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

Tuesday, Oct 22 2013 by

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…

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Judges Scientific plc is a United Kingdom-based company, which is engaged in the acquisition and development of a portfolio of scientific instrument businesses. The Company's activities are predominantly in or in support of the design and manufacture of scientific instruments. Its segments include Materials Sciences and Vacuum. Its subsidiaries include Armfield Limited, engaged in the design and marketing of engineering equipment and research instruments; Fire Testing Technology Limited, which is engaged in the design, manufacture and service of instruments that measure the reaction of various materials to fire; Scientifica Limited, which offers micropositioning equipment, microscopes and advanced imaging systems used in electrophysiology and neuroscience; Quorum Technologies Limited, which manufactures scientific instruments primarily used for electron microscopy sample preparation, and Sircal Instruments (UK) Limited, which designs, manufactures and distributes rare gas purifiers. more »

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Renold plc is engaged in delivering engineered and power transmission products and solutions across the world. The Company's Chain segment manufactures and sells power transmission and conveyor chain and includes sales of torque transmission product through Chain National Sales Companies (NSCs). It has manufacturing sites in the United States, Germany, India, China, Malaysia and Australia. It also offers leaf chain used in the forklift trucks. Its Torque Transmission segment manufactures and sells torque transmission products, such as gearboxes and couplings. It is a manufacturer and developer of coupling and gearbox solutions, from fluid couplings to rubber-in-compression and rubber-in-shear couplings, and a range of worm gears, helical and bevel helical worm drives. It also manufactures gear spindles. The applications of conveyor chain include theme park rides, water treatment plants, cement mills, agricultural machinery, mining and sugar production. more »

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Sepura plc is a provider of communications solutions. The Company is engaged in the design, development and supply of digital radios, infrastructure and applications for Professional Mobile Radio (PMR) users, providing specialist solutions for the public safety, transportation, oil and gas, mining, utilities, industrial and other commercial sectors. It offers terrestrial trunked radio (TETRA), digital mobile radio (DMR), Project 25 (P25) and long-term evolution (LTE) system solutions. Under TETRA, it offers systems infrastructure, applications, hand-portable radios, covert radios, fleet management, modem and accessories, among others. Its suite of control room applications includes dispatchers, automatic person location (APL) and in-building tracking. Its DMR radio systems include DMR Tier II, which links approximately 30 repeaters; DMR Tier III, which links over 1,000 sites, and Dispatcher applications, which provide call logging and call management. more »

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

15 Comments on this Article show/hide all

shopping365 22nd Oct '13 1 of 15

Judges Capital should actually read Judges Scientific in paragraph 3. Otherwise interesting article.

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JKeat 22nd Oct '13 2 of 15

Or should it? ;)

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Paul Scott 22nd Oct '13 3 of 15

In reply to post #78361

Hi shopping365,

Whoops, my apologies, you are correct. They changed their name some time ago, it used to be Judges Capital. I've amended the article accordingly, many thanks for flagging my schoolboy error!

Cheers, Paul.

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khalidf 22nd Oct '13 4 of 15

Hi Paul,

What are your thoughts/analysis on LON:ATUK?


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kevanp 22nd Oct '13 5 of 15

Morning Paul

Talking of savage pullbacks on warmly rated shares, Dart (LON:DTG) has had a bit of a caning this morning, following a far-from-disastrous trading statement, which ended with the familiar "the board remains cautiously optimistic in relation to profits growth". Currently down 11% at 222. Be interesting to see how many of the current nine Stocko screens they pass come tomorrow.

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bsharman 22nd Oct '13 6 of 15

Good advice as usual Paul. I'm finding value hard to come by at the moment (Mission Marketing may be an exception?!) and am wondering when the correction will come....can you see any catalysts for that before we reach the old tin can (Feb 2014) which has yet again been kicked down the sidewalk.

I'm looking forward to Thursday's Proactive meeting where Globo are presenting and Friday's London Investor Show!

