Small Cap Value Report (19 Mar 2014) - VLK, PPH, ESS

Wednesday, Mar 19 2014 by

Good morning!



Vislink (LON:VLK)

Vislink is a group that I've written about a lot here in the last year, as it has always struck me as being very good value, and still does. My rationale for buying the shares at 30.5p was set out here on 25 Mar 2013, and that remains a good summary of the current investing case.

The shares re-rated to about 50p later last year, but have since slipped back to about 40p (for chartists note that is a 50% retrace, which apparently can be a good point to look at buying, once something has stopped falling anyway). The only reason I can find for the share price weakness is the company's decision to move from a full Listing to AIM. This strikes me as an entirely logical step for a £47m market cap (at 41p per share), acquisitive technology company to take - i.e. it was an anomaly having a full Listing in the first place. However, this move to AIM seemed to spook some private investors, who invented conspiracy theories about management's motives for the change, and will also have probably triggered some Institutions into becoming forced sellers (those whose remit means they are not allowed to hold AIM Listed shares). Some  private investors also have an aversion to AIM, which is understandable, as it is arguably the unregulated Wild West of the investing world - plenty of very good companies are on AIM, but there's a lot of dross too - because wrong-doing is rarely punished, sadly, which attracts wrong 'uns.

Vislink has an ambitious Executive Chairman, John Hawkins, who has been following a strategy of rationalising the existing businesses to make them more profitable, then growth by acquisition (something he's done many times before). The longstanding strategy is to build Vislink into an £80m turnover group, making £8m profit by the end of 2014.

This strategy seemed to be counter-productive with investors, since people seemed to fret over whether the company could achieve this target on time, rather than being pleased with the progress being made to date.


Vislink has put its excess cash to work today, with the announcement of a takeover for £14.9m of Surrey-based Pebble Beach Systems, which is a "leading developer and supplier of…

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Pebble Beach Systems Group plc, formerly Vislink plc, is a software and technology company. The Company is engaged in the collection and delivery of video and data from scene to screen. The Company's Pebble Beach Systems division is a developer and supplier of automation, Channel-in-a-Box and content management software solutions for television broadcasters, cable and satellite operators. For the broadcast markets, the Company provides wireless communication solutions for the collection of live news, sport and entertainment. The Company's products include Marina, which is an enterprise level playout automation platform for multi-channel applications; Orca, which is an Internet Protocol (IP)-enabled cloud-based integrated channel delivery solution; Dolphin, which provides multi-format integrated channel delivery solutions based on information technology (IT) hardware, and Stingray, which is a self-contained Channel-in a-Box. more »

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PPHE Hotel Group Limited is a hospitality company. The Company, through its subsidiaries, jointly controlled entities and associates, owns, leases, operates, franchises and develops upscale and lifestyle hotels in gateway cities and regional centers in Europe. The Company's activities are divided into Owned Hotel Operations and Management Activities. The Owned Hotel Operations are divided into three segments: the Netherlands, Germany and Hungary, and the United Kingdom. The Company's portfolio of owned, leased, managed and franchised hotels includes approximately 39 hotels offering over 9000 rooms. The Company's development pipeline includes approximately five new hotels and the extension and reconfiguration of one hotel. The Company's hotels operate under brands, which include Park Plaza Hotels & Resorts, art'otel and Arenaturist in Europe, the Middle East and Africa. It owns and operates hotels, restaurants, bars and spas across various countries in Europe. more »

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19 Comments on this Article show/hide all

johnrosier 19th Mar '14 1 of 19

Vislink: Looks a super acquisition and John Hawkins deserves credit for doing a deal that looks like it considerably enhances the quality of earnings. Certainly looks good value on consensus forecasts; just need to cross our fingers for next Wednesday's results!

Website: JohnsInvestmentChronicle
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bsharman 19th Mar '14 2 of 19

Vislink are one of my favorite holdings but what i don't quite understand is why in this frothy market in small caps why has Vislink massively lagged the market (is it because the market is skeptical of the targets?). It is a 'tangible technology' company with good products and growth prospects. This is a value investors dream come true!

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cycle 19th Mar '14 3 of 19

Yes, I'm at a loss to understand the extent to which the market has been disbelieving Vislink's progress towards their growth targets. Management looks very competent and every recent acquisition has been excellent. I've been going over the company reports and figures trying to find problems but haven't found anything. Only a few cynical comments on forums about how the company is a 'serial disappointer' which seems to not fit the current management. This is my biggest holding at the moment, so was delighted by the news, especially at the tiny dilution to existing shareholders and acquiring a company that holds 40% of it's value in cash!

