Small Cap Value Report (25 May 2016) - JDG, MKS, CSG

Good morning!

Placings

An issue arose yesterday, where a share I hold dropped 20% because Tom Winnifrith revealed that the company was conducting a discounted Placing.

I'm the first to agree that the whole system is bad. There's no way shares should remain trading whilst a discounted placing is being organised. What this means is that a considerable number of people are insiders, and theoretically are barred from trading the shares.

However, in the real world, the news leaks out, and unscrupulous insiders just trade through a third party - selling in advance, thereby locking in a guaranteed profit. It's illegal, but it's obvious from the trades that it happens. Such people should go to jail, but sadly the regulators only seem able to catch the occasional culprit. Thus the law seems little deterrent for the unscrupulous, who seem happy to take their chances, with such favourable odds.

So whenever a placing is being organised, there is clearly a false market in the shares. This has to be changed. I suggest that we need a new, accelerated fundraising process, where the shares are first suspended.

Then, a book build should be conducted online, with existing shareholders having precedence (to recognise pre-emption rights). The fundraising would then complete, with the price being set by an auction process. The company could set a minimum price at (say) a 20% discount to the current share price.

This would be fair to all, and completely transparent. Therefore there's no chance of it ever actually happening!

Revealing price sensitive information

I've taken part in a few placings over the years. The golden rule is that once you are made an insider, then you cannot trade the shares, nor reveal any information about the placing, to others. Not until the deal is announced anyway. Once it is announced, then you are free to trade the shares again.

I've always scrupulously respected these rules. Sometimes to my own disadvantage. I took part in a placing at Synety (LON:SNTY) and watched in dismay as the share price collapsed before the placing was announced. It was obvious that someone was insider dealing. However, as I was an insider, I had to sit tight, and watch the value of my existing shares roughly halve. With hindsight, it would have been far better if I'd not been told about the placing, and could have sold in the market - as it was obvious something was going wrong.

The golden rule is that, no matter how unfair the system, you must not reveal price sensitive information, nor trade the share.

Cyan

So along comes Tom Winnifrith, and says that he is breaking a great journalistic scoop, by revealing price sensitive information - that Cyan was conducting a placing. I think this is outrageous.

The impact is that the share price collapsed - down 20% yesterday, and it had been falling earlier. Therefore the company will now have to do the placing at a deeper discount, in order to get it away.

As an existing shareholder in Cyan, this has harmed my interests. I will now be diluted much more heavily by the placing, because Tom has publicly revealed confidential information. As a result, the City fat cats benefit (from owning more of the company post-placing), and small shareholders like me are shafted. Not a good days' work for Mr Winnifrith.

The system may be deeply flawed, but whilst we are stuck with the current placing system, its essence is confidentiality. If confidentiality is blown, then a downward spiral begins, where the placing has to be done at an increasingly lower price, in order to make it happen. Who suffers? Small shareholders like you & I, who normally won't even know a placing is happening until after it's done.

I accept that there is a false market in the shares when the placing is underway, and the only way to stop this is to reform the system to require that shares are suspended whilst a fundraising is being negotiated.

However, sabotaging placings by blurting out details in the press or on blogs, is just irresponsible. It only helps lower the placing price, thus harming existing small shareholders.

Inside information

Whenever I hear any inside information, even if only a rumour, I respect the law, and keep quiet. You will never hear any "scoops" or "rumours" in this blog. That's not my style. I deal in facts & figures, and I respect the rules (even though they're wrong). So should everyone else.

Judges Scientific (LON:JDG)

Share price: 1375p (down 24% today)
No. shares: 6.1m
Market cap: £83.9m

AGM statement (profit warning) - the outlook given with the 2015 results, announced in Mar 2016, didn't sound too bad. I reported on that here. Bookings were down, but the company attributed this to seasonal patterns.

Since then, things have got worse:

"At the time of the release of the 2015 annual results on 21st March 2016, we indicated that order bookings in the first ten weeks of 2016 had been low, which had been our experience over the previous two years.

However, as of today, 20 weeks into the current financial year, unlike the previous year we have not seen a pick-up in order bookings.  This will negatively impact our interim results and, should the trend continue, has the potential to affect the Group's performance for the year as a whole."

It's a pity that the company has not been more specific. They could & should have given some numbers - e.g. saying that we expect full year profit to be down x% on last year. It infuriates me when companies leave us in the dark. Are they 5% down, or 20% down? We have no idea.

More specific guidance will no doubt be given to the house broker. We then have to wait for them to update, and assess the severity of the downturn.

WH Ireland said this morning that they're leaving forecasts unchanged for now, but recognise the downside risk. That seems an odd decision. Although it does perhaps signal that the situation is not too bad? They're currently forecasing 124.1p EPS for 2016. It might be safer to trim that by say 10% or more? So I personally would work on the basis of EPS for this year possibly being 100-110p?

Therefore, at 1375p the shares look reasonable value.

My opinion - a good company, with good management. In the past, it has had trading glitches which have turned out to be not too serious. Therefore, I'm looking at this as being a possible buying opportunity, once the dust has settled.

As you can see from the 2-year chart below, the shares often stumble on temporary bad news, but always seem to recover.

Retailers

This sector is very much out-of-favour at the moment. So is it a quagmire for investors, or are there opportunities out there? A bit of both, I think! We just have to find the good companies that will recover, and avoid the ones in structural decline.

I see that Marks and Spencer (LON:MKS) has put out a mild profit warning today, saying:

Overall, we expect the combination of difficult trading conditions, both in the UK and in our International markets, as well as our decision to invest in price and reduce our promotional activity, to have an adverse impact on profit in the short term. However, we're confident our actions will provide us with a more solid base from which to build long term sustainable growth.

I reckon MKS has a lot of home-grown problems. All too often its clothing is drab, and over-priced. There's a gulf now between the prices of similar items in Primark vs M+S. Sure, the M+S offering is better quality, but not enough to justify the sometimes huge price difference.

On the other hand, M+S is likely to be one of the biggest beneficiary of the (probably inevitable) demise of BHS. I can't see BHS surviving in its current form, thus opening up more market share for M+S.

Sweett (LON:CSG)

Recommended 35p cash bid - great news for risk-takers who were prepared to hold shares in this company - a cash bid from WSP at 35p has been announced today - this is a 52% premium to last night's close. Very nice indeed.

Personally, the corruption legal case against the company put me off. Whilst it may have been resolved, there was always the risk that more such issues might come out of the woodwork. My view is that, generally in life, wrong-doing is rarely an isolated incident.