Small Cap Value Report (27 May 2016) - RTN, NGR, CFYN

Good morning!

Several people have pointed out to me that a Director buy at Restaurant (LON:RTN) (announced today) could indicate that the company may not be in bid talks. I've decided to play it safe, and sell half my shares. That's locked in a smashing 31% gain from when I flagged up this share as good value at the UK Investor Show just 4 weeks ago. Why can't they all work out like that?!

Also, someone else spooked me a little in the comments here, saying that the price could crash again if they put out another profit warning. I worked out how much money I'd lose if the shares tanked by say 30% (as has happened in the past). The resulting figure frightened me, which is a sure sign that the position is too big. Hence another reason to sell half.

It's a great discipline to look at each position in turn, in your portfolio. Then work out how much you would lose if a 30% fall occurred due to a profit warning. If that figure is horrifying, then it's probably best to trim the position size somewhat, to reach a more comfortable figure. It depends on your conviction on the company though. Smaller companies often hit bumps in the road, it's the nature of things. So panic selling on every profit warning wouldn't get you very far.

I had an enjoyable afternoon in the City yesterday, and ended up at a Mayfair watering hole, chatting about shares with some experts (brokers & PE guys). A lot of interesting discussions were had. One chap caused amusement by pointing out that the market cap of Fevertree Drinks (LON:FEVR), the purveyor of premium tonic water, is now greater than Enterprise Inns (ETI)  and Punch Taverns (LON:PUB) combined! At some point FEVR is probably going to make a cracking short.

There are hardly any results or trading updates today in my universe of about 500 stocks. I've had a quick look at results from serial disappointer NATURE (LON:NGR) which is the biggest % faller today. It's down 24% to 5.6p, for a market cap of only £4.6m.

The company has reported a loss for 2015, but says it has restructured, so makes more positive noises about "turning the corner", and "being well positioned". Talk is cheap.

I've not seen anything to indicate that this is a viable business.

A particularly annoying thing about this company's accounts is that it wrongly describes gross profit as "operating profit" - see below. This is just plain wrong! If the FD doesn't know the difference between gross profit and operating profit, then no wonder the shares have done so badly!

Balance sheet - will it go bust? That depends on whether creditors are happy to continue supporting the business. Bank debt/term loans totals about £2.8m, not a good position for a loss-making company. It depends on the resale value of the £5.9m plant vessels & equipment. The bank may be happy with the security of those assets, I don't know. That's a key question to get an answer to though, if you're bold enough to hold this share.

My opinion - it's a special situation which would require a lot of work to ascertain if there is value here or not. Based on past performance, I certainly wouldn't be willing to give it the benefit of the doubt.

Caffyns (LON:CFYN)

Share price: 580p (up 1.8% today)
No. shares: 2.76m
Market cap: £16.0m

Results, y/e 31 Mar 2016 - the figures from this small chain of car dealers, look pretty good. The shares look strikingly cheap, but that's been the case for years now. The market just doesn't seem to like the shareholding structure (it's family controlled).

Underlying EPS rose 23% to 96.4p. So the PER is only 6.0.

The dividend yield is 3.75%, and it's 4-times covered.

There's a valuable property portfolio, which is said to be worth more than book value:

Property portfolio revalued at 31 March 2016: £9.5m surplus (not included in accounts)

There's a pension deficit of £5.0m, requiring overpayments of £300k p.a. plus inflation.

My opinion - I've owned this share before, and it's rather frustrating because it doesn't seem to do anything. You get a divi every now and then.

I panic sold my shares when the VW emissions scandal broke - as about half Caffyn's dealers seemed to be VAG outlets. I'm considering buying back a small amount of them, as there's a little cash burning a hole in my SIPP's pocket. Trouble is, it's a very thinly traded share, so you can be really stung for a huge bid/offer spread.

I was discussing this issue with my broker last night. He said that the quoted prices on micro caps are often an illusion. So often a MM will only be willing to buy a few hundred quids' worth of shares, and if you try to sell in any greater size, he'll quote you a price way below the market price.

So is it worth getting involved with micro caps? Generally I think not.

Speaking to my broker, there's a seller at 604p. I'm not prepared to pay that, given that the bid is 575p - the spread is just too wide at 4.8%. So you're throwing away more than your first years' divis just in the bid/offer spread.

That's it for today - there's nothing else of interest on the RNS.

Have a super long weekend!

Regards, Paul.

(usual disclaimers apply)