Small Cap Value Report (24 Dec) - ABM, UCG, AVA, CIN

Good morning! As expected, there's very little in the way of company announcements today, what with it being Christmas Eve, but as mentioned yesterday, I like to keep monitoring the market over this period because there have been some interesting buying opportunities thrown up in previous years, caused by a mixture of illiquidity and clumsy year-end portfolio rebalancing by Institutions.

 

 

One of the potential buyers for Albemarle & Bond Holdings (LON:ABM), Better Capital, has dropped out of the sale process, as announced today. The company goes on to say, "The Board confirms that the formal sales process is on-going and that it is continuing discussions with a number of interested parties". I'd be surprised if anyone buys it in its current form, because it's trading at EBITDA negative, but you never know. The shares are really now little more than gambling tokens, with a (probably) binary outcome. Hence I am avoiding these shares.

 

 

 

 

In a similar vein, another turnaround situation which has gone somewhat better, is United Carpets (LON:UCG). Unusually, this carpet retailer went through a pre-pack Administration process, and remained Listed. So having ditched the loss-making shops, and renegotiated rents down on the remaining shops, the company now has a low cost base, and a clean Balance Sheet. This pre-pack process is tough on suppliers and other non-secured creditors, who are stuffed with the losses, so it's a controversial process. On balance though, it saves jobs and enables the viable parts of troubled companies to continue trading.

Also, to be blunt, nobody who has proper financial controls should be supplying goods on credit to any company that is at risk of going bust. If they do, then that's a risk they have chosen to take (actively, or by omission), hence the consequences follow.

Shares in United Carpets have more than doubled in the past six months, and the market cap is still only just under £4m. They are horribly illiquid as a consequence, and I've found it almost impossible to get hold of any stock, so you have to wonder why they bother with a Listing?

Their last set of results here looked encouraging, although I'm not sure what the cyclicality of carpet sales are - I would guess that more are sold in the half year that includes summer perhaps, so it might end up being an H1-weighted year?

It's the same Chairman here as at JD Sports, who also attracted controversy over large bonuses paid to Directors at MBL a few years ago.

 

 

 

 

Shares in Avanti Capital (LON:AVA) have dropped over 60% this morning, but I can't see any announcement or news surrounding the company, so not sure why that has happened. If any readers are aware, perhaps add a comment below?

 

 

 

Things seem to have gone badly wrong at City of London (LON:CIN). The company has today announced that a £17.4m Placing agreement has fallen through, and two Directors have resigned. A friend asked me to look at this company a few weeks ago, but I couldn't really work out how to value it, and didn't see any value in it to justify the current price, but that was only from the most cursory look.

Today's announcement says that more funding will be needed, but they have adequate debt facilities to cover immediate needs. Sounds a bit messy to me, so I'm not planning on investigating further. Their shares are down 19% today.

 

 

 

Finally, interim results from broker Daniel Stewart Securities (LON:DAN) don't look good at all - turnover of £2.1m, and an operating loss of just under £1m, so they will need a big upturn in business to just reach breakeven. Net assets are declining fast, and there's not much cash left, only £0.5m, so I'd say that it will probably need a cash injection to keep going, in my opinion. Although the commentary does note that the last few months have been around breakeven. Plus of course we are in a boom for fundraisings and IPOs, so if they can't make money now, then there's something wrong.

 

 

Well, that's about if for today. Wishing everyone a very happy Christmas, and see you as soon as the markets re-open!

Best Wishes, Paul.

(of the companies mentioned today, Paul has a long position in UCG, and no short positions)