Small Cap Value Report (22 Jan 2015) - PEN, EMR, CTO, RST, MYSL, BOOT

22nd Jan '15 by Paul Scott

15 comments 23780 reads

Good morning. 2014 year end trading reports continue to be published thick & fast. I'm conscious of the fact that the volume is too high for me to cover all of them. I usually read them all, but just comment on the ones that interest me the most, i.e. the ones which are triggering price movements in particular.

Pennant International (LON:PEN)

Share price: 91p
No. shares: 26.5m
Market Cap: £24.1m

Trading update - this small group supplies a range of niche products & services to mainly the armed forces, and transport sectors - e.g. software & equipment for training & simulators.

Today's update reads positively. As always, the phrase that pays, is "in line with market expectations" - that's the key point, together with the outlook statement.

R&D tax credits - good news is delivered on this front - the company has received £645k in repaid tax, relating to claims made for R&D tax credits for 2012 and 2013. A further £833k tax loss has been carried forward (so will be offset against future taxable profits). Together with another claim in 2014, this means that no Corporation Tax should be payable for 2014 profits. Clearly this is good news. Investors will need to remember to normalise tax calculations in future, once the backlog of tax credits has been utilised. Broker notes in future should adjust for this, but the short term EPS figures will be boosted. The market cap is only £24.1m, so these numbers are distinctly helpful.

Property revaluation - I like this bit too;

Clearly a boost to the balance sheet is helpful. I wonder if there is read-across to other companies with freehold property that is worth considerably more than cost? Sounds like there might be. I firmly believe that all companies should show freehold property at its approximate market value, not at historic cost, on the balance sheet. Investors want to know how much it's worth, not how much it cost. That is particularly important for an asset that doesn't depreciate, such as land.

Valuation - this valuation looks undemanding to me, and note the high quality scores too;

The divi yield is pretty good, and the company has a sound balance sheet. So it ticks all my main boxes.

My opinion - the one box it doesn't tick, is predictability of earnings.…

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simoan

22nd Jan '15

Hi Paul,

Re: Pennant I take your point about lumpiness of contracts but still feel you're being a little mean about the company's prospects - Cohort is on a P/E about 30% higher and one of the best ways to cut defence spending is to use simulators for training. I also happen to know that "defence cuts" is yesterday's news.

To me, Pennant is a bit like Scisys (and even possibly Vislink) and is simply suffering from a lack of interest or newsflow to drive the share price upwards. I can't even see any current broker forecasts for 2015, for instance. The R&D tax credits and property revaluation are good news but it really needs some new contract newsflow to drive it above 100p.

All the best

V4Value

Hi Paul,

I see there has been a 60p per share cash offer for API Group today which seems very low to me in relative valuation terms. Maybe it will spark further interest, but I would be interested to know what you and others thought. The shares have jumped 23% at the time of writing.

Best,
Anthony

Gostevie

Apologies for a slightly off-topic rant here but your piece on 'Director expense accounts' reminded me of when I worked back in the late 1990s for what was then a FTSE 250 market research company called Taylor Nelson Sofres (now Kantar Worldpanel, part of the WPP empire).

For six months or so I was seconded to the Finance Department as a Data Input Clerk (yes really, that senior!) and one of my jobs was keying in staff expenses. Seeing some of the monthly claims that not just Directors but also some senior managers put through was simply astonishing to my in those days naive and innocent eyes.

It wasn't unusual for a single 'client entertainment' claim to run well into well over 500 pounds. Okay, some clients spent a lot of money on our services but where were they taking them to run up that sort of food and drinks bill for maybe four people? Strip joints?

First class rail travel seemed to be the norm for just about everybody, and if the hotels weren't quite 5-star, they weren't far off, and subsistence for some managers if they were staying away from home seemed limitless judging by the bills for food and drink that were passed.

One fairly-but-not-terribly-senior manager - who shall remain nameless but who is still there as I occasionally see him on TV commenting on the latest supermarket sales figures or whatever - sticks in my mind as having a particularly large trough into which he had his snout and must have lived the lifestyle of a minor royal at the expense of the company (i.e. the shareholders).

Nobody senior ever appeared to query any of this. It seemed to be a case of them all signing off each other's expense forms on a 'I won't question yours if you won't question mine' sort of gravy train.

I don't doubt for one moment that it still goes on at the upper levels of corporate Britain.

Steve

snickers

I have a question about PEN's stock report. I looked at it the other day, and saw the Quality measure had grown a little down-pointing arrow, labelled 'down 7 in the last 30 days'. There had been no announcements in that month. I've seen similar sudden re-calculations with other companies unconnected to news or results. I imagine there's some forward-looking smoothing-out going on, but am curious as to what.

