Small Cap Value Report (22 May 2014) - MTC, SSY, HYDG, EMR

Thursday, May 22 2014 by

Good morning.



Mothercare (LON:MTC)

Preliminary results for the year ended 29 Mar 2014 are issued this morning, and are actually not as bad as I was expecting. The Balance Sheet is certainly weak here, and in need of an equity fundraising, since net tangible assets are negative £29m - clearly a situation that needs fixing, so I would pencil in dilution from a probable future £50-100m equity fundraising at some point.

You might recall that the Sunday Times reported earlier this month that Mothercare was seeking a relaxation of their banking covenants. The company went into spin mode, and issued a response to media comment RNS, which basically confirmed the story, whilst sounding as if it was denying it. This was not clever at all, just PR gone mad, in my opinion. The market reacted by marking the shares down again, after a brief 10p bounce. My take on it was published here.

Companies need to realise that if things are bad, the market will respect you more if you just tell it how it is, along with an explanation of what you are doing to fix it. Trying to gloss over negatives, as in this case, just harms a company in the long run, as it undermines trust in management.

Anyway, on my cursory glance over today's results, Mothercare doesn't look like a company that's going bust, especially given the highly lenient attitude of the Banks towards Listed companies at the moment. Q4 trading seems to have improved, and overall they seem to have stabilised the situation.

Mothercare is a very odd situation in that its UK retail operation is loss-making, and they are having ongoing difficulties exiting from problem leases - a painful & expensive process, because landlords will not allow tenants to exit problem leases unless they can re-let the shop on at least equally favourable terms to someone else that is at least as financially strong as the existing tenant. Hence it can require very large financial penalties to persuade the landlord to take back the unit. Or, if you can find another retailer to assign the lease to, you might well have to subsidise their rent through an extended rent-free period, and/or paying them an up-front cash incentive to take on the unit (called a reverse premium).

These issues are…

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Mothercare plc is a retailer for parents and young children. The principal activity of the Company is to operate as a specialist omni-channel retailer, franchisor and wholesaler of products for mothers-to-be, babies and children under the Mothercare and Early Learning Centre brands. The Company's operating segments include the UK business and the International business. The UK business segment includes the United Kingdom store and wholesale operations, catalogue and Web sales. The International business segment includes the Company's franchise and wholesale revenues outside the United Kingdom. Its clothing and footwear product includes ranges for babies, children and maternity wear; home and travel includes pushchairs, car seats, furniture, bedding, feeding and bathing equipment, and toys are mainly for babies. It operates in the United Kingdom through its stores and direct business, and across the world in over 60 countries through its international network. more »

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SCISYS group PLC is a United Kingdom-based company, which is engaged in developing information technology (IT) services. The Company develops application solutions and products, and provides supporting services. The Company provides IT services to corporations and public sector organizations through four divisions: Space; Enterprise Solutions & Defence (ESD); Media & Broadcast (M&B) and ANNOVA Systems. The Space division provides various aspects of a space system, from fundamental research and onboard software solutions, to supplying ground segment infrastructure and services. The ESD division provides software solutions across various markets, including defense, security, marine, public sector and commercial. The M&B division is a supplier of digital radio production, archiving, asset-management and playout solutions. The Annova systems develops a portal for ARDAktuell based on the ground-breaking, product OpenMedia Newsboard. more »

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Hydrogen Group plc is a United Kingdom-based company, along with its subsidiaries, is engaged in the provision of recruitment services for mid to senior level professional staff. The Company operates through two segments offering both permanent and contract specialist recruitment consultancy for the organizations. The Company's segments are Professional Support Services and Technical and Scientific. The Company recruits for roles in Professional Support Services, including legal, finance, technology and business transformation placements, and in Technical and Scientific market sectors, such as power, mining, oil and gas and life sciences. The Company's subsidiaries include Hydrogen UK Limited and Hydrogen International Limited in the United Kingdom; Hydrogen Group Pty Ltd in Australia; Hydrogen Group Pte Ltd in Singapore; Hydrogen Group Ltd in Hong Kong; Hydrogen Norge AS in Norway, and Hydrogen Group LLC in the United States, among others. more »

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

11 Comments on this Article show/hide all

fredericktug 22nd May '14 1 of 11

Morning Paul,

Would live to hear your musings this morning on Hydrodec (2013 finals out this morning).

