Small Cap Value Report (21 May 2014) - RM., APH, ACT, MBH, SEA, PMR

21st May '14 by Paul Scott

10 comments 19410 reads

Good morning!

RM (LON:RM.)

There is a trading update this morning from RM, which is an educational IT and resources group. Its trading performance in the first five months (of an unusual 30 Nov year end) is described as strong, and for the full year outlook it says;

As a consequence, adjusted operating profit for the 6 months ending 31 May 2014 is anticipated to be higher than the comparable period last year, notwithstanding the restructuring of Education Technology referred to above. The Board expects that the Group's seasonal bias of profits towards the second half of the financial year will be much less pronounced than last year, but nevertheless now anticipates that adjusted operating profit for the year to 30 November 2014 will be materially higher than its previous expectations.

At the moment broker consensus is for 8.15p EPS this year, so "materially higher" must surely mean something nearer to 10p EPS? Therefore at 129p the PER is probably starting to look reasonably good value. Although it all depends on whether profits are sustainable - as this business has had somewhat erratic profits in the past, making it hard to value.

The forecast dividend yield is about 3%, which is worth having.

Unfortunately there is a fairly material problem here with an old pension fund deficit. This had a £53.5m deficit for funding purposes at the last triennial valuation on 31 May 2012, which requires £3.6m p.a. deficit recovery payments by the company. Remember that such payments don't normally go through the P&L, so have to be paid out of profits/cashflow, and therefore reduce the amount available to be paid in dividends. The company also has to pay some costs related to the pension fund, so the total cash outflow last year, shown on the cashflow statement, was £4.4m. So when you adjust for this factor, maybe the shares aren't good value after all?

Care is also needed with the apparently large cash balances held by this company, as it's not really their money - it's customer money which has been paid up-front by them. As we were discussing yesterday with Renew Holdings (LON:RNWH), that's all fine providing customers are happy to continue paying in that way, but things can change unexpectedly.…

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kevanp

21st May '14

Morning Paul

Re Actual Experience (LON:ACT), you wrote "It's a spin-out from a University, and has some novel way of analysing & rectifying computer systems apparently. It was explained to me, but I didn't properly understand what it is they do."

I thought, come on, how hard can it be? So I went on their website, and watched the three-minute video on their home page. Eh? The first thing they need to do is hire someone who understands communication. Apparently they "have the science in place to unlock the global digital economy". But the video doesn't attempt to explain what that means. Or indeed anything else about what they do.

Because of my business, I have a personal aversion to corporate videos that fail to tell a story, be it simple or complex. I figure if a company can't get that right, what can they get right? They are my equivalent of your Chinese companies on AIM: uninvestable.

Best, Kevan

Paul Scott

Hi Kevan,

I think that's a bit harsh. In some companies, the Directors are so wrapped up in the whole business that they forget how to explain it simply to outsiders! I quite often find that the case, at company meetings. Sometimes you have to stop them talking, and just ask some simple questions to establish what the company really does.

I love single sentence trading statements too, just saying we are in line with expectations, or beating expectations, etc.

Less is more - we need a campaign to drive this point home to companies, Directors, and all the PR people - just cut the crap, and explain things honestly, simply & clearly!

Regards, Paul.

Boros10

Alliance Pharma overstates its profits because it does not amortise the goodwill arising from its acquisitions of out of patent drugs. It should do so, in my view, because most of the drugs it acquires have a relatively limited shelf-life.

In a normal company, you would expect goodwill on acquisitions to remain intact on the balance sheet and you would ignore any amortisation of intangibles arising from acquisitions in the P&L, as this is often goodwill by another name (i.e. goodwill reclassified as an intangible asset at the time of the acquisition to satisfy accounting standards and benefit from tax breaks). However, in these cases the company is purchasing a revenue and profit stream it expects to continue long into the future. If profits and cash flows subsequently decline then some or all of the goodwill is written-off (although managements go to some length to persuade us to ignore these non-cash charges!).

Alliance Pharma should be writing off the goodwill from day one as the drugs it is acquiring will not produce cashflows forever. If it amortised the cost over say a ten year period it would give investors a better understanding of its true underlying profits. In some ways its acquisitions are a cost of sale.

bsharman

RE: Panmure Gordon & Co (LON:PMR) they seem to have been loss making every year since 2007?

evoh_1

Paul,

Major shareholders hold back many good companies, look at Dragon Oil (LON:DGO). Cash at >40% of market cap, but you never have a say in getting your share as a minor shareholder so what is the point in being along for someone else's ride?

chrigil

Seaenergy (LON:SEA) have only recently completely restructured the group so, sadly, your wish for them to separate the wheat from the chaff is unlikely to happen until they have burned through even more cash being generated by R2S.

I personally am thinking of dumping my holding in this not because I think it's a poor investment in the long run but because I think the cash could be better invested elsewhere.

Aislabie

I am in agreement with bsharman above. Panmure Gordon has , over 5 years, apparently managed to lose £85million on revenue of £95million. This is a company that includes financial advice in its description of business. Which as Paul notes is an easy one to understand.
Until I can figure out what I am missing here I am keeping my distance

Hi Bsharman & Aislabie,

But we're not buying the past, we're buying the present & future earnings, cashflows & divis.

So in the case of Panmure Gordon & Co (LON:PMR), it's restructured, disposed of loss-making operations, and is now performing strongly. That's all that matters in my view, providing it's sustainable.

Regards, Paul.

Hi Paul,
I understand that as investors we are looking for future growth in profits and that we have been through an unprecedented financial crisis which would have affected Panmure Gordon & Co (LON:PMR) badly. It would however be useful to see the 10-15 year performance of this company to see how it performed before the 2007/8 crash. I like turnaround situations and have Panmure Gordon & Co (LON:PMR) on my watchlist for this reason. I will not buy until I have done more research into the recent history and future strategy. cheers.

graememcinroy

4th Jun '14

Hi Paul,

After seeing RM sitting very highly on the Stockopedia stock rank I was reading your comments about the business. I had a question with regards to pension scheme funding; is the valuation of the scheme and any required funding sensitive to the interest rates used in the valuation? Do you think that the current low interest rate environment is artificially inflating pension deficits? And with increased interest rates we should see the pension funds deficits fall?

Best Regards.
Graeme

Small Cap Value Report (21 May 2014) - RM., APH, ACT, MBH, SEA, PMR

RM (LON:RM.)

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Paul Scott

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