Small Cap Value Report (20 Jun 2016) - NXR, FTC, PTSG

Good morning!

This is now the last week of the Brexit campaign, thank goodness. I expect many people are, like myself, heartily sick of the whole thing. Especially when tragedy struck last week, in the senseless murder of that lovely lady MP. That shouldn't affect the vote, but I think it will - as a reminder that there is an extremist minority element within the Brexit camp which is beyond unsavoury.

Personally, I'm wavering, and am now in the unsure camp. What has really worried me, is talking to people who work in financial services, including our own commenter "Maddox" here. They're saying that the removal of EU passporting for financial services will definitely lead to (possibly serious) job losses from the City to places in Europe.

My heart says leave, and get back our democracy. My head says that doing so would cause so much disruption, and consequences that nobody really knows, so perhaps it's better to play it safe for now? Also, as investors, we do have to think about the portfolios we've carefully nurtured. An out vote would undoubtedly knock them hard, possibly for quite a while - nobody really knows.

The betting odds have moved towards the Remain side in recent days. I follow the IG binary Brexit market, and it has recently moved from a mid price of 61.5 to 77.0 today - i.e. there is now only a 23% chance of a Brexit vote succeeding. That's probably why we're seeing such a big market rally today the FTSE 100 is up 211 points at the time of writing - a remarkable one day rise.

There are not many results/TUs today, which is handy as I'm heading into the City again shortly, to meet management of one of my favourite small caps, in which I hold a long position, Best Of The Best (LON:BOTB) . This is the weekly spot the ball, supercar competition, where 70% of its business is now online (the balance in large UK airports). I'll report back if there's anything interesting from the meeting.

Then I'm heading back home to Hove for a few quiet days, as all the frenetic activity of recent weeks in London has done me in a bit. So some R & R is definitely needed!

Norcros (LON:NXR) update

(At the time of writing, I hold a long position in this share)

I was delighted to finally meet the CEO & Chairman of this bathroom fittings group last week, and with some other investors, have a results briefing and Q&A.

I went through the detailed numbers here in my report of 14 Jun 2016.

Here are some key points from the meeting;

Strongly improving ROCE from 2012-16

Debt - 2x EBITDA is highest level they would feel comfortable going to (on making further acquisitions). Very sensible I think. Currently at 1.2x, so debt not an issue

Pension fund/deficit - they are cognisant of it, but it's well managed.

Pension buyouts, etc - prohibitively expensive. Why give away many millions for the profit that such providers require?

EU Referendum - "Won't throw us off course, our businesses are too resilient"

Brexit - is business going to stop? Of course not. Could affect Forex, but we're 6-9 months hedged

Flexible cost structures, so could adapt to any downturn, which they would see coming a year ahead (as Norcros products are "finishing" products once a development completed

S.African businesses - "unrecognisable" from 5 years ago. Performing very well, may have to increase capacity (would required capex - but less than 5 year payback, or won't do). Customer tastes are becoming much more similar to Europeans

What impressed me most is the buy & build strategy. This is working very well indeed, with clear improvements in performance once acquired companies join Norcros.

Vado - acquisition has been "a great success". Products have been introduced into Ireland & S.Africa. Profit risen c.20% since acquisition - real synergies achieved

Croydex - another successful acquisition. Will be introduced into new markets too

Further acquisition deals in pipeline - "everyone knows each other" in this sector, so deals come to Norcros, and they pick the best ones. Strict ROCE-based approach.

Why are NXR shares so cheap? They don't really know. Clearly the pension fund might put off some investors. But it's a mature scheme - average age 77, and they think the £2.5m p.a. over-payments, plus investment gains, should fully fund the scheme. In 10 years' time, it will be very much smaller scheme than now, due inevitably to natural causes.

CEO very committed. Agreed with me that the shares are a no-brainer at the current level.

Nobody knows when the shares will re-rate though - they've been cheap for a while now. Business is performing very well, and acquisitions strategy is working very well too.

My opinion - I feel that it's only a matter of time before this share re-rates up about 50%, to get onto a more appropriate rating for a successful buy & build share. Management seem straightforward, and answered all questions directly. So I'm comfortable with the management, although there have been some rumblings about excessive remuneration, which needs looking at.

