Small Cap Value Report (2 Sep) - OPM, MBH, ZIOC, NXR, COMS, CSG

2nd Sep '13 by Paul Scott

11 comments 21759 reads

Good morning. 1pm (LON:OPM 41p) has issued a trading update which sounds positive, saying that trading in Q1 has been "very encouraging", with "sales achieved in each month surpassing expectations". I've come close to buying these shares several times, but missed the big move up in price a few months back as I dithered too long, and then baulked at paying a higher price once they had begun moving up - clearly a mistake.

1pm is a small provider of lease asset finance to SMEs, so it has neatly filled a market gap left by the Banks, and typically raises money from HNW (high net worth) individuals and companies at about 8% p.a., then lends it on to SMEs for asset purchases, at just over double that rate. So a very simple business model. It has sensible underwriting & lending policies, which mean that risks are minimised, and it just looks like a good business, with plenty of demand from customers in an area where the traditional Banks still fear to tread.

Another Block Discounting Facility has been arranged for £1m, to allow them to write more business, and they also refer to increasing demand. The share price is currently 41p (which needs to be divided by 146.67 to adjust it to the pre-share consolidation price, of 0.28p). I first turned down these shares when the idea was put to me at 0.14p, so turned away a doubler. What to pay for them now? It's difficult to say. Profits look set to be approaching £1m this year perhaps, and growing strongly, so at £12m market cap maybe it's not expensive on a 2-year view? I shall have to ponder this a bit more, but it's certainly on my watch list as something to buy on a dip, if the opportunity arises.

It's difficult to see anything attractive about the interim results to 30 Jun 2013 from Michelmersh Brick Holdings (LON:MBH 39p). As I've mentioned before, it's a special situation where the operating business making bricks is largely irrelevant, as it doesn't make any sustainable profit, so the value is in the group's property holdings, which will be gradually sold to repay debt, which is still considerable at £18.7m. What…

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clissold345

2nd Sep '13

Hi Paul

I regularly read your Small Cap Value Report and enjoy reading it. I know you sometimes buy resource shares but I know you don't cover them in your report. In my opinion it's not usually a good idea to mention resource stocks in your report (you mention ZIOC today). Eg you will confuse new readers and you're sure to get someone new asking you your opinion of Get-Rich-Quick-Resources (the latest dodgy AIM resource share).

Regards,

Chris.

mikelevie

Hi Paul, are the COMS Interims in you reading pile today? Seems to be an interesting turnaround going on there.

Paul Scott

Hi Chris,

I take your point, although Zanaga Iron Ore Co (LON:ZIOC) is more of a special situation than a resources stock as such. It has just under 9p per share in net cash, and the only cash burn is corporate costs. Glencore/Xstrata have funded the Feasibility Study at enormous cost (c.$300-400m) entirely, so shares in ZIOC represent an option on the (unlikely) commercialisation of their project in Congo, with the net cash underpinning the share price at the level I bought (about 11p).

That said, now the shares are 23p, then the cash is only supporting around 39% of the share price, instead of 82% when I first bought.

The dynamics of the iron ore market are changing, with falling prices (and expectations of further falls) having recently reversed, and Chinese demand now growing again. So all of a sudden, a project that looked doomed to failure is potentially becoming very interesting. The $7bn capex required is the rather large stumbling block, but if Glencore manage to sell their interest in the project to the Chinese, then ZIOC could get a very lucrative free carry.

Nobody really knows what the outcome will be, you have to just weigh up the alternatives, and take a view where risk/reward lies.

So in a nutshell, the only resource stocks I will look at, are (1) ones where they have more than enough net cash, hence no dilution/fundraising necessary, (2) serious projects with low production costs, (3) following shrewd investors in, as I have a good network of friends who have excellent track records in this space.

So the standard resource minnow, of "a liar standing next to a hole in the ground" are of no interest to me whatsoever! But occasionally, a special situation might well crop up (as it has with ZIOC) where there's a good opportunity to make money. So I'll follow up on anything like that.

