Small Cap Value Report (26 Feb 2015) - IND, ZYT, ETQ, REDD, QPP, DGB, ATQT, R4E, LVD

Thursday, Feb 26 2015 by

Good morning! I'm running a little late today, due to having a jolly old time last night at a wonderful event organised by ShareSoc, and kindly hosted by Killik & Co, in their beautiful and historic Mayfair offices (3 very large, old townhouses combined). I'm sure far more exciting events have been held there over the last few centuries in their stunning wood paneled ballroom, than me rambling on about balance sheets! I really enjoyed the wisdom & experience from Lord Lee, David Stredder, and my boss here, Ed from Stockopedia.

As I usually say when invited to talk at this type of event, I feel like a charlatan to some extent, in that I've made some horrific investing mistakes, especially in 2008 when I blew up my personal portfolio by going into the credit crunch highly geared, and holding big positions in very illiquid stocks. Hopefully though, having learned some vital lessons the hard way, my openness about the things I've got wrong in the past, will help other people avoid the same mistakes.

Indigovision (LON:IND)

Share price: 340p
No. shares: 7.6m
Market Cap: £25.8m

Final results - for the 17 months to 31 Dec 2014. This is a one-off extended period, due to the year end being more sensibly set at 31 December, rather than the illogical previous 31 July (which caused year end nightmares, as they tried to close deals in the middle of summer when prospective clients tended to be on holiday).

Rather than type up a long-winded commentary, I will copy here the comments I've just emailed to several large holders who like to hear my views on the company at results time;

My opinion - results today are OK - underlying performance is flat against last year. One

region went backwards (S.America), which offset strong performances elsewhere.


  • Gross margins strong (so clearly a good product)
  • Balance sheet strong
  • Valuation is low
  • Move into mid-market augurs well (much bigger market)
  • Generous divis (2 interim divis already paid, totalling 12p, and 5p final divi declared - so 5% yield, but that's inflated due to one-off 17 month period).


  • Weak outlook statement (sales to date "subdued")

Conclusion - seems to forever have good potential, but never quite gets there in terms of overall progress. The company has performed better than other UK security companies, eg

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IndigoVision Group plc is a United Kingdom-based company engaged in the design, development, manufacture and sale of networked video security systems. The Company's segments include Europe, the Middle East and Africa; North America; Latin America, and Asia Pacific. Its cameras, encoders, network video recorders and software are designed both internally and with technology partners and manufactured in Asia and Europe. The Company's end to end Internet protocol (IP) video security systems allow full motion video to be transmitted around the world, in real time, with digital quality and security, over local or other area networks, wireless links or the Internet, using market compression technology to minimize the usage of network bandwidth. Its subsidiaries include IndigoVision Limited and IndigoVision Pte Ltd, which are engaged in marketing of its products, and IndigoVision Solucoes De Seguranca Eletronica Ltda., which is engaged in product repair and warehousing, among others. more »

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Zytronic plc is involved in developing and manufacturing of touch sensor products. The Company is also engaged in the development and manufacture of customized optical filters. Its geographical segments include Americas (excluding USA), USA, EMEA (excluding UK and Hungary), Hungary, UK, APAC (excluding South Korea) and South Korea. Its products incorporate an embedded array of metallic micro-sensing electrodes. Its technologies include projected capacitive technology (PCT) and multi-touch mutual projected capacitive technology (MPCT). PCT touch sensors can be constructed from one, two or three layers of laminated, toughened glass. Its sensing products offer touchscreen solution for applications, such as leisure, digital signage, retail, surfaces, banking and industrial applications. Its touch sensors are used in video jukeboxes and slot machines. The PCT touch sensors are used in a range of workplace applications, from medical diagnostic equipment to oil field machinery controls. more »

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  Is LON:IND fundamentally strong or weak? Find out More »

24 Comments on this Article show/hide all

johnrosier 26th Feb '15 5 of 24

I have been looking at Zytronic (LON:ZYT) in recent weeks and have got close to hitting the BUY button but am reminded of one comment that Lord Lee made last night about protecting the downside. Tieing that in with your observation that there is not much visibility in orders and "so every now and then a gap opens up in the order book, with the potential for a profit warning", I will,despite its StockRank of 99, keep it firmly on the watch list in anticipation of seeing a better entry point at some stage.

Website: JohnsInvestmentChronicle
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Edward Croft 26th Feb '15 6 of 24

In reply to post #93211

Paul - are you going to write up your Renew Holdings balance sheet "hatchet job" (as John Rosier called it)... I thought it was a brilliant piece of work last night.