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kenobi 19th Mar '14 4 of 19

I think apart from the concerns about moving to aim, one of the concerns would be that the 80M turnover be achieved by takeovers funded with paper which would cause dilution and limiting the upside for shareholders, while they take the risk of takeovers, always a risky strategy. This one sounds good. Not sure I understand the figures though, if it's 14.9 M, but has 5.9M in cash,  is this cash all needed for the business ?  I assume some cashflow is required and this figure has a little dressing up to make the aquisition more paletable to the shareholders.  otherwise we're buying something for 9M odd, and funding this with  our own cash + 10 M of other cash + 2M in new shares ?   I guess that comes to the 14.9 M  and as soon as it completes some of the cash will be moved from the newly purchased company to reduce this overdraft. 

Pebble Beach itself has £5.9m cash, so that brings down the net consideration to £9m. This has been funded using Vislink's own cash, plus a new £3m term loan, and £7m overdraft. The vendors will also be locked in to Vislink for two years, with the issuance of £2m in new Vislink shares. That's very little dilution, for what is quite a decent-sized acquisition, so to my mind this looks a good deal for Vislink shareholders.

the price itself looks good if taken at face value,  we're paying 9M  for turnover of 5.6M and profit of 1.3M

so a pe of 6.9 ?  assuming there are some economies and opportunites for cross selling,  all in all a pretty good deal,  the upside of paying partly in shares is keeping the previous owners on board and as you say not much dilution.   the shares are up over 10% as I write so clearly the market is impressed.  Fairly unusual for the buying company's shares to jump so much.  Hope you are right with your predictions and we're looking at 65-75p later this year !



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shanklin100 19th Mar '14 5 of 19


If you have the time, it would be interesting to get your thoughts on ESS and RTC both of which announced results today.

Thank you, Martin

P.S. Have bought some RTC today but not ESS. Its a shame I didn't buy some ESS when David Stredder first mentioned them to me a few months ago :-(

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Damian Cannon 19th Mar '14 6 of 19

Hi Paul,

I was wondering if you'd skimmed over the full-year results from UTV Media (LON:UTV) that were released yesterday? You last covered their interims, where they'd had a horrible six months, and speculated that they might warn on profits again. As it turns out they did have a much stronger H2 and the narrative suggests that this recovery is holding up this year.

For sure the balance sheet is stuffed full of intangibles but the current ratio is reasonable and the dividend is worth having. So it may well be that they've righted the ship and are set to benefit from the World Cup later in the year?


Blog: Ambling Randomly
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bsharman 19th Mar '14 7 of 19
2 this is worth a watch if you have in interest in Vislink.

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stocktrawler 19th Mar '14 8 of 19

As Paul explains in his article, VLK was held back by its transfer to AIM which clearly offered a buying opportunity for those willing to focus on the underlying business and understand the real reasons behind this move. In a market where its becoming increasing difficult to spot good value stocks this one is a little gem in my opinion and also one of my largest holdings

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shanklin100 19th Mar '14 9 of 19


Wrt ESS and their loan notes, their RNS yesterday, entitled "Loan Note Conversion" is highly relevant..

Regards, Martin

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ryanc106 19th Mar '14 10 of 19

I have a large holding here and completely agree with Paul's analysis... I think the target of 80m at 8m profit is doable from the research I've done and believe the value will come out over the long term here!

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Paul Scott 19th Mar '14 11 of 19

In reply to post #82130

Hi Martin,

Thanks for that, I shall add another section to today's article to reflect the RNS on Essenden that you highlight.

Regards, Paul.

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ChangFai 19th Mar '14 12 of 19

Paul, any thoughts on Speedy Hire after the latest update (and fall) ?

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kenobi 19th Mar '14 13 of 19

In reply to post #82131

I think the target of 80m at 8m profit is doable from the research I've done

yes I agree, but the other question is how many shares will there be when this happens ?
we have to be interested in earning per share not just earnings !

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Paul Scott 19th Mar '14 14 of 19

In reply to post #82125

Hi Martin,

Thanks for your input today on ESS, very helpful.