Cheers, Paul.

Hi Mike,

I've had a quick look at Coms (LON:COMS), but don't understand their business model.
Also, it's too early stage for me, still being loss-making.

They capitalised £3.24m which is described as "purchase of other intangibles", i.e NOT goodwill. So what are these costs I wonder? No further explanation is given, so I'd need to find out what the £3.24m costs are which have by-passed the P&L, and been capitalised.

It's not really my thing - a £25m market cap, loss-making telecoms company. I'd look at it again once it's consistently profitable perhaps, but people tend to pay too much for early stage growth, as so many of these things fail to live up to the hype.

Cheers, Paul.

Many thanks Paul, as always very interesting & helpful to get your perspective. KR Mike.

Hi Paul

Thanks for your reply. Thanks for your statement of what resource stocks you will look at. Yes that seems clear enough. Normally you analyse a company and then (days or weeks or months later) give "bulletins" about the company (eg if there is news or if the sp goes up). Will you do the same for resource stocks? I dont want to focus too much on ZIOC but with ZIOC I think you gave the bulletins and then only gave an analysis in your reply to me.

(I hope what Ive written doesnt sound as if Im telling you how to write your Report. It's your Report, and Im not paying you for it, so you write it as you like!)

Regards,

Chris.

Hi Chris,

It's a difficult balancing act, as if I mention my own stocks too often, then people start making accusations of me pumping my own portfolio. So I try to hold back on mentioning my own stocks, unless there is some meaningful news about them - so I wouldn't normally comment on price moves, unless they are really significant.

ZIOC fell into that category, as it doubled last week, and ended the week at a high (suggesting more to come this week), so it seemed particularly noteworthy, even though I've not mentioned it in my morning reports before, because it was out of the ordinary in terms of the sort of thing I normally look at, and is a very complicated situation to assess, involving a lot of guesswork about different probabilities for different outcomes, which is normally why I don't like junior resource stocks - too many variables that are impossible to quantify accurately.

However, I'm a great believer in being flexible & if a particular sector is heavily oversold, and then suddenly springs back into life, then it interests me, as there could be bargains, and a catalyst for them to rebound. So I might well look a bit more closely at resources stocks over the next few months for this reason.

The vast majority of junior resource stocks on AIM are complete junk in my opinion, so the key thing is to sort the wheat from the chaff as always, and find the genuine opportunities when they are cheap & unloved.

Cheers, Paul.

Beginner

Just a belated comment on Sweett (LON:CSG). I bought in here about a year ago, one of my first ever purchases, and they remained static. About six months ago I was doing a delivery and actually saw a Sweett (LON:CSG) office on a site. I went in and asked the guy there what he thought of the company's prospects. He said there was NO WAY he would sell his shares in the company. Although things were quiet then, there were loads of small jobs coming in and there were constant daily updates coming from Head Office about jobs in the pipeline. I waited, and they still stayed static. I sold when they hit 22p. Well, you live and learn!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

rick

Hi Paul,

Have you compared 1pm (LON:OPM) against Ultimate Finance Group (LON:UFG)? It also provides asset finance to UK SMEs. It looks like a similar business model to 1pm but trades on a discount to it when considering forward P/E, price/sales and it has a decent dividend yield. Would be interested in your thoughts (although it is in the process of merging with a cash shell called Renovo which may complicate things).

cig

Their business model seems simple enough: replace dedicated vintage telephones in offices with an internet based solution. It's a commodity product (Skype or Google surely have a corporate version of their IP phone services, and the like of Cisco are also in this space) so I wouldn't expect superlative profits even if they do good service to a specific niche (they seem to target public sector customers). So the point that it's likely to get overvalued on hype is fair.

UFG sounded like a good find but the RNS stream seems to say it has been bought out and will be delisted next week.

Small Cap Value Report (2 Sep) - OPM, MBH, ZIOC, NXR, COMS, CSG

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Paul Scott

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