Small Cap Value Report (28 Jun) - QPP, CKN, WATR, TAN, STAF

28th Jun '13 by Paul Scott

12 comments 23987 reads

Good morning! Firstly, just to let you know that the Webinar recorded by Ed and me on Wednesday, which proved popular on the day (it was full to capacity all the way through!) is now also available as a recording. Please click here to listen to that (the links are on bottom RHS of the target page). The customer feedback has been great, so we'll be doing more of these, and Ed & I thoroughly enjoyed making it too, although bear in mind it was my first ever attempt at anything like this, so it has a few rough edges, and the sound was dropping out on the live version (should be OK in the recording).

It's been a while since I last mentioned Quindell Portfolio (LON:QPP), the controversial insurance outsourcing company. Their AGM statement and trading update today obviously sounds ultra-bullish, as does everything they issue, so that's a given. On the face of it, things sound great - Q2 EBITDA is expected to be at least that of Q1, which was in excess of £25m. They also say that cash collection is according to plan.

So perhaps the bulls are right on this one? I remain highly sceptical, for several reasons - mainly that nobody has come up with an even vaguely credible explanation as to where this £100m p.a. EBITDA is actually coming from?! Quindell acquired a load of small, and not very profitable businesses, and we are now expected to believe that the combination has somehow miraculously started generating vast profits. How?

Also, they misled the market about a fundraising that was actually a complicated derivative deal, still not adequately explained. I don't like companies that put out misleading information, so for me that's a massive red flag. Finally, this sector has a long history of companies growing rapidly by acquisition, reporting huge profits, which are never collected in as cash, but instead pile up in a growing debtor book that eventually has to be written off. Whilst Quindell say that they have excellent debtor control, I bet that their results will show big increases in debtors every time.

Will be interesting to see how it pans out, but this is not a share that interests me, and I have never been either long or short of it, and very much doubt I ever will. There…

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Funnymoney

28th Jun '13

This comment has been moderated

steamy001

Paul Scott

bsharman

Morning Paul. Did you meet the management of VNET a couple of weeks ago? Any feedback would be great. I'm not currently a holder but am considering a small punt... Also how was the VLK presentation at the meeting on Wednesday? Did they speak about how they plan to increase revenues and profits as indicated in their bullish statements. Really enjoy reading your blog each day - and stockopedia has revolutionised my investing. Just wish I had signed up years ago!!!

Morning Bsharman,

Update on Vianet (LON:VNET) - I emailed & rang the company a couple of times, and was ignored. However, their NOMAD are trying to fix up a meeting, so hopefully we might make some progress. Why it has to be so painful, I don't know - normally Directors just take my calls without any problem.

Update on Vislink (LON:VLK) - I've seen them twice recently, the EXec Chairman has made the effort to spend time explaining the company with private investor groups, which is much appreciated. I really like it, at just £36m market cap, with £8m net cash in the bank, it's a lot of business for the money.
They have plenty of new products launching, and are global market leader in their niche of outside broadcasting mobile camera equipment. They are effectively in year 2 of a 3 year turnaround, and if they hit targets then I reckon the valuation should be 60-80p perhaps by 2015. In my opinion risk/reward is very good here. If they disappoint, then the downside might be say 20-30% on the current share price. If they do well, then the upside is considerable, and they sound on track with a good sales pipeline, although visibility is only about 3 months, and they recognise the need for recurring revenues. So for me, as a 2 year hold, it fits my investing criteria very well. Also, I really like the fact that they spend 10% of turnover on R& D - this should maintain/extend their competitive edge.

4.2% dividend yield also a big plus.

I will try to do a write-up on it for ShareSoc's magazine this month.

Cheers, Paul.

tads

re. Vianet. Their PR is simply disgusting. I did, however, get an e-mail from the chairman telling me what nice people they are!

Cheers

Mike

MrContrarian

Paul,
You are doing more for Vianet's profile among retail investors than their paid PR Abchurch Communications. What an irony that they don't take your call.
Perhaps Abchurch Communications could advise their clients not to antagonise investors who write favourable and well-written commentary, for free! Or are they conflicted in that respect?
I hold Vianet but this arrogance from the board makes me consider selling. In fact I would but the spread is too wide at present. Quoted 73.3 = 2.3% below mid.

Cisk

Very interesting to hear the comments about vianet's PR. I did buy a few, then sold out after the profits warning. Regardless of what you think about a business, how the company react and deal with inquiries is now a metric I use if I can.

They should be shamed if they can't even be bothered to communicate adequately with shareholders.

As a good example of communication, I've held Melrose Industries (LON:MRO) for a number of years, and have followed the BOD since their Wassall days. Last year I emailed David Roper (Executive Vice Chairman), and he replied back within half a day - and that's from the 2nd in command of a ftse100 company (which is just one of the reasons I'm happy to accumulate Melrose shares).

If only other, smaller companies could follow suit...

jraitt

Paul,
As the guy who asked you about selling and perhaps how to use Stockopedia to judge when. You may remember I preferred your method of selling too early rather than too late. From a holder in IOF!
Cheers
John

cig

Isn't their behaviour consistent with their line of business though? Maybe they have trouble with the idea of communicating with people who are not properly flow monitored. :-)

Note: I moderated posts at the start of the thread at the request, and by agreement of all parties concerned.

Regards, Paul.

marben100

29th Jun '13

Hi Paul,

IIf you find Clarkson (LON:CKN) interesting, you might like comparing against their competitor, Braemar Shipping Services (LON:BMS) which I hold. Like Clarkson: cash in the bank, no debt, strongly cashflow generative... but on a P/E of just 10.7 and paying a 6%+ divvy. Divvy cover vs earnings is a bit light but decently covered by cashflow and with a comfy cash reserve.

Profits at both busineses are under a bit of pressure because shipping rates are historically low. A significant element of revenues is commission on sales & chartering of vessels, so though volumes are good, the levels of commissions earned decline dramatically when shipping rates are low. The reason for low rates is historic overbuilidng of ships, leading to a glut. It will probably take some years for this situation to unwind, but when it does, profits can be expected to soar. Braemar have mitigated this by diversifying into providing maritime "technical services" which has generated good profits recently, offsetting declines in traditional shipbroking.

I looked into the difference between cashflow and earnings. This year's cashflow was exceptionally strong, due to timing of receipts (weaker than usual last year, for the same reason). However, another important reason for the stronger cashflow than earnings is amortisation of customer relationships and order books from past acquisitions. I observe that these have been almost fully amortised now (the remaining balance is less than the amount of amortisation booked last year). Therefore, all else being equal, this amortisation cost will drop out in the next year or two, leading to a stronger reported, unadjusted, earnings number - and, hence, better divvy cover.

Braemar's SP has come off a bit lately, going xd and suffering from general market weakness. I will look to add to my holding if it falls much further.

Cheers,

Mark

Small Cap Value Report (28 Jun) - QPP, CKN, WATR, TAN, STAF

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Paul Scott

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