Small Cap Value Report (19 Jun 2015) - STY, CRL, DAN

Good morning!

In case you're interested, and missed it, I recorded a SCVR Extra video last night, covering 8 more companies that I didn't have time to type up during the day. There are clickable links in the description box which allow you to jump straight to companies of interest, if you don't want to watch the whole thing (which is under 14 mins).

It's very quiet today in my area of the market, with hardly any results or trading statements for small caps.

Styles and Wood (LON:STY)

Results for y/e 31 Dec 2014 - this is a property services company. The results look good - turnover is up 3.2% to £97m, and underlying profit before tax is up 200% to £2.1m. The order book is up 20% too. The market cap last night was only £3.7m last night.

So clearly there's a catch! It's the balance sheet - the company has an inappropriate capital structure, with far too much debt, in the form of convertible preference shares.

Refinancing - however, in a separate announcement, the company gives details of a clever refinancing which gets rid of more than half of the convertibles. It took me a little while to work through the details of the refinancing, to get my head round it, as it's not a simple deal.

By the time I realised that this is a very good deal, that puts the company on a much firmer footing, it was too late, and the shares had already shot up over 40%.

Anyway, as it's a real micro cap, or even a nano cap, I won't waste any more time on it, as most readers won't be interested.

Creightons (LON:CRL)

Results for the year ended 31 Mar 2015 - another nano cap, so again just a very quick mention. Underlying operating profit was flat against last year at £0.5m, but an exceptional gain was made on a disposal, of £375k.

Interestingly, another disposal after the year end bagged another £1.0m, of which £844k is profit. The balance sheet is in good condition, especially when you include the post year-end disposal boost.

Although the narrative refers to margins being squeezed by customers, and revenue investment being made. So it doesn't look likely that underlying profits have much scope to go up, from my very quick review of the business. It makes cosmetics, creams, etc.

There's no divi, which is a bit surprising given the disposal proceeds, but it looks like they are limbering up to pay one this year perhaps?

Overall, the re-rating from 5p to nearly 9p in the last year is probably justified, but for now it looks priced about right to me.

Spurious share price rises

I've noticed that there are a lot of really spurious share price rises happening in micro caps at the moment. It seems that, as soon as a tiny share starts moving up in price, then a stampede of buyers appear, and drive the price shooting up, all looking to make a fast buck. Maybe it's connected to bulletin board rampers starting false rumours, etc, I don't know, I haven't looked.

There's a strong case for people who post blatant lies on bulletin boards (as opposed to personal opinions backed up with explanations & facts, which is fine) in order to create a false market in a share, being sent to prison. However, the internet is really impossible to control, and so we just have to live with the sort of vermin that write nonsense of bulletin boards, or filter them (which I find best) - life's too short - I always regret it afterwards when I get sucked into pointless slanging matches on bulletin boards.

Anyway, that's rambling off the point a bit. Daniel Stewart Securities (LON:DAN) is an interesting situation, because the shares have, astonishingly, 17-bagged in the last 3 months, on nothing more than the news that controversial/discredited former head of Innovation Group & Quindell, Rob Terry, has bought some shares in DAN (birds of a feather springs to mind). That's it! No other positive news.

Indeed, DAN shares were even suspended during this period for a while when DAN lost its own NOMAD. What makes this situation even more ridiculous, is that on 16 Jun 2015 DAN put out an RNS saying that it knows of no reason for the share price rise - remember this share has gone up 17-fold! For no reason, as the company has now confirmed!

Also it says that it will need to raise £1m in fresh equity, likely to be priced at a discount to the current share price.

So the company itself is specifically telling the market that this share price rise has been completely spurious!

I am very tempted to short £DAN shares, but generally I don't short anything small & illiquid. Probably AIM's greatest failing (apart from the appalling lack of scrutiny over the quality of new issues, especially overseas ones) is that there is no minimum free float. So share prices can easily be "cornered" - where the price is driven up to a totally artificial & irrational price, and shorters are forced to buy back at any price, no matter how high.

This makes shorting of small AIM stocks potential financial suicide, and it should be avoided at all costs, in my view. Just look at what has happened at Gate Ventures (LON:GATE) as another example of a hot air share, with little to no intrinsic value, that just keeps going up, because the market has been cornered.

Of course these irrationally high share prices always collapse in the end, but what's the old adage, that the market can stay irrational for longer than you can stay solvent (if you're betting against it).

AIM needs root & branch reform, and top of my wishlist is for a minimum free float to be introduced, to reduce the likelihood of share prices being artificially rigged through people cornering the market in that share.

Anyway, I've put Daniel Stewart Securities (LON:DAN) on my Bargepole List today - it's far from a comprehensive list, as what with everything else I do, there isn't time to keep it updated, other than every now and then when I remember. It's interesting to note though that the list has picked up a lot of big fallers. It's not right every time of course, nothing is. The main purpose is to highlight high risk shares.

Right, that's it for today, and the week. Thanks for all your interesting comments after each article, I read every one, and respond to most where relevant. I'm a firm believer that investing is a team sport, and by pooling our knowledge & experience, I think we can help each other.

Have a smashing weekend!

Regards, Paul.

(of the companies mentioned today, Paul has no long or short positions. A fund management company with which Paul is associated may also hold positions in companies mentioned)