Small Cap Value Report (21 Aug) - DX., HEAD, SPSY

Monday, Aug 21 2017 by

Morning folks,

I'm planning to look at Headlam (LON:HEAD), Spectra Systems (LON:SPSY) and DX (Group) (LON:DX.) today.


DX (Group) (LON:DX.)

  • Share price: 8.65p (-9%)
  • No. of shares: 200.5 million
  • Market cap: £17 million

Resumption of trading in DX Shares

Lots of drama on the open here as this logistics/parcel distribution outfit finally returned to trading.

The shares had been suspended since March, leaving shareholders to chew over dribs and drabs of news from the company as it negotiated the terms of a potential reverse takeover with John Menzies.

In a July trading update, covered here, trading was reportedly in line with expectations, and the bank was supportive of the £19 million net debt position. The CEO and the CFO simultaneously stepped down from their positions after presiding over huge percentage declines in the share price.

That brings us up to last week, when the John Menzies deal fell through (link) over a failure to agree terms, leaving DX to work on its business transformation alone:

This approach has the support of both DX's major shareholder and its bankers, with discussions on new financing options for DX already underway.

The "major shareholder" in this case is Gatemore, who were previously shareholder activists in French Connection (LON:FCCN) (looks like they've sold up and moved on from that now).

"New financing options": does this mean an equity raise? Maybe the bank is supportive in the short-term, but needs DX to raise more capital for it to remain supportive? That's pure speculation on my part, but is how I'd interpret that paragraph.

With the takeover not happening, the shares are back trading. They plunged >30% on the open but are only c. 10% lower now.

Full-year results "will include the aborted costs of the Transaction and certain other expected non-recurring exceptional items, principally a non-cash goodwill impairment".

Lots of red ink then. More losses on the way.

I probably shouldn't spend any more time on this, because in my opinion this is uninvestable, and is only worth gambling money at this stage.

If you are Gatemore, you can at least get high-quality information from the Board and can…

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All my own views. I am not regulated by the FSA. No advice.

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DX (Group) plc is engaged in the provision of parcels, mail and logistics services in the United Kingdom and Ireland. The Company's segments include parcels and freight, mail and packets, and logistics. The parcels and freight segment offers services, such as DX 1-Man, engaged in the delivery of irregular dimension and weight items; DX Courier, which provides next day parcel services, and DX 2-Man, which offers a business to consumer home delivery solution for heavier and bulkier items. The mail and packets segment comprises services DX Exchange, a business to business (B2B) mail service providing its customers with collection and delivery times; DX Secure, which provides security, and DX Mail, a mail service offering downstream access for smaller volume users. The logistics segment includes the provision of customer-liveried vehicles and uniformed personnel, such as fleet management solutions and integration with customer's business operations. more »

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Headlam Group Plc is a United Kingdom-based company, which is engaged in the marketing, supply and distribution of a range of floorcovering products. The Company's operations are focused on providing customers, principally independent floorcovering retailers and contractors, with a range of floorcovering products supported by a next day delivery service. The Company operates through 56 operating segments in the United Kingdom and five operating segments in Continental Europe. Each operating segment is a trading operation aligned to the sales, marketing, supply and distribution of floorcovering products. The Company's activities and facilities are located throughout the United Kingdom, France, Switzerland and the Netherlands. Its business in France operates from approximately two distribution centers and over 20 service centers, and the businesses in Switzerland and the Netherlands each operate from a single distribution center. more »

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Spectra Systems Corporation provides technology-based security solutions. The Company operates in three segments: Authentication Systems Group, which captures the hardware, software and materials related to banknote, tax stamp and other high value goods; Secure Software Transactions Group, which provides an internal control system (ICS) software offering to the lottery and gaming industries, and Banknote Cleaning Group, which captures the technology related to cleaning soiled banknotes. ICS provides tools for fraud detection, money laundering, match fixing and statistical analysis. The Company develops and sells integrated optical systems across a spectrum of markets, including currency manufacturing and cleaning, branded products, industrial logistics and other highly sensitive documents. The Company's solutions include engineered materials, sensors and quality control equipment. The Company's materials are available in several forms, including particles, threads, inks and coatings. more »

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  Is LON:DX. fundamentally strong or weak? Find out More »

29 Comments on this Article show/hide all

biloseli 21st Aug '17 10 of 29

In reply to post #210393

I don't know, Graham, sorry. I noticed it in their standard email footer in an email I received last week. I'll let you know if I find out more.