As regards RTC (LON:RTC), I decided to sell today for 30p. My view is that 4p EPS, on a PER of 7.5, considering the company has a fairly weak Bal Sheet with quite a bit of invoice discounting debt, and the dividend policy being that they appear to be waiting for the retained P&L to become positive (which might take 2 years), combined with the tiny size of the company & hence lack of liquidity, steered me towards banking my profit & moving on. I paid 21p for the shares a few months ago, so a 43% profit locked in a good result in my view. They might go up a bit more, but are now on the same sort of rating as Empresaria (LON:EMR) which is much bigger & more liquid.

Regards, Paul.

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Paul Scott 19th Mar '14 15 of 19

In reply to post #82138

Hi Kenobi,

Well so far Vislink (LON:VLK) acquisitons have been with hardly any dilution - all been done so far from its own cash & a small facility, which it looks like they will hardly need - the N+1 updated forecasts today still show them with net cash at the year end.

Therefore it looks as if VLK are most of the way to their target of £8m annualised profits, with hardly any dilution at all to date. So I think your concern on that front looks misplaced. Just IMO, please DYOR as usual.

Regards, Paul.

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kenobi 19th Mar '14 16 of 19

well that's great news if this aquisition takes us up to the 8M profit, I had not realised that,

a good investment from the looks of things based on the p/e. I guess the 2M in shares is only 4% or so dilution based on the market cap you quoted at 40p. There are good reasons to pay partly in shares, to keep the old owners on board for a period of time, hopefully they will be locked in.

With the move in vnet yesterday and visi today, that's 2 consecutive good days for shares you've highlighted !

Always interesting reading your Articles,

Cheers K

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RicGains 19th Mar '14 17 of 19


Hi Paul,

This a question rather than a viewpoint! On ESS, you mentioned "with current trading strong, this might mean about £4m profit for 2014". In today's RNS they stated

"I am pleased trading since the year end has again strengthened considerably with a run rate of 13.5%. At the margin a 1% change in like for like sales converts to EBITDA of around £300,000."

Now, obviously you will want caveats about all sorts of things from "Well this is only the first 15 weeks; the world cup is coming; that's just what they are saying... etc etc", but my cack handed analysis at 7:15am used this for a RicGainsOptimisicast(TM) and I came up with 2014 EPS of 14p! Then I read your analysis of the "one offs" and budgeted for some gaffes, but I still get to EPS of 10p and thus a forward P/E of 9.6 at tonight's mid price.

 2014 - Optimisticast:

13.5% increase in like for likes. 1% = 300k in EBITDA
13.5 x £300k = £4.05m
Add that to your "interest free" 2013 profit.

£4.05m + £3.3m = £7.3m ----> Profit of say, £6m

Let's now knock £1m as a gaffe allowance (either in their delivery, 20% tax or my calculations)

£5m / 50m = EPS of 10p per share.

So a close of 96p today, puts it on a Optimisticast forward P/E of 9.6.

However, this is without accounting for any "in the bag" tax losses, plus with a £1m gaffe buffer, nor any growth in the growth!

With a tenpin bowling place, I can see high fixed costs and, as you say "a geared return" if you get more people through the door, or encourage higher spend; so it didn't look that ridiculous. What's the mistake that I've made - is it misunderstanding this 13.3% runrate figure (and thus Essenden's EBITDA forecasts) and just arbitarily sticking it near the bottom line? 



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Paul Scott 19th Mar '14 18 of 19

In reply to post #82144

Hi Richard,

Your workings look sensible to me. However, your main assumption is that they can maintain +13.5% LFL sales for the full year, which I think is extremely unlikely. There's probably an element of impact from the weather helping this year's sales, compared with widespread snow & ice last year. Goals Soccer Centres commented on that in their results recently. Although Essenden should also benefit from generally improving consumer sentiment, and I think people are more willing to take the brakes off discretionary entertainment spending as they start to feel more comfortable with their economic outlook.

If Essenden do well for the full year, then they might see +5% LFL sales growth, which I think might be a sensible upside target at this stage of the year.

But your overall point about the geared upside from trading is a very good one. I should have mentioned that point more emphatically in my report, rather than skimming over it. So thanks for flagging up, and as you point out, there could be upside on my guesstimates for earnings.

Cheers, Paul.

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RicGains 19th Mar '14 19 of 19

Ah, that's what I missed - weak Q1 comps that I extrapolated. I've never been a fan of companies filling their RNS's with statements about the weather, but this business does seem quite weather dependent. Here's to wet summer holidays!

Thanks again,


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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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