£88m oil re-refining story stock (with long slightly chequered history) coming good at last? New-ish and well regarded management team, balance sheet cleared up and now debt free. EBITDA profitable (net loss), Revenue $40m and growing reasonably fast.

Director buying, and significant shareholder in the form of the entrepreneur Andrew Black (20%) who seems to have been a big buyer of the stock, as well as providing loan facilities (now repaid in a recent fund raising).

I like investing in "story" stocks but ones that are demonstrably on the turn (and with seriously credible credible management). Risky but this is where some decent returns (and losses!) can be made.

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purpleski 22nd May '14 2 of 11


Apropo of nothing there is an excellent article on the FT this morning by John Authers on the psychology of when to sell stocks at

This concept is fascinating

"And then there is the radical approach of Tom Howard of AthenaInvest, whose ideas were featured in this column two weeks ago. He makes no record of the price he pays for his stocks. Once a position has been entered, the price at which it was bought is irrelevant, he says. If it looks like a strong future performer at its current price, it should be held – even if that means foregoing the chance to book a profit. If it looks like falling, it should be sold – even at the cost of realising a loss."

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evoh_1 22nd May '14 3 of 11

Mothercare should just split their two businesses to focus on getting the UK right while setting a successful international business free.

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tomps3 22nd May '14 4 of 11

Morning Paul

Any views on the placing by KBC? I know this is one you've followed in the past.

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cig 22nd May '14 5 of 11

In reply to post #83558

It's silly though to call the blindingly obvious a "radical approach" -- how could the P&L position of a single minority investor have any relevance to the future prospects of a company?! -- and quote one random guy as if he had invented it. I'm sure sensible people knew that long before that guy was even born, as this was as true for investors in Roman times as it is now. It's investing basics. What is fascinating is that so many people still fall for the P&L fallacy when it makes so little sense.

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purpleski 22nd May '14 6 of 11

I think it is pretty radical by the normal definition of the word radical. One online definition of radical I have found:

"Departing markedly from the usual or customary"

which I suspect is what Mr Authers meant by the radical, as I dont think many people sell (anything not just stocks) without knowing the price they are selling at.

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kevanp 22nd May '14 7 of 11

In reply to post #83562

Give up! I've read your comment five times, and being a bear of very little brain I can't for the life of me understand your point. Are you saying that it is normal for investors not to record the price they paid for a share? If so, I completely disagree. I would bet that virtually all investors do keep a record — and indeed continuously refer to it.

If you are not saying this, how can you argue that this approach is not radical?

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loudenr 22nd May '14 8 of 11

Hi Paul

Thanks for the insights on Mothercare. Similar to you I had a short position and closed this partially on the results as I was expecting them to be much worse. I still believe that there is a big risk to MTC as a long term going concern given that it does not appear to be generating positive cash flow - the increased borrowings distort the cash balance. I also note that hefty pension deficit payments are being made together with increased interest charges.

Just my thoughts.

In your experience, if there is a placing soon would you expect them to get it away close to current market price?

Many thanks

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cig 22nd May '14 9 of 11

In reply to post #83567

Keeping a record is useful for the purpose of analysing past decisions, but useless for making forward looking decisions, because as I said this information is not an input in what will happen in the future. Basically the records help you answer the question "have I done well?", but never "what should I do now?" People who are looking at them for the latter are indeed wasting their time, the same as people who base their trading decision on astrological readings.

Yes, lots of people are victims of this cognitive flaw and spend far too much time "continuously referring to it" for the wrong reason but this doesn't make it any less nonsensical. I'm sure there are people who trade based on their horoscope too.

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cig 22nd May '14 10 of 11

In reply to post #83564

We're not saying that people shouldn't look at the current price when they trade, but that they shouldn't look at their own private past entry point(s), because they are not an informative item for the future. This is not radical, it just expresses that the past is water under the bridge.

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Jardine 23rd May '14 11 of 11

SCISYS (LON:SSY) should be congratulated for announcing a series of Investor Lunches, to be held not only in London but also in the regions. What a great way to develop their private investor shareholder base in the Shire counties. Other companies should copy their lead and host events outside London. Further details can be found in the link to their AGM trading statement in Paul's blog above.

Three cheers Dr Love from the private investors out here in the sticks!

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 Are LON:MTC's fundamentals sound as an investment? Find out More »

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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