in some share options!!!

I have another rule, which is that I only buy 1 share out of every 5 that I meet management. OK, it's not a hard & fast rule, and I can break it if I choose, but it's a very good discipline to make me hold back on buying too many average or poor companies.

Opinions differ on this, but generally I do like to meet management. But I take what they say with a huge pinch of salt. It's more about understanding the people behind it, and forming a view on what they are like. The more management I meet, the better I'm getting at sniffing out BS & BS merchants!

Also, I can like management, but not like their shares. It's key to separate those two points.

Regards, Paul.

Ramridge

Yesterday Goodwin, today Nature. Just shows that any company directly or indirectly reliant on the oil & gas sector needs to be avoided perhaps until a clearer picture and stabler situation emerge.

janebolacha

Paul, from FT Alphaville Markets Live, just now:

°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°

"PM

Anyway, isn't this just stupid?
PM

Slightest sight of a market wobble, Fed to the rescue, stock soar
PM

Future generations will look back at us and laugh
PM

"They thought the best was to fix economic confidence was to boost asset prices, relentlessly, for ever"

°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°°

How right he is, it's a world of how it looks, rather than how it really is.

Pass the punch bowl, keep the party going.

PJBY

I took a small position and have bailed with an impressive 40% loss. Another Co where I feel I was misled. Despite having unrivalled Industry knowledge it does not make you a successful Business man

The Co has had a torrid time over the last few years. It must be very difficult for the BoD to remain positive, they have done well in many respects.

However with the fatality and now possible fall out from the compensation claim, it does make you wonder if the Directors have any more wind in the sails?

I have been involved with a few Indusrtial accidents in my time, they take their toll understandibly

No intention of looking at this again

zoolook

"Yesterday Goodwin, today Nature. Just shows that any company directly or indirectly reliant on the oil & gas sector needs to be avoided perhaps until a clearer picture and stabler situation emerge"

I think it is narrow minded to avoid O&G related shares when panic may actually be throwing up quality companies at bargain prices for those prepared to take a longer view. Goodwin may fall into that category. I think it does for Pressure Technologies (PRES). We wont know of course without the benefit of hindsight by which time the SPs will re-rate (or have bombed further)

cig

It's far too early to look for bargains in oil and gas. Half the commentators say "look, bargain!" at the moment. Textbook "bull trap" phase.

ridavies

Thanks for the info on Mello presentations. Fortunately I was there and the ones I missed because I couldn't be in more than one place at the same time don't seem to be there........ and the price is in $! Amazing.

Bezhe

Two comments:

PJBY above has commented on a company - but I am not sure which one. If you put the £ sign before its ticker, the name will appear.

Paul has commented on the acquisition by Ideagen (LON:IDEA) and its treatment of R&D costs where the company says "certain elements of which, under International Financial Reporting Standards, would need to be capitalised."
This was news to me - I had thought that capitalising development costs was optional. I have now had a quick look at Section 18 of FRS102 which is applicable from January 2015. It does indeed seems to offer a bit more scope for capitalisation of development costs than the previous SSAP13 and even seems to bring in an element of compulsion. (I would welcome views from those who may be more up to date with their CPD!)

SSAP13 stated "Development expenditure should be written off in the year of expenditure except in [specified] circumstances when it may be deferred to future periods". Note that "may" indicated that it was optional.

This, of course, means that Paul is likely to be kept even busier from 2015 onwards in adjusting the reported earnings. Despite the rules, capitalising development costs is nonsense (IMO) and should always be adjusted for by reviewers of accounts as it is too easy to create and maintain (i.e. by convincing/fooling auditors). Sharp eyes even more important for "DYOR".

carmensfella

20th Dec '14

ridavies...regarding the Mello presentations at Derby. They are all top quality and needed individually editing so the Mello team are only releasing ten first of all to see how popular they are for download and are actually free to those who paid for full price tickets to the event.
Vimeo who Mello are using as a paid for distribution channel unfortunately do not have a ££ option to pay for the downloads but the currency conversion is done for you and the payment options are easy.
If these first ten prove popular we will add more but I have already paid out thousands to get this huge event off the ground so you will appreciate I am trying to be sensible. Hopefully, including the huge discount options, I have the pricing of them about right especially for those who did not attend as they are certainly all well worth watching and that includes our very own Paul Scott who was in great form at Mello2014.

extrader

21st Dec '14

Hi David,

I was at Mello 2014 and can vouch for the high quality of the presentations ....so look forward to seeing the videos.

My Q : I paid 'full price' for the 3 days, after a 'joining ShareSoc' discount : is that 'full price' or not and - ifi it is - how do I go about accessing the videos ?

Many thanks
ATB
extrader (from the 'If you don't ask, you won't get' school ;->)

22nd Dec '14

extruder....If you had a ShareSoc discount ticket that means you are entitled to discounted video downloads as well. You need to use the code that will have been emailed to you over the weekend. If you do not receive it then do email admin at Mello2014.com

Maddox

24th Dec '14

Hi guys, a further endorsement from me Mellow2014 was superb - very many of the presentations were unbelievably good. AO and Crawshaw were the most inspiring management presentations I've seen in many a long year.

IDEA - I hold some of these and I like the look of this acquisition. One further factor with the wider institutional involvement is whether they've got all the stock they wanted in the placing? If not, they tend to get into the market to top-up causing a nice spike in the sp.

Small Cap Value Report (19 Dec 2014) - NGR, OSG, PRW, IDEA, RGD

NATURE (LON:NGR)

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Paul Scott

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