Small Cap Value Report (25 Feb 2014) - NET, WIL, SNTY, TLDH

Tuesday, Feb 25 2014 by

Good morning!



Netcall (LON:NET)

This is a good company, demonstrating growth, and with high quality, recurring revenues constituting 63% of total revenues - which is good because recurring revenues greatly reduce investing risk - after all, if your clients are on long-term contracts, then all being well most turnover is in the bag before a financial year has even started. Sales efforts are then mainly focussed on additional revenues, which will build the recurring revenues again for the following year, etc. So that's why investors like companies with strong recurring revenues, and are prepared to pay more.

That said, on first glance at Netcall's interim results for the six months ended 31 Dec 2013, I'm wondering if the growth is strong enough to support the elevated share price? At 56p per share the market cap is about £69m.

The company achieved sales of £8.43m for the six month interim period, up only 3%. They quote the horrible "adjusted EBITDA" as their first performance measure, which is an inflated number as it ignores capitalised costs (mainly software development) of £390k, with adjusted EBITDA coming in at just under £2.5m.

I'm surprised at the size of share based payments, which are also identified as being an adjusting factor (i.e. they want us to ignore the cost) of £462k, which seems high for just six months (coming on top of £505k from the previous year). So some pretty generous share options being issued by the looks of it?

So basic EPS drops out at1.04p, with fairly heavy dilution that reduces to 0.94p. Annualise that, as there doesn't seem to be much seasonality to the business, and we're at just under 2p EPS for a full year. So at 56p you're looking at a very rich price of 28 times! That's too high a valuation in my view. That's based on my estimate of current year figures, calculated on a conservative basis.

That conservative diluted EPS figure is massaged from 0.94p up to 1.47p through the various adjustments, so I guess the company and its advisers are hoping that the market will value the company on nearer 3p adjusted EPS for a full year, which brings the valuation down to a PER of 18.7 times, still not cheap.

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Netcall PLC is a United Kingdom-based company, which designs, develops and markets communication, workforce management and business process management (BPM) software and services to the healthcare, public and private sectors. The Company provides corporate solutions, health solutions and public solutions. The Company's corporate solutions include multichannel contact center, workforce optimization, customer self-service and proactive outbound applications. The Company's health solutions include patient self-service, appointment management cycle, and resource management and work optimization. The Company's public solutions include case, record and document management, and customer service. The Company offers platforms, such as corporate liberty platform, public liberty platform and health liberty platform. The Company also provides deployment services, including on premise, cloud and hybrid; professional services, including training, and support services, including SolutionCare. more »

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Wilmington plc is engaged in providing education and networking. The Company's segments include Risk & Compliance, Finance, Legal and Insight. Its geographical segments include the United Kingdom, Europe, North America and Rest of the World. Its Risk & Compliance segment provides regulatory and compliance accredited training and information, market intelligence and analysis. It focuses on the international financial services and insurance markets. Its Finance segment provides expert and technical training and support services to professionals in corporate finance and capital markets and to qualified accountants in the United Kingdom and Ireland in both the profession and industry. Its Legal segment provides a range of training, professional support services and information, including Continuing Legal Education, expert witness training, databases and magazines to legal professionals. Its Insight segment provides analysis and clarity to customer-focused organizations. more »

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Cloudcall Group plc is a United Kingdom-based holding company. The Company and its subsidiaries are engaged in software and unified communications business. The Company provides a suite of cloud-based integrated software and telephony products and services under the name cloud. The Company is a full-service communication provider. The Company designs, develops and operates integrated communication services for customer relationship management (CRM) systems. The Company's CloudCall portal enables to manage organization’s call profiles, configures all settings and manages user and service accounts and access real time activity reports and call recordings. Its automatic call distribution (ACD) feature routes the callers directly to available team members in the organization. The Company’s subsidiaries include Cloudcall Ltd, Cloudcall BY. LLC and Cloudcall, Inc. more »

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  Is Netcall fundamentally strong or weak? Find out More »

6 Comments on this Article show/hide all

Camtab 25th Feb '14 1 of 6

Paul, I am not a holder but in this bullish market the purchase of Sentiment which gives them the ability to analyse information on sites like Google, Twitter, Linkedin and Facebook does perhaps potentially justify the valuation. The market won't put up with any disappointment though.

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Roger Lawson 25th Feb '14 2 of 6

Don't think Netcall have "purchased" Sentiment - just taken a stake in it. As to how much that stake might be worth is difficult to determine as Netcall seemed to have released little information about it. Anyone know more about the stake purchased for £1m or why it may be so valuable?

Otherwise not sure I agree with Pauls view that Deferred Income should be ignored when looking at the balance sheet, but probably agree with his view that it does not look particularly cheap at present.

Website: Roliscon
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Camtab 25th Feb '14 3 of 6

Apologies poor expression meant I overstated the case but the point remains. Equally you might both be right.

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MrM 25th Feb '14 4 of 6

Looking at Synety, in 2009 their share price was over £28, ten times today's 285p. Revenue reported was £2.17m, and profit -303p, cash flow -332p.
Paul, do you have any idea why this share price went so high?

A theory that sounds plausible to me, is that when a company has no profits, people can allow their imagination and valuation to run wild, but as soon as that business starts to actually make money, then unrealistic expectations finally have an anchor in reality, and the price drops.

Just for interest, last night on BBC2, there was a documentary about Daniel Kahneman, showing the differences between intuitive and logical thinking, and how they produce inconsistent results.

They went through a list of cognitive biases, anchoring, confirmation bias, hindsight bias, halo effect etc, with loss aversion they can demonstrate the same behaviour in humans and monkeys!

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narp 25th Feb '14 5 of 6

Paul, your valuation does not include the part of the valuation that make up the share price mentioned in this article:


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Paul Scott 25th Feb '14 6 of 6

In reply to MrM, post #4

Hi MrM,

Synety was reversed into an existing Listed shell in Sep 2012, which was formerly Zenergy Power.
So ignore all historic figures prior to that, as they do not relate to the current business.

It should therefore be regarded as a start-up, which is now beginning to deliver high margin recurring revenues from scratch.

As I said in the article, it's high risk, but seems to be on a strong growth curve now, from a low base.

Regards, Paul.

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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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