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

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 are numerous red flags here, but so far the bulls are carrying the day, with the price having recovered somewhat to 11.25p. If the business really is as good as stated, then the £463m market cap is cheap, as the forward PER is only 4.4. Personally though, I don't believe the numbers, and there are plenty of other pebbles on the beach, so I don't need to invest in this.

 

 

The FTSE 100 futures are pointing towards a flat open, up about 2 points.

It will be interesting to see what happens with Gold. It's really collapsed in price recently, from what I always thought was a bubble. It made sense that Gold should rise in price due to worries over the impact of QE, on devaluing currencies, but Gold rising long term from $250 to $1,900 was madness. How does 3% p.a. inflation in Western economies justify that kind of move in price of a so-called safe haven? Gold was pricing in hyper-inflation that hadn't happened.

Why didn't you say that at the time then, people might ask? Well, because it made me look a complete fool, because the price kept going up, so after a while I just kept my thoughts to myself, or just made disapproving murmuring sounds when friends ranted on about how bullish they were on gold.

It's a bit like the credit crunch. We all knew that we were in an out-of-control credit boom, but because it went on for so long & everyone was making money, we stopped questioning it. I remember Simon Cawkwell saying to me c.2003, "You wait to see what happens when all this credit is withdrawn! Just you wait! It will be withdrawn, I just don't know when!", and my goodness he was certainly right.

 

 

Clarkson (LON:CKN) is a share I've always liked whenever reviewing the numbers, but unfortunately didn't buy any. They have risen about 50% this year to date. They issue an in line trading statement today, so all going smoothly there. The forward PER of 16.7 based on consensus forecast EPS looks a tad warm to me, although the company does have lots of cash (which justifies a higher PER, as the cash could be deployed in making acquisitions which would boost earnings).

The dividend yield is reasonable at 3.3% (consensus forecast). The valuation doesn't look attractive to me, and I seem to recall is somewhat dependent on the vagaries of the Baltic Dry pricing index for shipping rates.

 

 

Today's RNS list is so heavily dominated by resource stocks, that it makes me think if the long-term commodities boom really is over, then many of these small, speculative mining shares are likely to de-List. It cannot come quickly enough for my liking, as there's so much background noise, it's difficult to find the important announcements. I regularly badger Stockopedia about coming up with a filter system for real time news, which hopefully is in the pipeline for the next 12 months.

 

 

I had a quick look at results from minnow Water Intelligence (LON:WATR). I don't normally go below about £10m market cap, as the liquidity gets ridiculous below that sort of level, and the risk of a de-Listing becomes too high. But this £2.5m micro cap has today issued results that look quite interesting. They have some product or service for detecting water leaks.

After years of losses, they have swung into a $762k operating profit, and indicate a positive "start" (errr, we're half way through actually!) to 2013. Of the $6.7m turnover, $4.4m is described as Royalty Income, so I'm wondering if that is recurring? If it is, and is growing, then this could get quite interesting.

There seems to be about $2.5m in net debt, so not a good balance sheet, but if it can maintain/grow profits, then this could turn into a nice business. Worth a look anyway, for people who like tiny companies, I probably won't bother with it myself, but just thought I'd pass on the idea for anyone who wants to follow up.

 

 

Tanfield (LON:TAN) results look grim, and they've run out of cash again. I don't understand why people are prepared to keep pouring money into this, when it's very difficult to see how they will ever turn it into a viable business. An EBITDA loss of £13.5m on turnover of £45.1m just doesn't look like it's a salvageable situation to my mind. Although they do say that there have been numerous expressions of interest in the business. Good luck to them anyway.

 

 

Staffline (LON:STAF) put out an interesting update on their division which operates the Govt's welfare to work scheme in the Midlands. They are one of 40 such providers nationally, and have been ranked no.1 for performance. So that should mean the work continues & should grow, I imagine.

It's back-ended profits-wise, because payments from the Govt are triggered after someone has been trained & placed in a new job, and it depends on how long they stay in the job. Having sold Staffline (LON:STAF) at 300p for a quick 40% gain, I can't bring myself to buy back in at 413p, although the shares still actually look good value - on a fwd PER of 9.6, and a dividend yield of 2.3%.

Somebody asked me recently if I would write something about when to sell shares, and I quipped, "don't ask me, I'm the last person you should ask, I always sell too soon!"

 

 

That's it for today, as almost all the other announcements today are either from foreign or resource sector stocks, which I don't cover.

Have a super weekend, looks like we might get some sunshine too! Back on Monday from 8 am onwards.

Cheers, Paul.

(of the companies mentioned today, Paul has no long or short positions)