Small Cap Value Report (21 Oct 2014) - SEE, BLUR, CBUY, ASC, NXT

21st Oct '14 by Paul Scott

6 comments 16858 reads

Good morning! The modest bounce in small caps continues, with FTSE Intl-aim All Share Index (FTSE:AXX) having bottomed out last week on 16 Oct 2014 at 676, and now having risen to 698 at the time of writing, a rebound of 3.3%. Although that is still down over 22% from the peak on 6 Mar 2014.

Whatever the overall market does, the only thing that really matters to me is the performance of the companies that I've invested in. So it's the year end trading updates in Dec/Jan, and the results (mostly being released in Feb/Mar 2015) that will really determine whether our portfolios out-perform or not. Not whether a particular magazine or journalist has tipped something, or if momentum traders are creating their own buzz around a stock, which is all just background noise in the long run.

Not much to report on today, there's very little news under my remit.

Seeing Machines (LON:SEE)

Share price: 6.25p
No. Shares: 827.6m
Market Cap: £51.7m

AGM update - there's an update for the year ended 30 Jun 2014 published today. It says turnover for the year was A$17.7m (that's Australian dollars, equivalent to £9.6m). Looking at a recent Edison note, forecast was for A$16.8m, so it seems that the company has come in usefully ahead of forecast in turnover anyway.

No information is given on profit/(loss) for the year, although the Edison note suggests a loss of A$2.6m (£1.4m) is expected. Although note that losses are expected to balloon to A$9.5m (£5.2m) in the current year due to the company having adopted an accelerated expansion plan, with the workforce having been doubled in size following a big fundraising in early 2014.

The current exchange rate is £1 = A$1.84.

My opinion - this is a difficult company to value at the moment, as nobody really knows how successful the company will be in extending its market reach from the mining sector into the wider transport sector. However, the way I look at it, is that their product (a warning system for drivers, which monitors their eyes and sounds an alarm if they are not giving the road sufficient attention, e.g. if they are nodding off behind the wheel) definitely works - because it is being sold successfully to the mining sector via Caterpillar agents.

Therefore it is…

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WarrantStar

21st Oct '14

Cloudbuy (LON:CBUY)
I've just had a look at their website. It's so full of buzz words, jargon and business school type presentations that it's very hard to see what they actually do for clients. I guess that the potential clients are equally confused & put off by the unnecessary complexity.
Cloudbuy is a good name. It suggests that buyers just hover onto the cloud and quickly buy what they want at lower prices. I suspect the reality would be very different. If the software that clients use is anything like as complicated as Cloubuy's website, it would require endless training to use it.
Given that you find their figures "lamentable", I would avoid the shares like the plague!

purpleski

I would never invest in any company Cloudbuy (LON:CBUY) that describes itself thus:

'cloudBuy delivers an integrated solution to automate your procure-to-pay process. The solution set includes granular spend data analysis, compliance-focused strategic sourcing capabilities, supplier-managed web content and touch-less eCommerce payment functionality.' I feel like vomiting just reading it.

The management must have real issues if they believe that is the way to describe a company and I would have no confidence whatsoever that they would know how to run a business.

lightningtiger

Hi Paul,
having top sliced Seeing Machines last month @7p it has now come above the 50 day MA, which is a positive move in the right direction.
Regarding Next and ASOS over that timespan, there is clearly 2 or 3 good clear signals where stop losses would have given a greater return with ASOS up to about Feb/March timeframe.
As with Seeing Machines Plus 500 is also now above the 50 day moving average with a telecast due tomorrow at 10:00 AM. with their 3rd quarter results. I would welcome your opinion on Plus 500 Paul.
Thanks
Lightningtiger

Paul Scott

Hi Lightningtiger,

I don't like Plus 500. I made enquiries about the company, and a number of things just didn't stack up with it, suggesting to me that profits may not be sustainable. Also I don't usually touch foreign companies that list on AIM, as there is usually something wrong with them.

That said, the cashflow & divis at Plus 500 do look real, and interesting. From looking at the customer reviews submitted to Google, you have to wonder (a) if they are genuine, and (b) if they are, then the customer base appears to be teenagers & people in their 20's who are just having a punt on the markets. That type of account has a very short lifespan before they blow up, so the company would need to be continuously recruiting new mug punters.

Furthermore, do you know anyone who has an account with this company? I don't. That somehow doesn't stack up. People I know who have looked at the company as a potential customer, have not been at all impressed with high funding costs, etc.

The growth & profit margins look too good to be true to me.

Regards, Paul.

Hi Paul,
Thank you very much for your opinion of Plus 500. Sorry you do not like them. I take your point regarding who has an account an account with the company that I personally know and the answer to that is I have not really asked that many people.
As far as " stacking up " is concerned, the retained customer base of around 40/50Milion seems to be a significant number and when the figures come out tomorrow for the 3rd quarter, I am expecting more positive numbers . Having banked banked a few hundred pounds of dividends so far with them, there is still the complication of 25% Tax being withheld by Israel unless you fill in a complicated form ,together with a copy of your passport which has to go to India for approval ! Needless to say I was not going to do that. It needs a more simplified system to be more user friendly.Hopefully this can be sorted out tomorrow at the telecast.
The share price is now showing above the 50 day moving average and at this point in time I am optimistic of further increases in the share price.
Thank you once again Paul for your comments.
Lightningtiger

Ramridge

22nd Oct '14

Re. BLUR. From time to time I am initially attracted by blur but end up putting it in the 'rejected' basket. It's frustrating because as a business model it is highly attractive and should allow it to grow substantially. Basically the company provides a platform to match people with problems (need to have software developed) with solution providers (developers and software houses) and takes a handsome cut in the process. See how Uber, the scourge of traditional taxi drivers, has used this model to devastating effect and made the owners billionaires in no time.

What puts me off? Lack of confidence in the management. How they thought they could get away with booking the whole of a project cost as revenue right at the start of a project is beyond me.
That led to a massive drop in market value (and confidence) and a revised revenue recognition policy which they now claim to be conservative. But Is it? Here is an extract from their recent accounts:

" Projects where the revenue is recognised based on milestones or deliverables: ….. the project revenue is recognised when milestones or deliverables are met as confirmed by the expert. "

Anyone who has managed software development knows that there is a huge difference between a supplier saying he has met a milestone or deliverable and a customer accepting it. The difference could in some cases be months and at worst involve major rework.

Then there is what appears to be runaway disproportionate administration costs. For the whole financial year 2013, staff costs amounted to £7.7m. For the following 6 months, they were £6.4m, i.e. £12.8m on an annualised basis. Note that these costs are net of capitalised software development costs (which is another dubious accounting policy; but let’s not go there today). This doesn't seem to square with the CEO's statement that they are benefiting from operational leverage, with the same number of FTEs (7) that they had in FY2013.

So my frustration is that management seem to behave as a bunch of dell boys out to make a fast buck, when they could easily run the company in a professional manner with clear and visible accounting policies and reporting, and tight operational processes. Basically stick to the knitting, the boring stuff, and watch the business blossom.

Ramridge (no short and unfortunately no long position either)

Small Cap Value Report (21 Oct 2014) - SEE, BLUR, CBUY, ASC, NXT

Seeing Machines (LON:SEE)

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Paul Scott

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