Small Cap Value Report (20 Oct 2016) - G4M, LRM

20th Oct '16 by Paul Scott

31 comments 16542 reads

Good morning!

Just a short report this morning, as I am heading into the city for a meeting at Panmures with management of my favourite GARP share at the moment, Gear4Music (G4M). As this is at noon, combined with me oversleeping, that leaves very little time to write much here this morning. Then I've got meetings all afternoon, so am out all day.

I note that the private equity backer of G4M is now completely out. These have been disclosed as Director sales, but they're not really. It's just that Key Capital Partners had a NED on the Board. Where did their shares go? A lot seem to have been absorbed in the market by private investors, which is great as it will increase liquidity & narrow the spread as daily volumes increase.

As I always tell companies & advisers, there's no point in being listed unless you nurture an active private investor base. This is because it's us who generate the liquidity, and small trades set the share price. As in this case, an enthusiastic PI base has apparently absorbed a lot of the shares by a selling institution - an ideal scenario.

Plus each PI that is interested in a company will tend to generate multiple trades each year - topping up when feeling positive, top-slicing when seeking to bank profits, etc. I'm not saying everyone does that, but a lot of people do.

It's pleasing to see that Hargreave Hale has bought 578k shares, taking them up to 12%, which is encouraging. I respect their analysts.

Lombard Risk Management (LON:LRM)

Share price: 8.5p (up 17.2% today)
No. shares: 400.6m
Market cap: £34.1m

Interim results, 6 months to 30 Sep 2016 - I was getting ready to pour scorn on these figures, but they're actually not too bad. As usual, the EBITDA figure is nonsense, so best ignored.

Revenue is up an impressive 41.2% to £15.2m.
It's around breakeven at a loss of £0.1m for the half year.
Funding is adequate, following an £8.0m fundraising in June, at £6.9m cash.

Outlook - reasonably optimistic;

The second half of the financial year will be a period of sustained investment for Lombard Risk, as we fully engage in the delivery of our next-generation products and our new software development facility.

Notwithstanding this, with the increasing strength of our recurring revenues, an order book of £9.2m…

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gsbmba99

20th Oct '16

I got hit with NCC (LON:NCC) this morning.

The market reaction has knocked about £300m off the market cap of the company. For comparison purposes, that is more than 2x the equity value of what they paid for Accumuli (£55m) and Fox IT (£93.5m initial) combined.

The announcement is very badly drafted. You're always going to spook people when you talk about not being able to quantify something even if it's because it's "too early". It makes it sound as if it's a black hole. It's also not clear to me why they say they're still trading in line. Is it because they haven't or can't quantify the impact or because they are confident that despite cancellations and slow renewals, organic growth of 25% in Assurance means they can make up the shortfall in other parts within Assurance?

I wanted to understand how big Accumuli was prior to its acquisition. In the interim results to 30 Sep 14 (http://www.investegate.co.uk/accumuli-plc--acm-/rns/interim-results/201411250700118684X/), Accumuli had £10.3m of revenue of which 64% was managed services, software support and maintenance. 1H14 group EBITDA margin was 20%ish. On an annualised basis, Accumuli managed services revenue (2 x £10.3m x 64%) would be in the region of £13m and about £2.6m at the EBITDA level (based on group EBITDA margin and assuming no growth in the intervening periods). This in the context of a group that is expected to produce revenue of £247m and PTP of £46m for y/e 5/17.

I take at least come comfort that when the worlds financial infrastructure is getting hacked by the NSA they're turning to NCC (https://www.swift.com/insights/press-releases/swift-engages-expert-cyber-security-firms-and-establishes-dedicated-customer-security-intelligence-team-0)

The company has a pretty extraordinary record of eps and dividend growth but not without setbacks along the way including the 2013 revenue warning and the .secure foray.

JDW72

Re Vislink, it looks like they've sold a large bit of the company for $16m which is more than the current market cap of VLK.....

Not sure whether this is the end or there's anything left to run as a business.

Might be an arb opportunity here. Or might not.

ricky65

Given Hawkins awful track record it's a bargepole for me while he's still at the helm.

For me, if the sale goes through and the company is "left substantially debt-free", as the RNS says, and if Hawkins skedaddles, it would probably be a good recovery play. Big ifs though.

Aislabie

The market has taken a dim view of GB Group (GBG) update today. Although performance is not bad, a lofty forward p/e of almost 30 demands more than a 9% organic growth rate, and to make the full year come out right (as they forecast) the second half is going to have to be pretty good. As always these forecasts of second half recovery give cause for concern.
In the longer term I think this is a good company but I hope that if they have to manage a miss for the year that they get onto it soon. A big surprise at year end is far more damaging

banana1

PHTM - Paul, today's AGM statement seems to exceed market expectations. But, there is no mention of Japan, which seems rather odd, doesn't it?

I would appreciate your comment when you have a moment.

Mark Charles

Hi Paul

It would be interesting to here your updated views on G4M after you've had face to face with management if you've got time please .

