Small Cap Value Report (21 Dec 2015) - BRY, GAH, RSTR, TRB, BPI

Monday, Dec 21 2015 by

Good afternoon!

I'm starting a little later than usual today, due to recording a CEO interview this morning with Gavin Lavelle of Brady (LON:BRY) . This is an interesting one, in that the company got in touch via advisers, saying that they would like to respond to my highly critical articles here on 7 Sep 2015, and again on the profit warning here on 1 Dec 2015. So that interview is now published on my website here.

As usual, Stockopedia readers submitted most of the questions, and I thought the CEO coped well with some fairly tough questions. (disclosure: I picked up a few shares in Brady once they stopped falling, after the recent profit warning). There wasn't time to cover all the reader questions, but we covered the main topics.

Kudos to the CEO for seeking to engage with a critic, and I'm very happy to be even-handed, and welcome a company putting their side of the story. Although I remain of the view that Brady really should have been more prudent, and guided down expectations earlier, instead of relying on Q4 contract wins to meet the full year numbers. Hopefully they will take this on board, and guide the market more conservatively in future.

Gable Holdings Inc (LON:GAH)

Share price: 14.65p (down 25% today)
No. shares: 135.3m
Market cap: £19.8m

Funding, trading update & related party transactions - I don't normally cover the insurance sector, as it's too specialised, accounts are strange, and I've never made money on this type of share, hence now it's just a sector I completely ignore.

However, as there's very little other news today, thought I would pass comment on the strange announcement today which has sliced a quarter off this company's shares.

It seems a rather convoluted fundraising, via a convertible loan, with Directors participating. Conversion terms seem to be variable, between 10-15p, so the shares have fallen to within that range.

I don't like the look of these arrangements at all, which result in the company apparently signing away £2m of 2015 profits, in order to get a relatively small (just under £4m) fundraising away, in order to meet regulatory capital requirements.

A friend in the City warned me away from this share earlier in 2015, saying that related party transactions made it high risk,…

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Brady plc is a United Kingdom-based provider of trading and risk management software to the global commodity and energy markets. The Company combines integrated and complete solutions supporting the commodity trading operation, from capture of financial and physical trading, through risk management, handling of physical operations, to back office financials and treasury settlement for energy, refined, unrefined and scrap metals, soft commodities and agriculture. The Company's business units are Commodities and Energy. Its clients include various financial institutions, trading companies, miners, refiners and producers, scrap processors, tier one banks, various London Metal Exchange (LME) Category 1, 2 clearing members, and other European energy generators, traders and consumers. It offers commodities solutions, energy solutions, credit risk, cloud services, and client services and support. more »

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Brave Bison Group Plc, formerly Rightster Group plc, is a United Kingdom-based provider of an online video distribution and marketing network, providing rights holders, online publishers and advertisers with the tools required to engage audiences. The Company is engaged in creating and capturing advertising spend using online video content and audience management. The Company operates through monetising content online segment. The Company brings together content owners, creators, brands and publishers and helps them build and engage online audiences. It enables clients to commercialize their content to audiences, utilizing various online video platforms, such as YouTube, Facebook and Twitter. It offers a multi-platform network. more »

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

8 Comments on this Article show/hide all

eezymunny 21st Dec '15 1 of 8

Mr Lavelle skillfully deals with the capexing of R&D issue but you've been much too soft on him IMO. All very well that IFRS says you must capex some R&D. All very well that amortisation is similar to capex for this R&D at BRY. The big issue however is the horrific (IMO!) insistence on quoting an EBITDA number. As you say in the interview EBITDA is a nonsense of a number for a company like this (that capexes R&D). If you stop your R&D in a software biz you are toast. There are always new databases, operating systems, user interfaces to deal with, never mind functionality upgrades to stay with or ahead of competition. I know, I ran R&D for a number of companies. The solution - simply never quote EBITDA in your numbers. There's only one reason I can see for doing so IMO and that reason ain't fair on the dimwits that are stupid enough to think it (EBITDA) has some meaning. Alternatively quote EBITD(A of acquired intangibles) and not EBITD(A of acq intang + capexed s/w costs).

Quoting EBITDA the way BRY do (and many others) just makes me think...where else are they trying to pull the wool etc etc!

