Small Cap Value Report (22 Aug) - CPP, PLE, AKR, MDM, DSG

Good morning. Apologies for being a little later than usual today - I sent a Tweet out at 07:19 this morning to advise that today's report would be a little late (@paulypilot on Twitter).

Yet another mis-selling scandal has blown up, this time it's relating to CPPGroup (LON:CPP), the bizarre share which looked bust, the founder tried to buy for 1p per share, then it was refinanced by the Banks, and the shares 10-bagged to about 30p, and now appear to be coming back down again.

The gist of it seem to be that CPP sold mobile phone & ID theft insurance policies which weren't worth the paper they were written on, apparently. The Banks promoted these policies in return for commission, and are now having to pay compensation to customers. So I don't quite understand why CPP is still in existence, other than if the Banks want to prop it up, so that CPP still exists and can therefore take the blame? Anyway, their shares are down 18% to 16.8p at the time of writing.

What exasperates me with all these scandals is that the root cause is the same - people trying to rip-off their customers. What we surely need is a complete change of mindset throughout business (and indeed society generally) where people adopt an honest approach to everything as their default setting, and simply supply customers with a worthwhile product/service at a fair price. Why is that so complicated? It is how everything should work, and is the best way to grow a business in the long term. Companies which try to trick their customers for short term profits nearly always come unstuck in the end.

Anyway, I'm not really interested in whether shares in CPP are likely to go up or not, I just wouldn't invest in this company at any price. Their results are here, for anyone interested.

 

 

 

 

Plethora Solutions Holdings (LON:PLE) announces what seems to be a cost & revenue sharing agreement with a partner for their premature ejaculation drug development called PSD502. I cannot really gauge how significant this is, as it's outside my area of expertise. However, anyone tempted to buy the shares should look closely at the Balance Sheet, as what you'll find is that the company is insolvent, but is being propped up with loans from Jim Mellon. He has a habit of doing this (e.g. the Speymill companies), and it usually just defers failure, but occasionally he hits the jackpot big time, so who knows? The shares must be treated as ultra high-risk though - plan for a 100% loss, but with an outside chance of success.

 

 

 

 

A theme seems to be developing this morning of all companies being basket cases. So sticking with that, I've had a look at results from Akers Biosciences Inc (LON:AKR), a company with a terrible track record of destroying shareholder value. I've not spoken to anyone who has a good word to say about it, but despite this I recently bought a few shares in it, after a positive trading statement.

The reason being that there is some positive newsflow coming out of the company at last. A positive trading statement was issued on 19 Jul 2013. Then there was a rather strange announcement on 23 Jul 2013, concerning the Chairman, Dr Akers, disposing of 7m shares to a third party that lent him $655k to buy them at over 30 times the current share price in 2007.

Next, on 8 Aug 2013 another bizarre twist, in that Akers announced they intended to list on NASDAQ (bear in mind this thing only has a market cap in the UK of about £3m). A cynic might argue that they need a new supply of mugs to buy the shares, and are seeking to raise a fresh $15m in the USA. Good luck with that, and I worry about the dilution, but if it's done at a decent premium to the current price, then who knows? Seems a long shot at best.

The reason I'm mentioning all this is by way of background, as the interim results announced today look quite good, in terms of growth - turnover up 235% to $2.6m, and positive EBITDA of $369k for the six months to 30 Jun 2013. It has cash in the bank of $1.55m.

So I'm wondering if this is a flash in the pan, from a large delivery of breathalysers, or whether it might be the start of commercial success? I don't know, but took a very small punt on it (as these micro caps have to be treated as punts) at around the current share price of 1.2p. They are very illiquid, as you would expect.

Do any readers have an informed view on this company's prospects? If so, please say so in the comments section below. I already know the company has an awful track record, but it's the future that counts, and of course a poor track record brings with it tax losses, which is handy when you break into profits.

We're in a real bull market for small caps at the moment, hence I'm happy to look at really tiny micro caps below £10m again, because some of these things are showing explosive moves upwards. I've seen quite a few micro caps double or triple (or more, e.g. @UK (LON:ATUK) ) recently, which has aroused my interest. Although I'm not convinced some of these share price moves are justified on long term fundamentals, buit it's all a sign of a bubbly market where money can potentially be made, as long as one doesn't get carried away with silly valuations.

(incidentally, does any reader know whether Akers is pronounced as in knackers, or as in acres?)

 

 

 

 

MDM Engineering (LON:MDM) keeps cropping up on my radar as a potential value situation. It's based overseas, and normally I don't touch overseas companies which List in the UK, however am beginning to flex that position to occasionally allow overseas companies into my portfolio providing they meet all of the following criteria:

• Profitable & have a sound Balance Sheet.
• Consistently paying dividends.
• A good track record of being a UK Listed company for at least 5 years.
• Not Chinese or Indian, as I don't trust their accounting, hence cannot value them.

 

MDM meets those criteria, so I would consider it. The reason I mention MDM, is that they have announced a contract win today. The company seems to be an outsourced engineering contractor for African mining companies. They have a solid Balance Sheet, are on a low PER, and pay a decent dividend (having a policy of paying out 50% of earnings in dividends, which is an excellent idea - more companies should adopt a similar policy in my opinion).

Looking through the last set of results, they say the outlook for the current year (ending 31 Mar 2014) is also good, but the downside risk seems high - i.e. the widely publicised curtailing of capex by mining companies must have some, or even a potentially large, impact on MDM at some stage. So although it does look cheap, at the moment I'm wary of investing, and need to understand it more.

 

 

 

 

Finally, Dillistone (LON:DSG) has issued a brief but positive trading update, saying:

 

Dillistone Group Plc, the AIM quoted supplier of software for the international recruitment industry, is pleased to confirm that it has enjoyed strong trading in the first half and currently expects to achieve a satisfactory performance for the year.

 

I've touched on this company here twice before, and continue to think it looks interesting.

There's the usual issue with Deferred Income, so they don't really have net cash, but by their own admission they bill customers for support contracts in December each year, for the year ahead.

However, it looks to be on a PER of about 10, and paying a lovely dividend of about 5%. Looks pretty good.

They are also capitalising development spend of around £800k p.a., but I am pleased to see they do not try to pull the wool over investors' eyes by quoting EBITDA. They just quote profits (i.e. after the amortisation charge). So a thumbs up there. The development spend capitalised was about £300k more than the amortisation charge last year though, so cashflow is a bit less than profit.

The shares are tightly held by individuals, probably founders, I would imagine. It's about £14m market cap, and looks a nice little business. Growth seems to be coming from an acquisition made in 2011, so I would need to look into the growth prospects, but in a recovering economy you would imagine that recruitment companies would be more willing to spend on software upgrades perhaps?

Also noteworthy is how the company today announce an investor lunch on 13 Nov 2013 not just for private client brokers, but also welcoming private investors. That is a real breakthrough, and is excellent to see. I note that it's Winningtons who are doing their PR, who I rate very highly - they completely "get" the fact that small companies need private investor support, instead of disregarding private investors with the haughty derision that some people in the City have traditionally adopted.

So welcoming & connecting with private investors is absolutely the right way forward, so top marks there for both Dillistone and Winningtons.

 

 

Jolly good, it's time for lunch now, so I will sign off. Back at the usual time tomorrow.

Regards, Paul.

Of the companies mentioned today, Paul has a long position in AKR, and no short positions.