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Hot Socks 21st Aug '17 11 of 29

In reply to post #210393

Ten years ago virtually all lawyers used DX. They had a network of deposit locations and you would send someone down to empty your incoming box and drop things off in the outgoing. The locations in central London had a constant stream of people walking between law firms and the DX with boxes of stuff on trolleys - probably 90% of correspondence between solicitors went via DX. Postage costs were a significant overhead and the DX was cheaper than the post.

Now we all use e-mail, electronic datasites, memory sticks etc and my yearly post bag now is probably about the same size as my daily post bag ten years ago. Lawyers just don't need the DX any more in the same way that they used to. DX have tried to develop their services but there are lots of alternatives and the competition is consistently developing as well. I also doubt that they are well served by a legal services industry that is consolidating and is itself under pricing pressure.

I've not looked at their accounts or what DX say about themselves, but the above is based on my experience as a lawyer for the last 15 or so years.

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MrContrarian 21st Aug '17 12 of 29

Spectra Systems (LON:SPSY) CEO takes excessive pay. $502k (£390k) last FY. Pre-tax was £840k after years of losses. Also a history of overoptimism.

There's hasn't been an AGM in 6 (IIRC) years - always postponed due to lack of quorum.

Uninvestable for me. 

| Link | Share 21st Aug '17 13 of 29

Graham makes the point on Headlam that with

"£50 million in net funds, after subtracting the value of the debt. There are large committed bank facilities, too. Such a large value of net funds probably means that the "fair" PE ratio should be reduced!

The cash swings for Retailers can be significant, both intra-month and across the year..and many Retailers are canny enough to choose a Year-End Date at a point in the yearly cycle where cash looks strongest!    I have recently read a Broker Note on Headlam which suggested the average cash balance across the year is closer to zero.

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Graham Neary 21st Aug '17 14 of 29

In reply to post #210480

Cheers alan, yes, that could be the case. At least the ordinary & special divis give some comfort that surplus cash is being generated over and above what they strictly need for operations.

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ambrosia 21st Aug '17 15 of 29

I just took a look at Headlams website to see what theyre about, could see nothing about the product or anything customer focused its entirely about investor relations.

It looks like they operate under 60 different brand names, but after over 10 mins of searching I havent found a single one

I'm a little uncomfortable with a company which is so investor focused instead of customer focused, reminds me of 'mission marketing'

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Howard Marx 21st Aug '17 16 of 29

In reply to post #210540

I think that's because 'Headlam' is the holding company rather than a floor-covering brand that their customers would recognise.

There's a company directory link on the Headlam website that reveals all of the subsidiary companies, each with it's own customer facing website:

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Richard Goodwin 21st Aug '17 17 of 29

In reply to post #210540

I agree it's strange. If you Google "Headlam group subsidiaries" you get a long list though.

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Graham Ford 21st Aug '17 18 of 29

In reply to post #210540

Their customers are the independent flooring retailers. I.e. The specialist shop in your town where you get traditional service typically. Those customers are used to dealing direct with a local wholesale distributor of floor coverings. So, as Headlam (LON:HEAD) have expanded by acquisitions and consolidating this wholesale distributor channel they have generally made the decision to preserve the local distributors brand name and identity and personalised service. So, they are aiming to achieve a customer relationship that blends the best of the local personal service from a respected local/regional distributor and brand with the purchasing, warehousing, and stock management efficiency of a national corporate.

In other words they do not want to be Headlam to their customers generally. They want to be A.N.Other & Son family floor coverings distributor. Thus their corporate website is deliberately not a customer website as such.

But if you click on the "Company Businesses Directory" tab on their website you can see all the local brands that they trade under, who have their own website.

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herbie47 1st Sep '17 19 of 29

Spectra Systems (LON:SPSY) I notice was up 11% yesterday, I can't see any news. I also have various cyber security type shares on a watchlist as follows: Defenx (LON:DFX), ECSC (LON:ECSC), Falanx (LON:FLX), all have gone up today by 6-10%, does anyone know why?

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hayashi22 1st Sep '17 20 of 29

Yes but its top secret.

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Howard Adams 5th Sep '17 21 of 29

In reply to post #214493

Hi Herbie

I was just following the Stockopedia's commentary trail for Spectra Systems (LON:SPSY) and had a second look at your cyber security watch list (above).

I'm sure you have noticed that Spectra Systems (LON:SPSY) is up again today (05/09/17) (+9.6% at time of typing), and Falanx (LON:FLX) is also up (+16.8% at time of typing).