Filtronic (LON:FTC)

Share price: 11.1p (up 10% today)
No. shares: 196.9m
Market cap: £21.9m

Trading update - this company has a very poor track record, and almost went bust quite recently. The shares have been rising recently, on a series of contract win announcements. The Placing of 90m shares at 5p per share last year looked (at the time) like people throwing good money after bad. However, it's worked out very well, with the shares now more than double that price.

Today's update sounds fairly positive:

Revenue for the financial year was £13.6m (2015: £17.5m) due to a strong sequential second half performance with six-month revenue of £9.1m (2016 H1: £4.5m).

The Group had net debt at the year-end of £0.3m (2015: net cash £0.7m) and we are pleased to confirm that Barclays Bank plc has agreed on a temporary increase of our invoice discounting facility from £2.0m to £4.0m to support our current working capital requirements as our revenues grow. In addition, the Group has an invoice discounting facility in the US with Faunus Group International Inc of $3.5m. The Board believes that these facilities will be sufficient to finance the period of sales revenue growth that we are currently experiencing.

No mention is made of profitability, so presumably that doesn't look quite so good. I assume the company is still loss-making.

My opinion - a friend has been nagging me about this share recently, saying that it's a good turnaround situation, and is worth a look. He seems to be right, in that the company clearly has good sales momentum now.

I'd like to see the full year figures when they come out on 2 August 2016.

The trouble with this type of company, is that everything hinges on buoyant demand for quite short-life products. Once demand dries up, the company must have the next generation of products ready, or it could just go under.

Looking back to 2010, the company has been consistently loss-making, only eking out a smallish profit in one good year. That to me looks like a pretty unappealing investment, even if things are now improving.

Filtronic is clearly now riding a wave of increasing demand, but for how long? Will there be much profit, and more importantly, will it be sustainable? I'm not convinced. A poor business doesn't suddenly turn into a great business, in my view. It's more likely to be a poor business that's coming up for one or two good years.

The market cap of £21.9m already factors in a lot of continued improvement. It doesn't look a bargain to me, but I've not seen any forecasts for the next couple of years.

Premier Technical Services (LON:PTSG)

Share price: 85p (up 1.2% today)
No. shares: 88.1m
Market cap: £74.9m

(At the time of writing, I hold a long position in this share)

AGM statement (trading update) - this is the first time I've mentioned PTSG in my reports. I met the company management a few months ago, and bought an opening-sized position in it personally. The company floated in Feb 2015, with only a small free float - the Directors still hold about 76% of the shares.

This is a group of companies which provide niche services, and it describes itself like this:

PTSG is the UK’s leading provider of façade access and fall arrest equipment services, lightning protection and electrical testing, high-level cleaning and training solutions.

Operating through four divisions, Access & Safety, Electrical Services, High Level Cleaning and Training Solutions, the Group provides highly-engineered industrial products and quality services and has a substantial presence in a number of niche markets.

Emphasis on the word niche - as combined with the company's very good operational expertise, results in high margins. The figures look great. However, I'm always sceptical about recent floats, as often something goes wrong.

There's nothing wrong with today's update though:

"I am pleased to report that the Group has achieved record sales in the year to date, particularly in the installation divisions, and that working capital utilisation and profit levels are in line with the Board's expectations.

"Our contract renewal rates remain high at 85% and the Group has secured new contract wins across all its disciplines, including a number of multi-discipline framework agreements with new and existing customers.  The six acquisitions completed in 2015 are delivering healthy contributions to turnover and profit and have been successfully integrated into the Group.

The Board is confident that the business is in a strong position to continue to grow both organically and through carefully selected acquisitions."

My opinion - so far so good. It's been listed nearly 18 months now, without any problems. The valuation seems reasonable, at 12.9 times 2016 forecast EPS.

I like to get to know companies gradually, and then build a position as confidence grows. So I'll report back here when the interims are issued, probably in late Sept 2016, judging by last year's timetable. That's a bit slow, to let's hope management can speed up the reporting cycle. It's good to see June interims out in July or August.

I've run out of time, sorry. Didn't have time to properly look at £WINE whose results are out today, as it's quite a complicated situation - the legacy business of wine warehouses has been joined by an online business for crowdfunding of wine production, called Naked Wines.

Must admit, I don't really know what to make of it, so will have to leave that one for another time.

Regards, Paul.

(usual disclaimers apply)