Small Cap Value Report (28 Sep 2015) - PEN, SDY

Good morning!

I'm writing this from the 21st floor of the Hilton Hotel in Warsaw (a superb hotel by the way - highly recommended). Just a flying visit, to see extended family, and check out the branches of DP Poland (LON:DPP) (there's one over the road). This certainly seems like an up & coming city, with shiny new office buildings popping up all over the place. The old town is lovely, and looked authentic, even though I suppose most of it would have been destroyed during the war.

I have to check out fairly soon, so this report will unfortunately be somewhat abbreviated.

Pennant International (LON:PEN)

Share price: 64p (down 18%)
No. shares: 26.5m
Market cap: £17.0m

Contract win - news of a £7m "landmark contract" for this aerospace simulators company. So why has the share price gone down, not up? The company has put out results too:

Interim results to 30 Jun 2015 - the figures look bad. Turnover is down heavily, and the company has swung from a profit last year in H1 to a loss of £0.75m.

Outlook - the Directorspeak is unusual, but sets out the situation clearly;

"Pennant experienced challenging markets in the six months to 30 June 2015. The anticipated second half weighting, highlighted last March is now likely to be significant. Contract awards have been delayed by the weakness of the oil price, election uncertainty in the UK and the complexities of public sector procurement.The outturn for the full year will depend on the timing of anticipated contracts with an aggregate tender value in excess of £15m, which are expected shortly.  The exact timing of the awards will result in an outcome for the year as a whole which could either be in line or significantly below market expectations.  Notwithstanding the outturn for 2015, prospects for 2016 remain very positive and underpin the Directors' decision to increase the interim dividend payment."

It's difficult to know what to make of that! How can we value the company, if even they don't know what the results are going to be like? This just reinforces the inherent lumpiness, and hence unpredictability of this type of company.

Dividends - it's a surprising decision to increase the interim dividend from 0.9p to 1.0p, which the company says is due to their confidence in the prospects for 2016.

Balance sheet - looks strong, but Receivables is strikingly high, at about the same figure are the whole of H1's turnover. Turning this figure into cash is key.

My opinion - this share looks potentially interesting, but you would need a strong constitution to buy now, given the likelihood of another profit warning in the next few months, if they are not able to conclude the big contracts in the pipeline. Dividends are good, but ultimately have to be covered by earnings in the long run.

Overall, I'm probably neutral on this share at the moment.

Speedy Hire (LON:SDY)

Share price: 32p (down 14%)
No. shares: 522.0m
Market cap: £167.0m

Profit warning - not really a surprise this one, since the last profit warning made it clear that the company had big, and ongoing problems. Today it says;

Whilst we have now instituted the remedial actions referred to above, the resolution of the legacy issues previously identified is taking longer than originally anticipated. Current year core hire revenue in the UK and Ireland is now expected to be c.10% below the prior year. Accordingly the Board anticipates that profitability will be weighted towards the second half of the year and materially below current market expectations.

Net debt of £104.4m the group is operating "well within its borrowing facilities of £180m, which expire in September 2019" 

My opinion - it's difficult to know what to make of this company. From what I can tell, management controls just seem to have broken down, so who knows what other horrors might be lurking under the surface? The big difference between this under-performing equipment hire company, and competitor HSS Hire (LON:HSS) which also warned on profits at the same time a few months ago, is that Speedy Hire has a good strong balance sheet. That is probably why the shares are only down 14%, on another big profit warning ("materially below current market expectations").

So, with the balance sheet now providing strong support, the shares could be getting close to the low point? If I am tempted to bottom-fish, it's only with companies that have strong balance sheets, as they tend to recover, sooner or later. Whereas companies with weak balance sheets that run into trouble, can end up going bust, or being forced by their banks to dilute existing shareholders in an emergency fundraising.

Speedy Hire is starting to look interesting, as a recovery situation, although it doesn't sound as if all the bad news is out yet perhaps?

Sorry, have to dash now. I'm moving hotels, to the Raddison Blue, as it wasn't possible to get consecutive nights at the Hilton - bit of a nuisance.

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 share mentioned.

NB. These reports are just Paul's personal opinions only, and never constitute advice nor recommendations. Please DYOR)