Small Cap Value Report (23 Oct 2014) - EPO, SEPU, BMY, FOXT, PTCM

Thursday, Oct 23 2014 by

Good morning!

Earthport (LON:EPO)

Share price: 44.5p
No. shares: 475.7m
Market Cap: £211.7m

This company has a staggeringly bad track record. It has raised money from shareholders more times than anyone can remember, and has been loss-making every year since it was created. Not just a little bit loss-making either. I thought it would be fun to look back and collate the losses since 2001, and they look like this (see spreadsheet on the right).

Turnover has been rising in recent years, but it really doesn't matter because losses have stayed the same. So they could just be recirculating payments through the system to generate more revenue, it's meaningless unless they actually make a profit.

More recently, turnover has been bought in through acquisitions, to (in my view) mask the fact that the legacy business is going nowhere.

Over the years there have been numerous big fanfare deals announced with major banks, etc, and none of it has ever created anything of commercial value.

Yet the market keeps coming up with new enthusiasts to pour money into the company, and on it goes. All this company actually is, is a collection of bank accounts in multiple countries, and small payments are made for clients across borders by grouping them together, and making a single bulk payment. The payments are then broken down at the other end and paid out to the people they are intended for.

The only usefulness of this, is that it saves clients the bother of opening up numerous foreign country bank accounts. Since Earthport kindly operate this service running at a permanent loss, then it's no wonder that some clients take advantage of that by using Earthport instead of managing their own cross-border payments in-house.

None of which has ever sounded even remotely like a viable business to me. The market cap of £211.7m is beyond insanity in my opinion.

Final results - for the year ended 30 Jun 2014 are published today. The company trumpets 161% growth in turnover, to £10.8m, although note that most of the growth has come from an acquisition.

The underlying loss before tax didn't fall, it actually rose slightly to £8.6m (2013: £8.1m). This is masked somewhat by a £2,274k foreign exchange gain, bringing the reported loss before tax down to £6.3m.

Balance Sheet - it is rapidly burning through the cash, with £9.1m remaining…

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Earthport plc is a financial services company. The Company provides cross-border payment services to business enterprises and banks. The Company's payments solution connects international payment and local infrastructures to provide clients access to global payment options via a managed service. Its service offers a range of options for connectivity, including application program interface (API), file-based solutions and Society for Worldwide Interbank Financial Telecommunication (SWIFT); validation and message transformation; advisory services for market entry and new product development; project management support during implementation; client funding options and liquidity management services, and various currency offerings to support a range of currency requirements. It has a range of country-specific checks and validations for payment processing, including modulus checks on account numbers, referential checking on beneficiary bank details and enrichment of beneficiary bank data. 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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Bloomsbury Publishing Plc is a global publisher. The Company is involved in the publication of books and other related services. The Company operates through four publishing divisions: Adult, Children's & Educational, Academic & Professional, and Information. These divisions derive their revenue from book publishing, sale of publishing and distribution rights, management and other publishing services. It specializes in the humanities and social sciences, and publishes over 1,000 books and digital services each year. The Company's digital products include Berg Fashion Library, Bloomsbury Collections, Bloomsbury Fashion Central, Churchill Archive and Drama Online. The Company's subsidiaries include A & C Black Limited, Bloomsbury Publishing Inc, Bloomsbury Information Limited, Bloomsbury Professional Limited, Bloomsbury Australia PTY Limited, The Continuum International Publishing Group Limited and Osprey Publishing Limited, among others. more »

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7 Comments on this Article show/hide all

biloseli 23rd Oct '14 1 of 7

Hello Paul,

Do you have time to comment on Debenhams (LON:DEB) final results today? I know it's not a small cap, but you've commented before and it would be interesting to hear your views on progress (or lack thereof) before we get into the festive season.

Thanks for SCVR - always a great read.


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maffs0 23rd Oct '14 2 of 7

Hi Paul,

Not sure if you're still following Porta Communications but they put out a very bullish trading statement today. They are planning two further acquisitions that will be funded from current resources.


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Maddox 23rd Oct '14 3 of 7

Hi Paul,
EPO: I'm not going to take issue with your analysis of their past performace - you're absolutely correct - and I'm not a holder and probably won't be in the future. However, I can see the market need and rationale for an alternative to the inter-bank international payment monopoly SWIFT - particularly for smaller value payments. So I do hope that Earthport turn their fortunes around and become a successful player in this underserved sector of the market.
Regards Maddox

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Roger Lawson 23rd Oct '14 4 of 7

Re Earthport, I think it's a bit unfair to say most of the 161% growth in revenue has come from acquisitions without mentioning that they also report a like-for-like revenue increase of 67% which presumably ignores the acquisitions. As regards the valuation being "beyond insanity", it looks like 10 times current year revenue which is about what most other similar companies in the same sector are going for. There must be a lot of insane investors out there. As to why they are paying so much for such companies would take a lot more explaining than I have time for here. I would certainly agree with many of your comments about the past history of this company, but more recently they do seem to be moving in a more positive direction. I would not write them off totally at this time.

Website: Roliscon
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Paul Scott 23rd Oct '14 5 of 7

In reply to post #87189

Hi Roger,

My statement that most of the 161% growth came from acquisitions was correct, i.e.

100 last year's turnover
67 organic growth
94 (balancing figure) - growth from acquisitions
261 this year's turnover (i.e. 161% growth on last year)


So as the 94 growth from acquisitions is bigger than the 67 organic growth, then my comment about growth mainly coming from acquisitions is correct, surely?

Regards, Paul.

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underscored 23rd Oct '14 6 of 7

Hi Paul,

Don't discount the effect of high land prices in crushing the economy. Lancing this boil maybe painful, but we need to step away from the crystal meth of a house price driven economy of unfunded consumer debt.

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Reynart 28th Oct '14 7 of 7

Hi Paul

A belated comment on BMY. I think your caution is justified. The company has made the best of the Harry Potter franchise - but I just don't buy the idea it has classic status. It will get a boost temporarily from the new films, but it won't be anything like the scale of the past. The problem is that the company has constantly used up its operating cash on acquisitions, but the cash is running out. I predict a large miss on the year end numbers, a very harsh dividend cut, and a pretext for a cash call. Note that Nigel Newton made a significant share disposal at 166p in June.

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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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