Small Cap Value Report (22 Oct) - JDG, RNO, SEPU

Good morning. One hour fifty minutes late this morning, defective bogey at Earlsfield. OK, the real reason is less glamorous, in that I got so involved in interesting & convivial conversations at Mello Beckenham last night, that I didn't get back home until 1am, and was then too hyped up to sleep. Another terrific investor evening, thanks as always to the organiser David Stredder.

I enjoyed the presentations from an unlisted company raising loan financing, and also from niche Fund Manager Chris Boxall, of Fundamental Asset, and Investors Champion. Chris gave a very insightful talk about a sector he's researched in depth, the high yielding shares of companies providing the "picks & shovels" to the oil drilling sector.

However, at that point I experienced a severe lack of oxygen (and Peroni), so ducked out of the presentation from David Cicurel of Judges Scientific (LON:JDG). Apparently he was given a bit of a hard time by investors who were miffed about not being given access to the latest fundraising (reported on yesterday). In my opinion that criticism is misguided. The reality (as I see it) is that Cicurel has done a remarkable job, in driving up his share price 18-fold, and then raising fresh capital at only a small discount to the market price, on a very warm valuation of 20 times, for minimal dilution of existing holders. He should be warmly congratulated by existing holders, not criticised! It's cemented my view that the valuation is now too high at 1687p, on almost 20 times current year earnings, and I don't think these shares offer attractive risk/reward at this point.

A company should not be priced on a growth rating when the growth is coming from acquisitions, in my opinion. It does deserve a management premium, given Cicurel's great track record, but to my mind a price of about 12 times earnings would be more sensible, so I think the shares are probably worth realistically about £10-12 perhaps?

As always, this is not a prediction on what the share price will do - I have absolutely no idea what the share price will do, as with all shares. My comments are always about how I see the fundamental underlying value of the company. The share price can detach from that value for long periods of time, but eventually shares tend to come back to it. In the meantime momentum continues, often taking things to warm valuations. I hope people are top-slicing, as pullbacks can be pretty savage on warmly rated shares when the euphoria subsides.

 

 

 

 

I stumbled across an article by renowned value investor Stephen Bland (aka. "PYAD") last night, and was delighted to see he's now writing for Stockopedia. A little bird had told me that he might appear at some point here, but the timing took me by surprise.

I'm sure most of you will have come across Stephen before, he's been a very popular writer, and a real original thinker, who has greatly influenced my education as an investor over the last 15 years. His views are sometimes unorthodox, always thought-provking, and grounded in a structure stressing the importance of basic Value principles (low Per, high Yield, good Asset backing, and low Debt, being the "PYAD" approach). A warm welcome to Stockopedia, Stephen!

 

You can meet Stephen (and lesser mortals such as Ed, Dave, and myself!) this Friday at the London Investor Show this Friday, 25 Oct. Here is a link to obtain free tickets. Hope to see many of you there. Ed has twisted my arm into giving a talk about using Stockopedia for small cap stock picking, so if you want to come along and laugh at me, here is your chance!

 

 

 

The other good news is that I received authorisation from Share Soc yesterday to set up a Brighton & Hove branch of Share Soc, with the intention of holding regular social events for investors (e.g. a Pub social say once a month), and a quarterly dinner/speakers event starting in Jan/Feb. The train links to Brighton are pretty good, so the intention is to find a nice venue within staggering distance of the mainline station in Brighton, to build a network of like-minded investors in the area, and hopefully get some good speakers along. If you might be interested in coming along to such informal investor meetings, please email me: Paul AT stockopedia DOT co dot UK, so that I can gauge the level of interest.

 

 

 

 

Right, let's look at some results & trading statements. The market is buying into the turnaround story at industrial chains maker, Renold (LON:RNO). They have issued a positive trading statement this morning, with the key bit saying (my bolding);

 

The first half underlying adjusted³ operating profit is therefore expected to be substantially better than the first half of the prior year. The full year results will be sensitive to the successful delivery of the Bredbury closure and associated activities. However, it is expected that the second half will see a similar result to the first half and the Board therefore expects the full year result to be substantially ahead of current market expectations.