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Paul Scott 21st Dec '15 2 of 8

In reply to post #115383

Hi Eezymunny,

Good points, well made!

Just to clarify, I'm not seeking to harangue company Directors in my interviews, but instead am giving them a chance to put their side of the story, and then listeners can make up their own minds.
I've already demolished a lot of their arguments, in advance, in my articles here, so people are already aware of my view (which we share) that EBITDA is a nonsense number for software companies in particular.

I think the biggest risk is when the Banks finally twig that EBITDA covenants are badly wrong for some sectors, then you could see a big withdrawal of financing for sectors like software. Brady don't have any bank debt though, so they should be unaffected.

To my mind, development spending at software companies is an essential, ongoing, cash cost of running the business. So I would always reverse the accounting entries, and write it off completely. That mirrors reality - as you say, any software company that stops development spending would quickly wither away. It's essential to spend on development, just to stand still, for that type of company.

I think the other benefit of my CEO interviews, is that it gives listeners a flavour for the type of person running the company. Mr Lavelle struck me as pretty slick, and a very good communicator, but I still think they made a mistake not guiding down market expectations earlier, given the turmoil in the sectors they serve.

It just reinforces my view that a strong H2-weighting is nearly always a deferred profit warning, so a dash for the exit is the best response whenever any company guides that it needs to close big contracts by the y/end in order to hit its numbers.

Regards, Paul.

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Firtashia 21st Dec '15 3 of 8

Super post, eezymunny. A great quote from Charlie Munger : "I think, that every time you see the word 'EBITDA', you should substitute the words 'BS earnings'. People who use the word EBITDA are either trying to con you, or trying to con themselves."

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ACounsell 21st Dec '15 4 of 8


How is it possible that British Polythene Industries (LON:BPI) raw material costs increased in November and again in December with a forecast of further increases early next year. My limited technical research indicates that polythene is produced from the raw materials of oil and natural gas, via Naptha and ethelyene, and we all know what has happened to the oil and gas price in the last year and what the price projections are for 2016. This trading update cannot be taken at face value and needs further clarification. Why aren't they achieving better gross margins vs. previous year - is there some quirk to do with mix of product coming out of oil refineries?

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ACounsell 21st Dec '15 5 of 8

Having had a look back at the interims for HY to June 30th for British Polythene Industries (LON:BPI) it would seem that it is the Polymer manufacturers (the raw material used by £BPI) who must be increasing their margins at the expense of companies further 'downstream' in the process. Perhaps we should be looking for investment opportunities in Polymer manufacturing!

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apad 21st Dec '15 6 of 8

Knitting Fog.

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DarwenLad 22nd Dec '15 7 of 8

One reason I share Paul’s cautious confidence about Tribal’s recovery potential is the makeup of its institutional shareholder base. The two biggest long-term shareholders, owning a third of the equity, are RWC Partners and Schroders. However, they have been joined over the past year by two investment trusts - Strategic Equity Capital and Crystal Amber – which describe themselves as activist investors. The two trusts, whose shares are trading at a premium to net asset value, have a reasonably good record of supporting managements involved in corporate turnarounds. Since Tribal’s troubles surfaced it has recruited a new chairman (Richard Last), who is also chairman of Servelec, a successful IT company in which Schroders and Strategy Equity Capital are the two biggest shareholders, and a new senior independent director (Roger McDowell) who does the same job at Servelec. Tribal still needs to find a new chief executive and it would be surprising if its big shareholders were not making sure it picks the right person. The fact that the company has been able to announce a standbye £30m rights issue, fully underwritten by Investec, even before the company releases what look likely to be terrible 2015 results, suggests that Tribal’s big shareholders are sticking with the company. Strategic Equity Capital, in particular, has strong record in working as a co-operative shareholder behind the scenes, unlike some other small cap funds which rush for the door after the first profit warning. It must be showing a heavy loss on the shares it has acquired over the last year. If it were to sell out of Tribal, or decline to take up its shares of the rights issue, then that would be a major red light for me.

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gus 1065 9th Jun '16 8 of 8

Bid for British Polythene Industries (LON:BPI) just announced by RPC (LON:RPC) . Cash and shares valued at 940p, c. 31% bid premium. Opening salvo or knockout blow?

RPC placement announced to raise finance.


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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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