Unrelated Fact of the day:   Paul Scott is Renew Holding's Finance Director

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DGW 26th Feb '15 7 of 24

Cheers paul - many thanks for that

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Flackwell 26th Feb '15 8 of 24

Arguably one of the most sensible investment mantras is not to have too many eggs in one basket

And yet we value directors shareholdings (when they're already exposed to salary, bonus and options from the same source)

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johnrosier 26th Feb '15 9 of 24

In reply to post #93223

I'd rather he didn't although I am pleased to see the share price steady after last night! 

You can't refute what Paul says about the balance sheet but for now I am happy to hold given the recent trading statement. I also believe that the characteristics of the business are not as shaky as Paul suggests. I do not think it is a classic contracting business with big lumpy contracts that can, and often do go wrong; most of its business is long term, 3-5 year "framework" agreements for maintenance/renewal of infrastructure e.g. rail, nuclear etc.i.e. it is ongoing regular work.
Last year for instance it was "Appointed to 7 Network Rail frameworks for Control Period 5 with advertised value of £450m over 5 years". Given the growth in rail travel does anyone see that budget being cut? 

Management have also overseen a steady increase in margins, admittedly from a low level and has been public on its target "The Board has set targets for Group revenue in excess of £500m and a Group operating margin of at least 4.5% within the next three years." I know just because they say that it doesn't mean it will be achieved but management's track record thus far has been good and the recent trading statement didn't ring any alarm bells:

"Trading for the first quarter of the year has been satisfactory and in line with expectations.

In the Energy market, I am pleased to report that our participation in the Multi Discipline Site Works framework has been extended by Sellafield Ltd for two years until 9 January 2017. This is our principal framework at Sellafield which focuses on Production Operations support.

The Group order book at 31 December 2014 has increased by 19% to £449m (31 Dec 2013: £376m). The Engineering Services order book stood at £369m (31 Dec 2013: £306m), an increase of 21% over the comparative position last year.

Cash generation in the first quarter has been good.

These factors confirm the Board's confidence in the Group's future financial performance. A further trading update will be given in a pre-close announcement in early April 2015 prior to the announcement of the interim results on Tuesday 19 May 2015."

Happy Holder for now!

Website: JohnsInvestmentChronicle
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iwright7 26th Feb '15 10 of 24

I like Zytronic (LON:ZYT) too: My notes: Poor historical top line growth, 90% exports, Moat, Earnings upgrades, Dorsey, F8 (very close F9), 99SR, Competitive advantage in industrial/rugged public screens, Cash generative worth 17% of market cap, Lumpy sales, Sales too variable to be a conviction share, so Trading only. Ian

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herbie47 26th Feb '15 11 of 24

Hi Paul, any chance of LVD review please, results out today which look OK?

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muckshifter 26th Feb '15 12 of 24

You mentioned Zytronic in writing about director shareholdings as their holdings didn't really match up to Lord Lee's criteria. Quite a while ago I studied Zytronic carefully with a view to buying, and came to the conclusion after reading ARs that the company was very well supported by its staff in that context. It's a while ago so I have to say “iirc", but this is what I remember thinking:

The directors' holdings looked quite commensurate with their salaries, and bigger in comparison to most small companies, although obviously some of the shareholdings had been aquired from options. Most of those options had been granted in what looked to me to be respectable tranches at reasonable discounts, and were exercised at a decent price increase, but I don't remember seeing any of them being immediately sold. One of the biggest shareholders was a previous Chairman called Kennard, I think, who had a million+ iirc before retiring and was probably a founding director. But the remarkable thing (I think I remember) from the old RNSs was the lack of sales by directors, and the number of shares they kept transfering to their wifes, children and pension funds (although they were still classified as part of their holdings in terms of declarations), which all look like long term commitment to me.

The other thing that always interests me when I'm really looking hard at a company, but no one else ever mentions, is ordinary “privates" ownership within the company as a measure of loyalty and confidence amongst the ranks. I believe it is substantial within ZYT. From memory, in the old sharesave scheme in about 2009 (which doesn't include directors I think) the options held under that scheme worked out to something like £1000/employee, which I found impressive in a workforce who may have been subjected to Newcastle Brown Ale. The current EMI scheme appears to be well supported also.

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purpleski 26th Feb '15 13 of 24

Hi Paul

Writing this today before reading the bulk of today's report. I wanted to come over from Meribel for the Sharesoc event last night but it sold out before I got my act together! Glad it went well. Don't suppose you would consider publishing you notes on your balance sheets talk?

Thank you


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Glaws2 26th Feb '15 14 of 24

With respect to RNWH it's also worth noting that they cleared out around £5m losses with the sale of Allenbuild. I think they have better control over the engineering side of the business that now accounts for 89% of revenue.

