Small Cap Value Report (22 Oct 2014) - SUN, PFIT, SHOE, THAL, XSG

Wednesday, Oct 22 2014 by

Good morning! Fairly quiet again today for news.

Surgical Innovations (LON:SUN)

Share priceL 1.75p
No. shares: 404.7m
Market Cap: £7.1m

Profit warning - this is not good at all. The company has 'fessed up to a number of items that will require £1.6m in exceptional charges in the current year (ending 31 Dec 2014). These include;

  • Reversing out previously booked sales of £0.6m
  • Write-down in trade receivables relating to anticipated rebates from distributors, and
  • Redundancy costs


In situations like this, I always go back to the double-entry bookkeeping. To generate a profit, any company has to credit the P&L with a sale, and then the debit has to go somewhere on the Balance Sheet - usually into either Debtors or Cash. That's where profit comes from.

So, when a company starts writing down debtor values on its Balance Sheet, this means that it has previously booked profits incorrectly. Therefore in this case, it looks as if the reported profit in 2013 (and maybe earlier) was not real. It's unusual to see debtors within long term assets, as normally debtors are all in current assets. I believe that any debtor item in long term assets is inherently suspect, and this has been confirmed here.

Note how long term debtors rose from £1,367k to £2,124k between Jun to Dec 2013. So that looks as if it provided a false £757k boost to profits in H2 of 2013. That wipes out almost all of the £885k operating profit reported in 2013, thus the company was probably trading at breakeven in 2013.

This type of stuff should make cautious investors run for the hills. If you can't rely on some items in the accounts, then in my view you can't rely on the accounts at all. The final sentence just reinforces my negative view here, clearly indicating the company is now under cashflow pressure;

As previously notified, the Board expects that the Company will report a significant loss before tax for the full year. Against this backdrop, short-term working capital funding and cash generation remains the Board's key priority and further updates will be provided to shareholders as appropriate.

I note it had a £3.0m bank loan reported at the last Bal Sheet date of 30 Jun 2014), so that could be at risk now. If the bank pull the facility, then the only option for survival is a hurried & probably deeply discounted Placing.


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Surgical Innovations Group plc is a United Kingdom-based holding company, which is involved in the design, development, manufacture and sale of devices for use in minimally invasive surgery (SI) and precision engineering (PE) markets. The Company sells branded products through independent healthcare distributors across the world and own label products through original equipment manufacturer (OEM) relationships. The Company operates through three segments: SI Brand, OEM and PE. The SI Brand segment is engaged in the research, development, manufacture and distribution of SI branded minimally invasive devices. The OEM segment includes the research, development, manufacture and distribution of minimally invasive devices for third-party medical device companies through either own label or co-branding. The PE segment is engaged in the research, development, manufacture and sale of minimally invasive technology products for PE applications. more »

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Shoe Zone plc is a footwear retailer in the United Kingdom and the Republic of Ireland. The Company offers women's shoes, men's shoes, boy's shoes and girl's shoes. The Company's online offering combined with its store network enables customers to shop through multiple channels. The Company operates from a portfolio of approximately 550 stores. Its customers purchase all of the products available in stores, as well as an additional approximately 400 product styles. The Company sells over 20 million pairs of shoes per annum. The Company has operations in various countries, including Germany, Italy, Spain and France. The Company's distribution center is located in Leicester, England. The Company's subsidiaries include Castle Acres Development Limited, Shoe Zone Retail Limited, Zone Property Limited, Zone Group Limited, Shoe Zone (Ireland) Limited, Shoe Zone Pension Trustees Limited, Stead & Simpson Limited, Zone Footwear Limited, Zone Retail and Walkright Limited. more »

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

26 Comments on this Article show/hide all

Paul Scott 22nd Oct '14 7 of 26

In reply to post #87154

Hi Shanklin100,

I only noticed today that Plus500 (LON:PLUS) is above my market cap limit, it's more what I would consider a mid cap, with a mkt cap of £595m.

Having a quick look at the trading statement today, I'm not close enough to the figures to be able to interpret it.

The company doesn't pass my sniff test, hence it's not something I would invest in.

Regards, Paul.

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Damian Cannon 22nd Oct '14 8 of 26

Totally agree GavinT.

BTW this is the book that I've just read:

It's a very easy to read and clear introduction with a bit of humour. Very useful IMO.

Blog: Ambling Randomly
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purpleski 22nd Oct '14 9 of 26


'Don't forget it's the company's management who selects and pays the fees of the auditors.'

In a way but the fees come off 'our' profits so surely it is the shareholders (I do not have an interest in either of these companies) ultimately paying the bill. Perhaps this comes under the heading of accountability to shareholders of boards and auditors that Paul is campaigning for?

