Small Cap Value Report (27 Jan 2015) - AFR, BMK, CPR, SPH

Tuesday, Jan 27 2015 by

Good morning.

Afren (LON:AFR)

Share price: 8.0p (down 55% today)
No. shares: 1,108m
Market Cap: £88.6m

I don't normally report on the resources sector, but there are lots of interesting things going on at the moment - as the plunging oil price is throwing up risks, but also opportunities. So I will mention the odd one. The opportunities are going to be the companies that survive this period of low oil prices, where share prices could rebound strongly once the oil price is moving back up again. So cashflows, hedging, balance sheets, terms of bank debt & bonds, etc, are the crucial elements to consider right now.

Review of capital structure - the title of the RNS alone should be enough to frighten shareholders. Key points seem to be;

- cash is now tight
- negotiations are underway with providers of a $300m debt facility
- $15m of debt interest payments due on 1 Feb 2015 may be deferred
- bond holders are mobilising - have formed an ad hoc committee (to represent their interests)

However, the killer one is this;

"...there is an equity fundraising requirement which is likely to be significant and in excess of the Company's current market capitalisation".

So who knows what is going to happen next? It hinges on whether existing & new investors are prepared to stump up fresh cash for equity.

There is also ongoing discussions about a "possible combination", i.e. takeover, by Seplat Petroleum Development (LON:SEPL) , a Nigerian oil company which listed on the London market in Apr 2014, and has a market cap of £675m at 122p per share.

My opinion - when companies get into financial distress, effective control passes from the equity holders to the debt holders. If debt holders play hardball, then equity can end up being worthless (if they seize control by forcing it into Administration). At the very least, equity holders here are likely to be heavily diluted. Or it could go bust.

I'll be giving this one a miss. Although it might be worth another look once they have raised some fresh cash, but who knows what price that might be at? 5p? 3p? 1p? Massive dilution appears inevitable.

I think you would need to be a sector expert to even consider getting involved here, or just a gambler. It's a good reminder that, if the capital…

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Benchmark Holdings plc is engaged in the provision of aquaculture health, genetics and nutrition. The Company’s segments include genetics, advanced nutrition and health. The Company develops products that helps fish and shrimp to improve their sustainability and profitability by improving yield, quality, and by reducing mortality. The Company’s products include high genetic quality ova for salmon, shrimp and tilapia, and breeding, program, specialist feeds for early stage shrimp and fish; probiotics, Vaccines, biocides, and medicines. more »

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Carpetright plc is engaged in providing floor coverings and beds. The Company operates through two segments: UK and Rest of Europe (comprising Belgium, the Netherlands and Republic of Ireland). The Company trades from approximately 440 stores and concessions in the United Kingdom, as well as over 140 stores across Holland, Belgium and the Republic of Ireland. The Company offers free home estimating services. The Company's product range includes carpets, mattresses, headboards, laminate flooring, engineered wood flooring, rugs, vinyl flooring, luxury vinyl tiles and flooring accessories. Its luxury vinyl tiles are available in a range of designs, including tile, oak, pine and stone. It offers a range of beds and bed products, including divan beds, roll up mattresses, bed frames and others. It offers a range of options from memory foam mattresses to open coil and pocket spring mattresses. Its brands include Kosset, Essential Value, Storeys, Carpetright Clearance and Carpetright. more »

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

13 Comments on this Article show/hide all

Roland Head 27th Jan '15 1 of 13


The Afren (LON:AFR) statement this morning made me look back through last year's accounts to see whether there were any obvious warning signs about the firm's financial weakness (there were, if you looked at the accounts in the context of a falling oil price).

One thing I did notice was that Afren claimed to have a 'strong balance sheet' in its Q3 statement at the end of October. I might adopt your rule of thumb about such claims...


Disclosure: no position in AFR

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Glen Keedy 27th Jan '15 2 of 13

Hi Paul,
You say cash is king and you're right, but Afren says it had $235m cash balance at 31st December in it's RNS, but can't afford to pay $45m to bondholders and banks 4 weeks later. Even Stocko says it's got lots of cash. But it isn't really cash because it's tied up in other stuff. I think any bottom fishers have to look at debt, which is Afren's undoing. Afren's idea of liquid net cash isn't liquid at all and now they are being squeezed by the bondholders (sounds painful and probably is).

So be careful of reported cash figures because they don't seem believable especially in this case.

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Camtab 27th Jan '15 3 of 13


HAve you taken a look at RBN recently? P/S around 1 but PE 7. Yield over 3%. Strong balance sheet. I have never bought this company although it is clearly well run. The takeover worried me as some management teams manage well but cannot handle acquisitions. I also question the sector as everytime I come away from the supermarket I cannot help but feel there should be less rather than more packaging in this world! Anyway I know you were keen on them and just wanted to highlight them.