Paul Scott

Anthony,

I think the takeover bid is probably a lucky escape for shareholders at API (LON:API)

It's a cash bid from the largest shareholder. It looks a done deal, so very unlikely that there will be a higher competing offer.

The company has been up for sale for a long time, with no takers. So it was very much damaged goods, and I think this is a fair price.

More detail in my previous reports here.

Regards, Paul.

Mark Simpson

Pennant International (LON:PEN) has an interesting CEO incentivisation plan:

http://www.investegate.co.uk/pennant-int--group/rns/director-incentivisation/201404291620068187F/

Think the idea is to align the CEO's interests with the Chairman's. Chairman is a big holder and getting towards retirement age. CEO doesn't hold very many but this arrangement means that he is well incentivised to accept any reasonable takeover offer if it comes.

rumplestiltskin

Hi Paul,
do you have any thoughts on what the stock market will do around the time of the pensions reform, if people like myself who have a lot of shares in their sipp, sell up to move the cash out but re buy them in ISAs and trading accounts. Would there be a good time to sell and buy.
Kind regards,
Mike.

Hi Mike,

I've no idea I'm afraid.

I don't try to second guess things like that, I just focus on the fundamentals of smaller companies, and over time the good ones will tend to go up in price, and the bad ones go down, with other factors being background noise in the long run.

Regards, Paul.

Redrumtum

Hi Paul, your comments on CTO re operational gearing inspired me to have a look at their figures on Stockpoedia. The impact is startling:
2008 revenue £220m, op margin 5.7%, reported eps 22.2p, free cashflow 63.3p
TTM revenue £212m, op margin 0.85%, reported eps 1.62p, free cashflow -24.9p

So looking forward, the 2105 forecasts are for £238m revenue but eps only 5.6p, implying margins will remain low (relative to recent years).

Beginner

Hi Red
In 2008 we were in a property boom. Contractors stuck in estimates with silly margins, knowing full well some would get taken up. That is not the case now. The lower margin is probably more typical of what can be expected for some time. Mind you, said it before and will say it again, T Clarke (LON:CTO) is a cracking firm. I sold too early, as usual!!!!

muckshifter

rumplestiltskin,
I very much doubt if there will be any significant effect from such cashing in of sipps, because of the tax angle. Most people with a sipp are either earning from employment, or have their sip in drawdown as an income.

Either of those situations is unlikely to leave the sipp owner with much headroom before higher rate tax kicks in if withdrawals are increased, so I see the most likely outcome being that most people juggle their income between drawdown, money from ISAs and any employment income if they are asked to do work for anyone, for the best tax result.

That's what I do anyway, and I would not be prepared to give 40%, or whatever it is to the government just for the assumed safety from government meddling that an ISA seems to offer (and in the end is that any safer?). So I think that people with enough savvy to run a sip are very unlikely to cash them in. In fact I'm sure that the whole suggestion that this was likely on a grand scale was just part of the siren voices for the insurance industry into the ears of our pathetic civil service, to prevent the changes that have just been implemented.
God bless Cameron and Osborne I say (slightly tongue in cheek, but their action is the first step to making pensions respectable, imho).
Regards.

Beginner,
T Clark have been around for a long time, and are probably as good as you get in terms of electrical contracting, but I would suggest that you have a look at Balfour Beatty's website and read their four consecutive profit warnings / downgrades 6th May, 3rd July, 29th September, and today. The major causes of these problems, aiui, have been electrical contracting in London ( which is also Clark's main area of operation I believe), and major building in London, where labour costs as the recession eases, are really hammering BBY.

In fact today's RNS from them prompted me to write a post about the perils inherent in reporting and forecasting in the contracting industry over on the shft thread on the lunatics site. That post might be completely irrelevant, as I don't know for sure what procedures are used by electrical contractors, but I would think they are similar, and it might give you a bit of insight into an area of risk.
Regards.

Cheers ms and PS.

You are bang on Muckshifter. Thank you for your wise words in that other place.
I would recommend what you have written to anyone thinking of putting money into any contractor.

ridavies

23rd Jan '15

Paul
Re Empresario
I think it is rather like a franchise operation. When they say they open new offices, they seem to be affiliates which already exist as separate businesses. I dont fully understand the financial relationship between these and the Empresaria 'centre'. I will have to look back through my Small Company Sharewatch notes because they had them as a major reco at some time during 2014. So whether the 'centre' directors need to do much travelling, I dont know.

Small Cap Value Report (22 Jan 2015) - PEN, EMR, CTO, RST, MYSL, BOOT

Pennant International (LON:PEN)

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Paul Scott

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