Mark

GavSmith01

Re Vislink (LON:VLK), I had a look at the potential acquirer, xG Technology. They have a market cap of just $9m, lost $17.9m in FY2015 on sales of $932k, and currently have cash on the balance sheet of $154k as of Q2 2016.

I wonder where they are going to get $16m from?

goingbroke

I suspect at some point over the next 2 years you will be adding the likes of Keyword Studios, AB Dynamics and other shares whose prices are ignoring a very Difficult outlook. The FT are reporting Ncc's contract issues are associated somewhat to Brexit uncertainty. On the ground, I am starting to see this happen in smaller unlisted businesses. Brexit bubble building up, fall in sterling disguising it at the moment .

rhomboid1

I'd love to know who's been selling into today's share price increase

madmix

goingbroke,

Whilst I agree that Brexit uncertainty will undoubtedly lead to further profit warnings, Keywords Studios might not be the best example. In their 1H results from 13th September, they stated :

Thanks to the global nature of the business' earnings, and the fact that only 3% of revenues are denominated in sterling, the Group has not seen and does not expect any operational impact following the UK referendum vote.

By comparison, 58% of NCC's revenue in FY16 was derived from the UK.

LongbeardRanger

Hi going broke,

I am sure you are right as a general matter, but in relation to NCC (LON:NCC) I am skeptical. I read that FT article and the link to Brexit seemed pretty vague. Sounds like spin to me, perhaps the FT have been briefed by the company (this seems likely as I'm sure they haven't made it up) but unless more concrete comments come out from the company I would be inclined to view this as excuse making.

If it really was the reason, why not say so in the RNS?

21st Oct '16

Either way, I can only conclude two things. Brexit is going to have a big effect on NCC or if this is not the case, then their economic moat is not particularly strong and other competitors are taking way business. I don't see it as a micro problem as cybersecurity in general seems to be in a sweet spot and growing strongly. I would suggest if it is a weak moat this is far more concerning and leaves no earnings visibility.

True. However KWS derives significant revenue from Ireland and Italy. Yes this is worth more but I suggest, like with the banks, problems with visas may arise and thus cause performance issues which could eventually lead to a lack of confidence in KWS ability to execute contracts.

I also hav my doubts over Keywords for other reasons. Namely video game growth is greater in China. The Chinese will eventually buy their way into making their own games and platforms. Chinese are protectionists, and if successful will unlikely outsource work to UK companies. I don't feel KWS has any intellectual moat with its people and if China wanted too they could set up a company similar to Keywords.

Furthermore,despite KWS being in a sweet spot in the games cycle, this won't last forever and fewer games will be made as the ps4 and Xbox one wind down in anticipation for next release. This could leave them exposed with so many acquisitions under one umbrella.

Finally, imo, console gaming will become less and less lucrative in the future. Consoles lend themselves to big games. However, the future will be in mobile gaming which will come with much smaller budgets and less need for the movie like experience that console gaming lends itself too. This will lead to much less reliance on a outsourcer/specialist like KWS. Game makers will see greater profit margins in smaller games than excessive console games. Nintendo are releasing Mario on the iPhone at Christmas.... For free. They will not have exhausted a huge budget on this. I believe Ninyendo have also announced today their latest console which enables it to be played mobile, by docking a smaller screen to the controls. I'm babbling on, but mobile gaming will require much smaller budgets, more frequent releases and less movie like experiences. This does not bode well for KWS's services.

tabhair

I read some of the XGTI financials and it appears that they used a promissory note to finance their last acquisition.

It seems to me that there's a good chance that the money to close this transaction doesn't exist.

grb

Hi Paul
I'd still like to know your views on the Hayward Tyler (LON:HAYT). RNS. It's one of the more bullish H1/H2 profit warnings I've seen. I hold and am considering my options.
Cheers,
Geoff

Sully8786

Hi Banana1,

I picked that up too. I'm waiting for a call from the company to add shall we say...some colour to the announcement.

I have done a video on Vislink (LON:VLK) - here:

https://www.youtube.com/watch?v=1yFukNm2BBQ

I've recorded one on Photo-Me International (LON:PHTM) and NCC (LON:NCC). I'll post that later.

I'd be grateful for feedback in any case.

Regards,

Sully.

And this is the one on Photo-Me International (LON:PHTM) and NCC (LON:NCC)

imranawan

Just watched the videos about Vislink (LON:VLK), Photo-Me International (LON:PHTM) and NCC (LON:NCC) - and thought these were very good. Thanks for posting these and I look forward to any future videos you make.

I've had Photo-Me International (LON:PHTM) on the w/list for a while, it looks like a quality company, but just never bought. One that got away.....

Thanks for the feedback Imran :)

I'm hoping to continue to post videos going forward - we'll see how it goes.

Thanks again...

Sully.

Bushranger

Hayward Tyler (LON:HAYT) is a company I had been interested in. I really like what it does. It is the kind of buisness this country needs regardless of Brexit. I hope they do well. That is my heart talking.

Small Cap Value Report (20 Oct 2016) - G4M, LRM

Lombard Risk Management (LON:LRM)

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Paul Scott

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