Small Cap Value Report (23 Aug 2016) - PSN, JNY, HSW, BVXP

Good morning!

We've settled into our villa in Paxos, and I'm starting to unwind. We have a 2 hour time advantage here, so 7am UK time is 9am Greece time. So I can both have a lie in, and make a prompt start reading RNSs. This is a good thing, and is making me wonder whether I should permanently relocate to a time zone which better suits my body clock?

Further good news is that the mosquitoes which normally eat me alive in this area, seem largely absent. We can't decide whether this is a natural phenomenon, or whether our liberal application of every imaginable type of mosquito repellent, is doing the job? So far I don't have a single bite, which is very pleasing indeed.

Persimmon (LON:PSN)

Share price: 1794p (pre market open)
No. shares: 308.3m
Market cap: £5,530.9m

Interim results to 30 Jun 2016 - this was one of my favourite Brexit plunge shares, and it's already come roaring back, so has been a very good trade.

However, the outlook comments today almost made me fall off my chair. The company is not only reporting strong interim figures, but it appears the new house market is not only surviving, post-referendum, it's doing rather well:

"While the result of the EU Referendum has created increased economic uncertainty, customer interest since then has been robust with visitor numbers to our sites around 20% ahead year on year.

Our private sale reservation rate since 1 July is currently 17% ahead of the same period last year. The Group is now trading through the traditionally slower summer weeks but customer demand remains encouraging and we anticipate a good autumn sales season."

So, as we've seen with many other companies reporting of late, the referendum result has been shrugged off by UK consumers. Although as others have pointed out in the comments section here, nothing has actually changed as yet. So we could yet see longer term disruption, but so far, so good.

So expect a strong day for housebuilder shares.

Journey (LON:JNY)

Recommended bid at 240p per share - Christopher Mills of Harwood Capital has done it again! This is the latest in a series of takeover bids he has made for companies in which Harwood has a shareholding. The trouble is, he finds undervalued companies, then puts in a cheeky bid at a relatively low premium, which usually significantly undervalues the company.

Often, institutions are happy to accept a say 20% bid premium, as it means they can exit cleanly from an illiquid stock. The trouble is, it means private shareholders are forced to sell. This happened with Essenden, where I was forced out through Harwood's opportunistic & under-priced bid.

On the upside, in my opinion, Harwood is exceptionally good at finding decent, undervalued companies. So following their trades is likely to bring upside, either from a re-rating, and/or a takeover bid from Harwood itself. The downside is that you don't get the full upside - Harwood does, by buying good companies too cheaply.

The 240p cash bid is an 18.23% premium to last night's closing price. Hardly generous.

Interestingly, there is an alternative, to take shares in the new, private holding company which is going to be buying Journey. However, who would want to be a minority shareholder in an unlisted private company? Especially where the majority shareholder is, how can I put this without getting into trouble, well known for being aggressively shrewd.

Hostelworld (LON:HSW)

Share price: 169p (up 8.3% today)
No. shares: 95.6m
Market cap: £161.6m

(at the time of writing, I hold a long position in this share)

interim results to 30 Jun 2016 - the H1 figures show a lurch into a loss of E5.5m (note that the company reports in Euros). However, this is pretty meaningless, as it's due to a E8.2m impairment loss. Also, there is a large amortisation charge, due to the balance sheet being very heavy with intangibles.

So in this case, I'm happy to work on the adjusted figures, which ignore all the amortisation charges.

Key figures;

H1 2016 revenue down at E40.2m (H1 2015: E43.9m) - the company explains this by saying it's not chasing low margin business.

Adjusted EBITDA of E10.1m (vs. E10.0m in H1 2015) - so profits are essentially flat - it's an ex-growth business.

A very strong profit margin of 25%, up from 23% in the prior year (this is at the adjusted EBTIDA level - which is OK, as there's not much depreciation, or interest charges).

Dividends - a key reason to hold this share. It's basically a mature business, that is now a cash cow. So an 4.8 euro cents interim divi is announced. The full year forecast yield is c.7%, so clearly extremely attractive in a low interest rate environment. Providing of course that big divi yield is maintained? We have seen several examples of IPOs being promoted on a big yield, only for performance to disappoint, and the divis cut. So care is needed I think.

Outlook - the company says it's on track to meet 2016 full year expectations, which would put it on a fairly modest PER - just under 11, once we factor in today's share price rise.

My opinion - the company seems to be blaming flat performance on terrorist attacks, and there might be some truth in that. However, surely people just choose different destinations to visit, which are perceived as lower risk? I'm not sure there has been a general downturn in people visiting hostels.

There's no getting away from the fact that Hostelworld is ex-growth. So although it's an internet business, it's rated as a conventional value stock. My main worry is that internet businesses which stop growing, could be about to go into decline.

So I'd say this is only a weak hold for me, in my personal portfolio. I won't be buying any more, and may chuck it out if there's a decent run up to say 200p.

Bioventix (LON:BVXP)

Share price: 1170p
No. shares: 5.1m
Market cap: £59.7m

Updated forecasts - I covered BVXP yesterday, and was awaiting updated broker forecasts. These have come through to me today, so thought I'd quickly update any readers who have not seen the latest note from FinnCap.

Calendar 2016 EPS forecast has been increased by 13.3% to 64.9p. That's a PER of 18.0.

Calendar 2017 EPS forecast has been increased by 19.2% to 71.2p. That's a PER of 16.4.

Once you adjust for net cash, which is expected to rise to £6.3m, or becoming material, at 10.6% of the market cap. That would reduce the ex-cash valuation to 1047p, so a PER reducing to 14.7 on the 2017 forecasts.

That doesn't look a stretched valuation to me - it's probably about right.

My opinion - the company has a great track record, and I can see why lots of readers like this share, and hold it. The valuation looks about right to me for now, but there could be good further upside if the company out-performs.

It's all really a question of nothing going wrong, and those enormous profit margins proving to be sustainable.

I can't upload any pictures into this report, as the internet bandwidth here is too narrow.

All done for today, see you tomorrow!

Regards, Paul.

(usual disclaimers apply)