Small Cap Value Report (26 Nov 2015) - new version - LTHM, CTO

Good afternoon!

Our old friend the software bug has made an unwelcome reappearance today, after a long slumber. So I've had to re-create today's report, as the original corrupted. Sorry about that.

I haven't been through the detail yet, from yesterday's Autumn Statement from the Chancellor of the Exchequer. However, the bits I have seen seem to possibly impact shares in ambulance-chasing companies, with a clampdown on the widespread misuse of whiplash claims.

£NHL has put out a response today, saying that the proposals might affect them, but there's not enough clarity yet. I see that shares in Slater + Gordon, the hapless Aussies who foolishly overpaid for Quindell's main business, are collapsing, they're currently down 51% to only A$0.94. Just a few months ago when they were doing the Quindell deal, their shares were between $6-8. What a complete disaster. What on earth were they thinking?

Other companies that might be impacted that I can think of, are £FRP which does some personal injury legal cases, and perhaps £REDD ? Another one which might be affected is £GTLY as it is another legal services business.

All in all, I shall be avoiding the legal services sector for the foreseeable future, until it becomes clearer what the impact of these changes is likely to be.

Another area hit by the Autumn Statement is buy-to-let, where (quite rightly in my view) the Chancellor is concerned that buy-to-let landlords are hoovering up properties, and crowding out first time buyers. So Stamp Duty is being hiked on properties not bought by owner-occupiers. I bet plenty of landlords will find a way round that, by putting properties in relatives names, and claiming they live there, that already goes on a lot to avoid tax, I believe.

So £ALD is one company that might be harmed by a reduction in buy to let mortgages, and I'm sure there are others. If you can think of other companies and sectors affected by the changes announced yesterday, then please do post comments below.

Another key focus for the Govt seems to be increased housebuilding, so that should generally stimulate companies in the construction sector - not just builders, but building supplies.

The deferral of cuts to so-called tax credits, and increased spending on police & defence, should also boost aggregate demand in the economy, compared with what was expected before.

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James Latham (LON:LTHM)

Share price: 689p (up 3.2% today
No. shares: 19.4m
Market cap: £133.7m

Interim results to 30 Sep 2015 - there's a nice summary at the start of the results, which I have copied below, and re-formatted into bullet points:

• The results are better than the same period last year.
• Revenue for the six months to 30 September 2015 was £96.2m, up 8.0 per cent on £89.1m for the same period last year.
• The operating profit was £6.5m, 20.4 per cent up on £5.4m last year.
• Finance costs were £227,000 (2014: £263,000), reflecting reduced interest charges on the lower pension scheme deficit.
• Profit before tax was £6.3m, up 21.2 per cent on last year's £5.2m.
• Earnings per ordinary share were 25.8p (2014: 20.5p) an increase of 25.9 per cent.

As at 30 September 2015 shareholder funds had increased to £67.8m (2014: £63.3m) with cash and cash equivalents of £12.4m (2014: £12.6m).

That all looks pretty good to me, and shows some nice operational gearing (i.e. profits rising faster than revenue, due to fixed costs being worked harder).

Outlook/current trading - this sounds reasonably good, albeit with mixed trading;

Management information shows growing revenue for October and the first half of November, at slightly improved margins. Market conditions continue to be difficult in some areas, while improving in others. We are in a good position with our wide range of customers and we are trading comfortably in line with market expectations. We are progressing with our plans to relocate our two oldest depots. We are close to agreeing heads of terms on the new Yate site and are in negotiations for the new Wigston site.

The all-important "in line with market expectations" is there, with an added "comfortably", which suggests they're a bit ahead. Looks good.

Balance sheet - absolutely wonderful, there is tremendous asset backing here, so the shares are very strongly underpinned, thus limiting downside risk.

Valuation - quite reasonable actually, when you adjust for the surplus capital on the balance sheet. Also, it looks to me as if the current year forecast of 44p is too low. I reckon the company is heading for the 47-50p EPS range this year, and increased construction activity should give them several more buoyant years ahead.

My opinion - a very nice, but rather illiquid share, as it's tightly-held. The valuation still looks reasonable, and the company appears to be trading ahead of forecasts. So shareholders should be pleased with today's announcement I think.

This appears to be a well-run, very conservatively financed business. I like it a lot.

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T Clarke (LON:CTO)

Just to let you know that I recorded an audio interview with the CEO & CFO yesterday, which can be listened to here. The transcript has already been typed, I just have to edit it this afternoon, so that should be up by tonight, hopefully.

I think this is a good point in the cycle to look at companies like this, as there appears to be years of buoyant trading conditions ahead, due to the high level of infrastructure and construction activity going on, and planned, in the UK.