Small Cap Value Report (27 Nov 2014) - TRT, DGB, LTHM, MSI, TRK

Good afternoon! I'm gradually adjusting to Las Vegas time, hence today's report being later than usual. Can't say I'm particularly enjoying myself here - endless malls full of designer clothes & other trinkets has zero interest to me. Also the casinos simply reinforce my view that any form of fixed odds betting where the house has an edge, is a mug's game. I only really like poker, as you can pit your wits against other players. Trouble is, most poker players here look so unsavoury that I'd rather play online, and can do that anywhere! Still, it's good to experience this place, even if it will be just the once.

Anyway, onto some company results.

Transense Technologies (LON:TRT)

Share price: 4.1p (down 30% today)
No. shares: 295.7m
Market Cap: £12.1m

This company has been around for ages, so it's quite a stale story. It looked to be getting somewhere with its tyre pressure monitoring technology, but checking the archive I last reported on it here on 13 Jun 2014 when there was a mild profit warning.

Profit warning - they've warned again today, with contract delays being the culprit. I'm wary of contract delays, as if a product is really good, customers tend to just buy it. Contract delays can mean the customer isn't going to buy it, but just hasn't got round to telling the vendor yet.

My opinion - I've never looked into the products or markets in any detail with this company, but one has to wonder after so many years trying to commercialise this technology, whether there's really much appetite for it?

The forecast break into profit this year & strong profit growth next year must be increasingly questionable. That said, the market cap has adjusted down to reflect that, and is now only £12.1m, which could end up looking cheap if big orders do start rolling in.

One would need to keep a close eye on the cash position here. The company said it had adequate cash in Jun 2014, but I wonder if it will need to raise more next year? The number of shares in issue has gone up every year for the last 6 years, so it seems to be a continual fund-raiser, and at some point the appetite to keep putting in more money might dry up?

A bit too speculative for me.

Digital Barriers (LON:DGB)

Share price: 42.8p
No. shares: 64.6m
Market Cap: £27.6m

I've been very sceptical about this jam tomorrow technology company, and rightly so, as it's been a serial disappointer.

Interim results - are absolutely terrible. This company always talks up its performance in trading statements, but when you see the figures, it's apparent that the company is heavily loss-making, and worse still, is burning through cash like there's no tomorrow.

At the current rate of cash burn, they'll be skint by spring 2015. So another Placing is a virtual certainty, which means more dilution for existing holders, and new shares might be issued at a discount, if there is little Institutional interest in another Placing. So private investors just have to watch as their investment withers away. Why take that risk, on the off-chance that the company might improve its performance?

Outlook - this is typically upbeat, saying that the sales pipeline is strong, and that they expect to meet forecasts for the year, but they also say this could be affected by contract delays.

My opinion - Given that broker forecasts indicate breakeven or profits in H2, my best guess is that they are likely to warn on profits again, and then need a discounted Placing to stay afloat. So a bargepole job for me, as it has been from day 1. Jam tomorrow shares hardly ever perform according to plan. There are nearly always delays & unexpected fundraisings needed, so the early investors usually see a dismal result. It amazes me that people still queue up to invest in story stocks though.

James Latham (LON:LTHM)

Share price: 520p
No. shares: 19.4m
Market Cap: £100.9m

Interim results - to 30 Sep 2014 are published today, and look good to me.

EPS has risen from 16.9p last year to 20.5p this year. You have to be a bit careful when looking at the full year figures, as last year included a one-off pensions credit, so the adjusted full year EPS was 36.9p, i.e. 20p EPS in H2.

If we assume a similar uplift to EPS in H2 of this year, as happened in H1, then I make that a guesstimate of c.24p EPS for H2, giving almost 45p full year EPS for this year. That compares very favourably with broker forecast of 37.3p, so I reckon brokers will be upgrading their forecasts for this year after today's interims.

Valuation - if my figures are right, then at 520p the shares look good value, on a PER of about 11.6. Bearing in mind that LTHM also has a very good Balance Sheet, and the valuation looks better still.

Outlook - the company says it's trading "comfortably in line" with market expectations, which I think is code for being ahead.

My opinion - I've always liked this company. It's now trading strongly, and on a modest valuation too, so it looks appealing. The only thing to bear in mind is that it's in a cyclical upswing (due presumably to the buoyant new build housing market), so at some point profits will probably fall back down again. Therefore it's important not to overpay in the good years.

The shares are illiquid, so it's difficult to trade, but it seems to me that there could be further upside here, as the company clearly has the wind in its sails with positive trading, and the housebuilding boom looks set to be around for some time to come. DYOR as usual.

VP (LON:VP.)

An impressive set of results is published today from this equipment hire company too.

I don't have time to go through the figures in detail now, as am going out in a moment. However, the results look good, and the valuation seems reasonable. So well worth a look for readers to DYOR, in my opinion.

MS International (LON:MSI)

Interim results here look poor. The company has crashed from a £2m profit to only £0.2m operating profit in H1. I wouldn't touch this company, due to poor corporate governance - especially the grotesque management remuneration a couple of years ago - making it clear to me that this is a company which operates mainly for the benefit of Directors.

Torotrak (LON:TRK)

This company limps on, and on, and on. It amazes me that investors keep refinancing it.

Today's figures are, as always, lamentable. It made a £3.8m loss on £1.6m turnover.

In my view Torotrak has never been a viable company. It is just a research organisation, that has conspicuously failed to significantly commercialise anything to date, after about 15-20 years trying. When one project fails, they just find something else to tinker around with, and gullible investors pour in another load of money.

Who knows, one day its time might come?

Right, I have to dash. See you tomorrow afternoon.

Regards, Paul.

Of the companies mentioned today, Paul has no long or short positions.

A fund management company with which Paul is associated may hold positions in companies mentioned)