I'm interested in both, not too sure about Defenx (LON:DFX) and not at all keen on ECSC (LON:ECSC) at present.

Has your interest developed further on these since your posting (21/08/17)?


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herbie47 5th Sep '17 22 of 29

In reply to post #215158

I was still considering Spectra Systems (LON:SPSY) and of course the intermins are out today which look good and shares are up 10%, there were a few negatives raised in post 12 above. Falanx (LON:FLX) I had not seen, operation statement out today which also reads well. I agree at the moment it is between these 2, I feel it's an area I want to invest in as it will be a growing sector.

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Howard Adams 5th Sep '17 23 of 29

In reply to post #215183

Hi Herbie

Thanks for the response.

I am currently digging into the people behind Spectra Systems (LON:SPSY).

Based on website list (22/09/16). Six major shareholders

Board seems to have some rather illustrious people

My interest is certainly pricked.

As an SP commentator, on a previous thread I looked at, noted the spread on HL is almost 2.9% so a bit steep, but not too off putting for me.

I'm going to watch this one for a bit but I'm quite interested I must say. But, wary all the same.

I'll look at Falanx (LON:FLX) in more detail as well.


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Howard Adams 11th Sep '17 24 of 29

In reply to post #215183

Hi Herbie

Have you noticed the RSN for Falanx (LON:FLX) today?

And the resultant share price rise &%+ at time of typing.

I bought a small holding. Having read up on Falanx (LON:FLX) I can see some potentials developing. I recognise its a Sucker Stock at present and it is a long way below my normal Mkt Cap. I shall see.

I'll keep looking into Spectra Systems (LON:SPSY) as well as per your original cyber security themed list. Thanks for posting such lists of yours up, I always have a look at your ideas.


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herbie47 11th Sep '17 25 of 29

In reply to post #217438

Howard, thanks for your comments. No I had not seen that, thanks. I did not buy any, they are a bit small at £10m market cap. The acquisition is very small but is interesting about Mr. Morrell, if what they say is true.

I did take a small holding with Spectra Systems (LON:SPSY).

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Howard Adams 11th Sep '17 26 of 29

In reply to post #217453

HI Herbie

Yes £10m usually too small for me and why would Mr Morrell cause a price lift?

I listened to their webcast interviewing him (about 20 mins). It's obviously a supportive perspective but it does add some context to what Falanx (LON:FLX) is purporting to be offering.

I found it to be quite informative, you might like to listen.

All that said, I have heard similar views many times over the years in the IT/Tech sector, so I am cautious and sceptical but also cognisant of the notion that cyber risks are increasing rapidly but protections are not keeping apace.

Further, that cyber risks apply equally across the spectrum to any actors (people/organisations) or agents (devices) that access the net. Yet, most of these actors/agents have little idea of what is protecting them and to what degree they are protected.

If Falanx (LON:FLX) are indeed able to create an offering accessible by the smaller actors/agents as this webcast claims. Then I think there could be potential here.

I will watch with interest, but still with only a small holding and a flag to myself that this is a 'story stock' not a quants-based holding.


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herbie47 11th Sep '17 27 of 29

In reply to post #217483

Thanks for that link to Directors Talk, sounds quite good but I'm no expect in that field. Yes one to watch.

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Howard Adams 22nd Oct '17 28 of 29

In reply to post #217493

Hi Herbie

I don't know if you progressed with Falanx (LON:FLX) but if you did, this might interest you.

Falanx Group Ltd (LON:FLX) Coverage Initiated at Beaufort Securities

This is one of their paragraphs ....
Beaufort Securities initiated coverage on shares of Falanx Group Ltd (LON:FLX) in a research note released on Friday, October 13th. The brokerage issued a speculative buy rating and a GBX 12 ($0.16) price target on the stock.

They are putting a price target of 12 (it's 7.5 at time of writing this note).

I have a small holding. First buy was 7.26, then 7.67 then 8.46. Nervously watching it though. It looks like the 50MA is now going to go above 200MA, so it might just be gaining traction.

Just thought you might be interested as I know you looked at it n the past.


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herbie47 23rd Oct '17 29 of 29

In reply to post #231668

Hi Howard,

Thanks for the info. of Falanx (LON:FLX).

No I did not buy any Falanx (LON:FLX) in the end, decided they were a bit too small for me at the moment. I did buy a small holding in Spectra Systems (LON:SPSY), but sold out at 92p, despite a good trading update the price has fallen more, I don't really understand why so I will leave for now.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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