All the best


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imranawan 27th Jan '15 4 of 13

In reply to post #90882

Hi Guy

I think Paul covered Robinson (LON:RBN) on Friday:

Best wishes,

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rick 27th Jan '15 5 of 13

Can someone explain the RNS today by Gresham Computing (LON:GHT) regarding "Proposal for an amendment to the Share Option Plans".

Is this (as I fear) the directors increasing their share options plan, for no apparent reason?

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Camtab 27th Jan '15 6 of 13

Thanks Imran missed it.

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janebolacha 27th Jan '15 7 of 13

There was an excellent post by "orangetree" on Stockopedia about seven weeks ago:

AFR are said in this article to have a production cost of US$67 a barrel (about 40% above the present price of Brent/NYMEX) and enormous debts.
The writing was very clearly on the wall.

Also, FT Alphaville "Markets Live" a few days ago had included some very cautionary "grey" (analysts' comment) on AFR which was promptly dismissed on one bulletin board as "total nonsense"

If people have a death wish with their money, what can you do?

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dangersimpson 27th Jan '15 8 of 13

In reply to post #90882

P/S around 1 but PE 7. Yield over 3%.

Be careful about quoting the P/E from the StockReport without looking at the source of this. The StockReport uses fwd P/E which is probably the best compromise overall. However for small companies without much broker coverage this can be highly dependent on one or two, sometimes biased, opinions. There is no substitute for looking at the outlook statements and trading history of the company and determining if the fwd EPS is likely to be reality.

For Robinson (LON:RBN) this P/E is based on a forecast 2015 EPS of 20.1p from WH Ireland. So when valuing the company on the fwd P/E you have to assess how likely it really is for the EPS to jump 57% when the outlook is "much more challenging". They suggest there will be some growth due to an acquisition however acquisition EPS growth is the lowest quality and you really shouldn't pay a high multiple for it.

If you are valuing the business on an ex-organic-growth multiple on 12.8p EPS you'd probably call the current price slightly overvalued. To believe that it is undervalued you need to have a good idea of where future organic growth is going to come from despite the much more challenging outlook. Personally to invest here I'd want a much bigger margin of safety from either a much lower share price or a clear and believable strategy for organic growth from the company.

Book: Excellent Investing: How to Build a Winning Portfolio
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hayashi22 27th Jan '15 9 of 13

Sinclair IS is also 'up for sale' potentially so may have some bid premium in the price. On the other hand it is more likely that any serious offers would be higher than the current price. All IMHO.

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Camtab 27th Jan '15 10 of 13

dangersimpson that's a very good point and i appreciate you taking the time to make it. I was being a bit lazy.

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janebolacha 27th Jan '15 11 of 13

Paul, maybe the R&D expenditure is written off because it's to be a recurrent feature of BMK's business model?

From the BMK Chairman's statement:

"Your company has had a busy and productive year and I am pleased to be able to present this inaugural report and accounts as a public entity. Benchmark has exacting but achievable strategic ambitions within a substantial global market for animal health products and services. Whilst there is a long way to go for the business, major steps have been taken since the IPO in December 2013 to deliver these objectives both in terms of the products and services that Benchmark is bringing to market but also in the judicious acquisition of businesses and technologies that complement the Company's existing operations.

The various Executive Director's reports contained further in this document will provide you with detailed explanations of the strategic, operating and financial performance of your company during the year under review and so I will confine myself to reporting on the significant highlights and provide shareholders with an insight into the Company's tactical rationale.

An important component in understanding Benchmark's long term objectives is to note how the Income Statement is divided into Investing Activities and Trading Activities. The Investing Activities category reflects how the Group's financial resources are devoted to developing and expanding the pipeline of proprietary animal health products and services. The Trading Activities category reflects how these products and services, once fully developed, are performing in their various markets. We are committed to investing significant resources to secure the long term trading prospects for the business and, as mentioned later in this report, our pipeline of products currently in development has an estimated revenue potential in excess of £350m. We will continue to invest significantly in this pipeline over the next few years whilst ensuring that the revenue producing divisions are prudently managed so as to achieve their growth-oriented targets."

The talk is all of the long-term opportunity with resources being poured in continually over the next few years. Maybe this role of funder appeals to some but is there not a whiff of a "story stock" about all this?

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chemistdude 31st Jan '15 12 of 13

I think afren is worth a play, just look at that book value per share. It's not investing or trading, a gamble/punt but if it turns around what a contrarian play this would be.

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chemistdude 2nd Feb '15 13 of 13

I sold my 4.5p buyin for slightly over 9p so I'm happy. What a trade! Only held for 4-5 days.

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 Are LON:AFR's fundamentals sound as an investment? Find out More »

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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