(3 Adjusted for exceptional items and IAS 19 pension charges including finance charges and administrative expenses included in operating costs and, where relevant, any tax thereon)

 

 

Sounds pretty good. Although as I mentioned back in May, there's a large pension deficit here, and quite a bit of debt, so it's not of interest to me. Broker consensus is for 1.93p EPS this year, so "substantially ahead" makes me think they might be looking at 2.5p to 3.0p this year perhaps, at a guess? That means at 45p they are probably on a PER of 15-18 times. That's just too high for me, especially as the Balance Sheet is not good, and it doesn't pay a dividend. Why chase something up to that kind of valuation??

When this market does correct, I think a lot of people are going to get a nasty shock, as in many cases people are just overpaying for stocks right now. I'm sticking to my value principles, and if I can't find value, then I'll sit in cash and wait for better opportunities.

 

 

 

 

 Sepura (LON:SEPU) is an interesting company. It's around £200m market cap (at 146p per share) maker of specialised "TETRA" radios for e.g. the emergency services. I bought some shares at 55p about 18 months ago, but as usual sold too early. They looked expensive at 100p, and I cannot get anywhere close to the current valuation, which is for a PER of almost 20.

The dividend yield is only just over 1%, as with so many things right now I like the company, but the valuation is simply too high in my opinion. Risk/reward is all wrong at a price of 20 times forecast earnings. If something goes wrong, you've made an instant 30% loss, so there needs to be attractive upside in order to take that risk. I can't see any meaningful upside for a couple of years from a PER of 20. Historically this company has hit bumps in the road, as it is dependent on large roll-outs from customers, which can sometimes be delayed or cancelled.

They indicate in today's trading statement that things are going well, with a strong order book, and trading in line with market expectations. That's already priced-in, and the shares are flat on the day. It's not an attractive investment proposition at this price in my view.

 

 

 

 

That's all I can find of interest today, within my remit here, which just to recap is for companies which are:

• UK Listed
• Market cap between about £8m and £250m
• UK-based companies, i.e. excluding overseas companies which list in the UK (especially Chinese or Indian companies!)
• Excluding certain sectors, e.g. resources, financials, biotech, and generally excluding Blue Sky companies (i.e. zero turnover hype things)

 

I did a screen at the weekend to find out how many companies I cover, and it's around 500 in total, which is a lot for one person to cover. So it has to be emphasised that my coverage is not in particular depth, unless I really like the company's valuation and want to buy some shares in it, whereupon my research is much more detailed & will include at the very least reading the Annual Report, RNSs, and broker notes.

So readers really need to view these reports are just flagging up ideas that you might then want to do some more research on yourself. As always, our mantra here is DYOR! Also please remember that we never, ever give recommendations or financial advice here, these are my personal opinions only - sometimes I get it right, sometimes I get it wrong. Although just because a share price goes up, for a company I don't like, doesn't actually mean I'm wrong - because what these reports are all about is the fundamental value of a business, not what the share price will do in the short term.

Things like Globo (LON:GBO) are just an accident waiting to happen, because it doesn't actually make any money (when you properly account for intangibles amortisation), and burns cash. Sooner or later the penny will drop, and so will the shares - dramatically. In the meantime people are making money on the shares, good for them and enjoy it while it lasts! It's no skin off my nose either way, as I'm neither long nor short Globo. I can see a good case for having a punt on it on the long side, as it has momentum, but would want a guaranteed stop loss on the position. That's not investing though, it's just gambling. Equally, I think a short position will pay off handsomely eventually, but shorting is a risky business, and can have big drawdowns as you wait for a bubble to burst.

Good, that should rattle a few cages & stoke up a few bonkers conspiracy theories, and get the readership numbers up!

 

Have a good day, and see you at 8 am tomorrow morning.

Regards, Paul.

(of the companies mentioned today, Paul holds no long or short positions)