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RichardK 22nd Oct '13 7 of 15

Covering 500 companies averages 2 per day assuming the market is open 5 days per week for 50 weeks. The difficulty is that reports and IMS's are not evenly distributed, and of course you are not allowed holiday beyond statutory ones. You might think of narrowing the scope a little, say to market cap in the Investec Bank plc (LON:10MN) to £225mn range, and excluding Russian companies too I hope.
I suspect catalysts for corrections tend to be black swans....


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RichardK 22nd Oct '13 8 of 15

Don't know where Invettec bank came from in the above. I typed Investec Bank plc (LON:10MN) !

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RichardK 22nd Oct '13 9 of 15

Let me try £10 mn this time

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Fangorn 22nd Oct '13 10 of 15

"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! - "

Agree. Some investors just aren't satisfied these days it seems. They should be roundly applauding the efforts of Cicurel - that 18 fold increase in the share price is astounding. They're lucky they've not been on the receiving end of a stock performance mirroring an inverse performance to that of Judges Scientific (eg Range Resources)

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jraitt 22nd Oct '13 11 of 15

Paul, Any idea of what time you are speaking on stand? I'd like to be sure to be there.

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carmensfella 22nd Oct '13 12 of 15

In fairness we were not challenging David Cicurel and claiming he had been unfair to his private investors who had after all supported him from when the company was tiny and needed the investment from us as institutions were totally disinterested. We were challenging the system and asking DC his views and how he thought we could change it to allow the loyal investors to take part in placings such as this ?

David Cicurel is totally admired and respected at the Mello events....he has been to nine of them !

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Paul Scott 22nd Oct '13 13 of 15

In reply to post #78379

Hi David,

Thanks for clarifying those points.
What is interesting is that both Judges Scientific (LON:JDG) and Tracsis (LON:TRCS) recognise the key importance of Private Investors in getting their share price & PER up to a level where making acquisitions began to generate its own momentum - i.e. each earnings enhancing acquisition drives a further rise in share price, giving them more ammunition to do further deals.
It only works if you can generate an enthusiastic PI shareholder base.

Cheers, Paul.

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Fangorn 22nd Oct '13 14 of 15

Ah apologies then DC - seems I've misinterpreted PP's original comments. :)

"We were challenging the system and asking DC his views and how he thought we could change it to allow the loyal investors to take part in placings such as this ? "

A worthy question.Suggest it's a tough ask as what ever you do you'll have disgruntled private investors. eg If you allow the HNW PI's in, then those with say £10,000 worth will feel disadvantaged.

let me know if you see a solution as I'd be interested.

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DarwenLad 22nd Oct '13 15 of 15

Totally agree with Paul's assessment of RNO. As a long-term investor who backed the 20p a share rights issue in 2009, and having attended the last 4 AGMs, I threw in the towel when the shares touched 30p. The new management team, (the chairman and chief executive are ex-Filtrona), have been heavy buyers of RNO shares which has clearly impressed investors. However, they have yet to prove that they can turn round the low margin chain businesss - a challenge which has defeated past managements.

However, RNO's,biggest problem remains its huge pension fund deficit. This company has not paid a dividend since 2005 and is unlikely to for some years to come. In addition, it has agreed with its pension fund trustees that if its operating profits are "significantly higher" by 2017 it will have to make additional pension fund contributions.

Whilst the re-rating of the shares means that for the first time in a long time the company's market cap of £100m is well above its net pension fund deficit of £58.7m, the company has long since used up the money raised from its 2009 rights issue which was supposed to have underpinned its long-term recovery. RNO's net assets of £28.6m are well below the £44.98m immediately after the 2009 rights issue and its net debt of £22.8m at the end of its last financial year was more than a quarter higher than after the 2009 rights issue.

The recent jump in the share price must increase the chances of the new management team returning to the city company for another slug of equity.

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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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