Small Cap Value Report (21 Apr 2017) - REC, CAY, IDH, PEB

21st Apr '17 by Graham Neary

12 comments 11514 reads

Good morning,

It's Paul's day off today, so I'm planning to cover 3-4 of today's stories in his absence. First up is Record (LON:REC):

Record (LON:REC)

Share price: 42.375p
No. shares: 221.4m
Market cap: £94m

Fourth Quarter Trading Update

This is an unusual type of asset manager, as it is focused on currencies rather than equity/fixed income.

One might ask: when clients want hedging or currency-derived returns, shouldn't banks be the go-to provider? How can a smaller institution compete with them?

On the hedging side, it doesn't surprise me that there is space for a smaller, independent player. After all, there are plenty of currency brokers dealing with the retail market, providing individuals with advice and better rates on their FX needs when they expatriate/repatriate, buy foreign property, etc. Think of Record as a large, institutional version of this!

And on the currency-derived return side, Record acts similarly to any other independent asset manager or hedge fund.

So, in principle, I'm very comfortable with the idea that there is space for an independent currency specialist, focusing on institutional clients.

The track record of profitability isn't bad either: profits were reset lower during the 2008-2012 period, but have been stable since then.

Which brings us to today's update:

(AUME = Assets under Management Equivalent)

So it's a 2.8% gain in USD terms, and also a 1.7% gain in GBP terms.

My opinion

I'm kicking myself a little bit when I look at the share price chart - even after today's slide, the shares are higher than they've generally been over the last couple of years.

Admittedly, it's not the easiest investment thesis.

On the positive side:

The company has always been financially strong. At the last interim results (for Sep 2016), it had a tangible and liquid balance sheet which included cash and short-term instruments worth some £36 million.
In the absence of strong growth, dividends have at least been generous relative to earnings (1.7p divis in 2016 versus 2.5p EPS).

On the negative side:

The client base is not too well-diversified. According to today's update, the number of clients has reduced from 64 to 59 (this time last year, it had 58 clients).

Note that today's update shows AUME up by $1.6 billion, but $2.1 billion of increase was due to movements in global stock markets and exchange rate movements. So the…

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21st Apr '17

Anyone Know why COG have suddenly taken off?

Howard Marx

Simon Thompson article in this weeks Investors Chronicle. He concludes:
"Having considered all the risks, I still feel that Cambridge Cognition’s shares represent a good investment at the current share price, on the proviso of course that management hit their budgets and deliver on finnCap’s earnings estimates. If they do then I feel a cash-adjusted rating of 25 times 2018 EPS estimates is a much fairer valuation, implying a target price of 130p, in-line with finnCap’s own objective."

JohnEustace

Denis,
Cambridge Cognition Holdings (LON:COG) are up on a Simon Thompson article in the IC

Edit - you wait 30 minutes for a reply and two come along within 30 seconds!

Camtab

Thanks for the update on Record Graham. It is a share I have held for some time. I was pulled in by the good cash flow and strong dividends, which are supported by Employee purchases and should continue to grow. I have heard ex share holders complain about the company's attitude to share holders but given their own holdings have always been a little cynical about this claim. Divi seems covered well enough at this stage. I used to work in the Institutional business so understand the clients pretty well. It is unlikely a group of clients would work in unison to leave ( Local Authority more likely to leave together) but not got the breakdown of clients. Investment Consultants can be a risk as they are quite concentrated Mercers, Towers Watson which Myners highlighted all that time ago.But all in all with increasing world upheaval there should be demand for a good currency hedger like this. I would like to see them develop a higher margin product but everyone can see consistent active returns in currency are a tall order. That said their operating margin is high which is something I always look for as it provides good defence against dropping demand. Well that's my tuppence appenny for what it is worth.

mercury61

re Record (LON:REC) I don't like the fact that free float is only 32.6% (Stockopedia data) the majority share holder being a Neil Record at 32.06% (Morningstar data)

Tortoise investor

ONS data on Q1 2017 retail sales released today looks interesting. Clothing sales are up by a respectable amount which is promising for the likes of Next (LON:NXT) which has received some attention on this report recently. Costs might be going up too of course but part of the worry around Next (LON:NXT) and clothing retailers was the potential for lower sales as higher costs get passed on.

Graham Neary

Thanks for the insights camtab.

shauniekent

Quite a drop on Record today. Im surprised but possibly because no mention of the special dividend which some holders myself included may be holding for.

thanks guys

Boon

On Record (LON:REC), I was a holder when it was below 30p, and I'm kicking myself for cashing out at 30p.

The reason why I cashed out was the concentration risk in a few big investors, as well as the fact that for many quarters (and including this one) they didn't earn any performance fees, which means they're not delivering great returns for their investors. As an investment fund, if you're not delivering great returns for your investors, they're going to pull out their AUM and go elsewhere in the long run.

For me, that is the main reason why I don't hold REC.

gsbmba99

I have to commend Immunodiagnostic Systems Holdings (LON:IDH) on their shareholder communications. They are remarkably clear and unusually frank for a small company. I wish more companies let you see the equation for revenue rather than just the result. The annual letter from the Chairman gives a comprehensive overview.

You have to imagine that Vitamin D testing revenues (particularly for the automated assays) are at risk of approaching zero eventually as the continued shift of Vitamin D testing to the large diagnostic companies continues (with Bioventix (LON:BVXP) being a beneficiary of this shift with double digit licensees). I guess the good news is that they managed positive net placements and expanded their testing menu (though by less than their stated intention). If memory serves they also have a deal in place for allergies with Omega Diagnostics (LON:ODX) which could prove an interesting catalyst.

seadoc

Record (LON:REC) As the last trade was 10% of day's trade what means a second price monitoring extension at the close?

Small Cap Value Report (21 Apr 2017) - REC, CAY, IDH, PEB

Record (LON:REC)

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Graham Neary

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