It does make you think though that accounts might as well be two pages a cash flow statement and the chairman's statement!

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purpleski 22nd Oct '14 10 of 26

In reply to post #87158

RandomAmbler. Thanks for this. I have the book but have not yet tackled it as I have reading list as long as my arm. Is readable and informative?


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Damian Cannon 22nd Oct '14 11 of 26

In reply to post #87161

Hi purpleski,

Actually it is readable and not just for an accounting book! I've got a whole pile of partially read books but I've motored through this one in a few weeks and finished it off yesterday. In fact I used it last night as a means to work through the Accesso accounts (yeah exciting night, I know!) and it was super helpful. There are a few things in these accounts that concern me but, well, I won't get into that here.

Suffice to say you should definitely tackle the book and then use it in anger!


Blog: Ambling Randomly
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betjeman 22nd Oct '14 12 of 26

One of the standing items at all AGM's is for the Auditors to be appointed for the following year - this is voted on by Shareholders.

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Jardine 22nd Oct '14 13 of 26

Perhaps one reason why Xeros Technology (LON:XSG) has perked up over recent months is that Neil Woodford has a holding in his new fund. So it must have passed his due diligence test. The smallest of his holdings though.


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Ramridge 22nd Oct '14 14 of 26

Re. SHOE. And if we are heading into deeper market correction territory, then Shoe Zone would make a good defensive stock.

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beatingmrindex 22nd Oct '14 15 of 26

Hi Paul,

Keen on Shoe Zone (LON:SHOE) however I cant find in the latest RNs or the interim results from June any mention of the dividend - where would I be able to confirm this? With Div yield above 6% it looks great value.



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invest8020 22nd Oct '14 16 of 26

I'd love to see the list as well if you'd care to share.

"Financial Shenanigans" is a good book for understanding the games that can be played but I'm sure it's not exhaustive.

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AlanJenkins2 22nd Oct '14 17 of 26

When I told my broker the symbol for Shoe Zone he said 'I wonder what they do :-]

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Beginner 22nd Oct '14 18 of 26

Regarding Pressfit Holdings (LON:PFIT) they not only deal mainly with the AMCO Group but share directors and other staff. In effect they are a near subsidiary of AMCO. That cannot be good.

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woakesd 22nd Oct '14 19 of 26

In reply to post #87166

Looks like Stockopedia's dividend for SHOE is a forecast. There are no dividends noted in Stockopedia for SHOE

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bsharman 22nd Oct '14 20 of 26

Shoe Zone (LON:SHOE) seems to have modeled itself on Sports Direct. Both offer cheap products in no frills retail stores. Not a bad business model and it clearly works for Sports Direct. 

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brucepackard 22nd Oct '14 21 of 26

I agree about family ownership. Adnams (OFEX:ADB), which even has a separate share class so family don't lose control, was a ten bagger for me - from £20 per share in the early 1990s to £200 15 years later. I sold and have just bought back in at £80. NB it is quoted on OFEX, so not one for the day traders!

I wrote this long term analysis

NB - as I say I own it. So talking my own book. DYOR.

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Paul Scott 22nd Oct '14 22 of 26

In reply to post #87170

Hi woakesd,

Indeed, the dividend yield for Shoe Zone (LON:SHOE) is based on forecasts.

That's why my article above referred to (note the word "forecast");

"in particular note the 6.0% forecast dividend yield!"

All the PER and dividend yields on Stockopedia are based on consensus broker forecasts.

With a small cap like this, the company will have given the brokers a steer, so the forecasts are really the company's forecasts.

Regards, Paul.

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arfournier 22nd Oct '14 23 of 26

In reply to post #87152

Enron and a few others managed to mess with the Cash Flow statement. That said it took an unbelievable amount of effort.

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beatingmrindex 23rd Oct '14 24 of 26

In reply to post #87180

Thanks Paul, I wasnt sure where the forecasts came from... Hopefully the company matches these predictions

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cig 23rd Oct '14 25 of 26

If I may find some positive in the Surgical Innovations (LON:SUN) situation:

- previous CEO fired
- bad accounting practices kitchen-sinked
- business refocussed on the best product lines
- board trimmed and working for free until further notice

It may get worse before it gets better -- a discounted rights issue may indeed be needed -- but it may be an interesting recovery situation thereafter.

(I hold, wasn't my best call so far, but looking at the future from now.)

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tournesol 24th Oct '14 26 of 26

Hi Paul

I notice that THAL is listed in the headline of this article but not mentioned thereafter. Is that a deliberate decision on your part?

I have no holding in Thal at present but am an admirer of Duncan Soukup and think the company looks very interesting.



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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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