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janebolacha 26th Feb '15 15 of 24

Paul, the RNS from ETQ on December 18, 2014 is interesting in the context of today's announcement. They have reached heads of agreement with a company in USA to manufacture their fan coils under licence and also to distribute in UK the products of that US company. Perhaps that agreement may have kicked off thoughts about different options for the business.

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herbie47 26th Feb '15 16 of 24

I have IND and ZYT on my watchlist, my concern is the past performance has not been that good, yes good sounding companies but sp is up and down over the last few years.

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PFhunting 26th Feb '15 17 of 24

ETQ : The problem I have with buying companies that are putting themselves up for sale is whilst you may think it's an each way bet because the valuation looks reasonable, should they not attract a bid the market tends to take the view that if no one in the industry wants to buy you why should we and the shares get marked down pretty aggressively

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Bezhe 26th Feb '15 18 of 24

Director holdings: CFO of SuperGroup (LON:SGP) resigned in recent days. Was made bankrupt earlier this month for reasons that are unclear. There is some interesting information in the annual report. Total package for the CFO was £509,516 in 2014, yet he held only 1,254 shares in 2013 and 2014 (cost probably under £10k). A note also indicates "Shareholding guideline achieved? - No". Possibly a warning sign - are directors asked to comment on these things and, if so, what answers are acceptable?

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jonesj 26th Feb '15 19 of 24

Hello Paul,

Thank you for the article. If disregarding director purchases, how do you find proof of your alternative measures of director commitment and hard work?
I just don't see how to do that and to compare with directors elsewhere.


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Paul Scott 27th Feb '15 20 of 24

In reply to post #93259

Good point. That certainly happened with API - which put itself up for sale, and no offers were forthcoming, leading to a prolonged period of share price disappointment. Although a bid did eventually come for the company, quite recently, although it was probably at a level shareholders found mildly disappointing.

Another point is that when a company puts itself up for sale, that usually means they've been pushed into doing so by shareholders who want to exit. So if no deal happens, then you could find shareholders instead dribble out their stock into the market, putting downward pressure on the share price.

In the case of Energy Technique (LON:ETQ), it had already come up on my watchlist as something that looked vaguely interesting at the current price. Hence why I was happy to buy a few today at a slightly lower price, on the news of it being put up for sale.

It's not a high conviction trade on my part.

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Paul Scott 27th Feb '15 21 of 24

In reply to post #93274

Hi jonesjeff,

That's the trouble, trying to assess director commitment & hard work, are subjective, and can't really be measured. This is why I like to meet management. To get a tick in the box for me, I want to see Directors who constantly talk about the company, reel off detailed facts & figures about the company, answer my questions immediately (none of this pausing for the right choice of weasel words that you sometimes get), and have an obviously firm grasp of their brief.

I don't like overly slick presentations with lots of fancy powerpoint slides, and a delivery that's word perfect. That's too rehearsed, and can be fake. People who are good presenters are not necessarily good hands-on managers (and often aren't actually). So a bad presentation is not necessarily a bad sign, strangely enough! Also people have off-days, and sometimes they are just tired, or unwell, so the occasional bad presentation can be permitted. I'm not keen on CEOs who are too charming either. That clouds my objectivity, and needs to be fought against inwardly.

You can also sniff around and ask staff, if you get the opportunity to visit a company. Asking the Non-Execs what they think of the CEO can be revealing too, not necessarily in what they say, but how they say it.

It's all very subjective. Ultimately, you're looking at a CEO and asking yourself, am I happy with this person as a custodian of my money? I tend to form a very clear overall view on that, and get more right than wrong overall.

Regards, Paul.

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herbie47 27th Feb '15 22 of 24

Hi Paul, Thanks for LVD review, yes Im a holder. I did buy them about 1 year ago but saw they were falling so sold out which was a wise move. Just saw them a couple of weeks ago had another look seem OK so I bought them back at around 160p. They seem a good company and good value now. Re profits these are based on Underlying results, in the statory results the profits are down? But debt has fallen by over £7 so that may explain that? Anyway I think good value, last year they were 240p, not much has changed. My concern is quite specialised company and if Europe does get worse then will get hit.

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tiswas 3rd Mar '15 23 of 24

Anyone know if the profit forecasts for IND on here are sensible?

What strikes me is the big increase for 2016 and the large fall in expectations for 15/16. Are these related to reporting in dollars or the 17 month period?

The reason I ask is that the Axis purchase by Canon was on 23 x forward earnings according to this

Not saying you can compare the two that simply but need to start somewhere!

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janebolacha 9th Mar '15 24 of 24

I can see companies such as Indigovision (IND) that export goods or services from UK being very much handicapped now against Continental European competitors by the strength of the pound against the euro,
at its highest level for over seven years.

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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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