Small Cap Value Report (3 Jul 2014) - CRAW, AXS, MPOW, AGA, THT

Good morning!

Crawshaw (LON:CRAW) & fundraisings generally

If I were a shareholder here, I'd be very unhappy with a Placing that has been announced this morning. It involves the enlargement of the share capital by 36%, to raise £8.8m at 42p per share. That would have been a sensible price when the roadshow started a few weeks ago, but the share price has risen very strongly since, on the AGM announcement about accelerating the roll out of stores nationally (it's a small Northern butchers chain at the moment).

The trouble is that the share price was 54p last night, 60p the day before, and peaked at around 70p a few days before that. So doing a Placing at 42p dilutes existing holders considerably at what is now an unfavourable price.

You can see from the chart below that the Placing was probably set up in early June, then there would have been maybe a fortnight of meetings with Institutions, etc, so at first the 42p price would have seemed sensible. However, the big spike in price since mid-June has caused the problems here. Anyone who bought in that spike must be feeling very bruised now, especially as a lot of the spike was caused by the company itself putting out a bullish strategy statement in the AGM trading update. This would not have been a problem if existing holders had a chance to buy at 42p too. The additional costs of an Open Offer are not a lot, about £30k I've been told. So this could, and should have been done.

The big mistake, as we so often see with fundraisings, is that existing shareholders were completely excluded. I don't hold here, but in principle this is totally unacceptable. Unless there is a very good reason not to do so (e.g. an emergency fundraise, which this wasn't), then companies should ALWAYS allow existing shareholders to participate in a fundraising on equal terms to people taking part in the Placing. A sensible fundraising would be 50:50 between Placees and existing holders through an Open Offer.

Better still, you can do what Volex (LON:VLX) recently did, and give priority to existing holders in an open offer, and then have placees lined up to take any shares which existing holders don't want. That's the best way to do a fundraising, as it respects the pre-emption rights of shareholders, which is a core legal principle in company law.

It infuriates me the way Placings are increasingly being used with complete disregard for existing shareholders. This is wrong! Companies and their advisers should be strongly condemned by shareholders who feel put out by this - nothing will change unless we all kick up a fuss, so all existing CRAW shareholders who feel angry that they have missed out on some cheap stock at 42p in the fundraising should blast the company & its advisers.

In this case particularly, the company was raising money from a position of strength, so the company should have insisted on a substantial part of the fundraising being an Open Offer. They have really let down their existing shareholders with this deal, in my opinion.

Also I don't understand why they have raised so much money in one go? A better idea surely would have been to raise perhaps half this amount (£8.8m has been raised), which would have been ample for about 16 new shops (an almost doubling in size of the business), then on the back of that more money could have been raised at a much higher share price probably in a couple of years' time, if the roll out went well.

So a massive thumbs down for a bum deal for existing shareholders. I can understand companies wanting to get quality Institutions onto their shareholder register, so there is a role for Placings, but they should never disadvantage existing holders by letting in new shareholders at a deep discount, without giving existing holders the right to subscribe at the same price. It's just not fair otherwise.

You get the feeling, over & over again with small caps, that the City sees private investors as the cannon fodder to get the share price up, and then be diluted when a fundraising happens and the Instis are let in on the cheap. It's not good enough, and these Placing-only deals should be challenged by us, otherwise nothing will change.

If you agree with me, then do something about it by contacting companies that do Placing-only deals, and tell them that you expect any future fundraisings to included an Open Offer of at least the same amount as any Placing.

I know that companies prefer a Placing, because it gives certainty over the funds being received. However it should also match such a fundraising with an equal (or larger) Open Offer. Too many Directors forget who actually owns the business - reminder, it's the shareholders. Therefore their interests should be paramount at all times, but rarely are in my view..

Accsys Technologies (LON:AXS)

This company is commercialising a new type of processed wood, called Accoya. It looks the real deal to me - i.e. a growth company with big potential markets, a credible product that is in demand, and a realistic growth plan. It's currently loss-making, but seems to have enough cash in the bank to get through to profitability, probably.

Results for the year ended 31 Mar 2014 are out this morning, and note the company reports in Euros. It's always worth double-checking the currency, as otherwise you can end up over-paying if you accidentally value it as if the figures were sterling. Helpfully, Stockopedia converts the currency correctly when working out all the valuation measures on the StockReports here, which makes life easier, and avoids any such errors.

Turnover has grown an impressive 78% to E33.5m, although the gross profit is low at 23.3%,, and there is an underlying loss before tax of E7.5m.

It's now a pretty binary investment outcome, where they will either succeed in scaling up the business into profit, or they won't. The key element seems to be a deal with chemicals company Solvay, who I believe are close to setting up a factory to make the product under licence. So the terms of that deal, what royalties will be due, likely sales volumes, etc, are key to valuing this company.

I'm baulking a bit at the £86m market cap at E0.245 per share. The trouble is, decent growth companies are rarely cheap. So in this type of situation, a lot of research is needed. Or you can ride on the coat-tails of existing shrewd investors. Henderson, Invesco & Fidelity all hold about 5%, and seem to be generally successful in small caps from what I've seen. Tricky one - I really like the company, but am a bit put off by the valuation at the moment. Although if it works as planned, I wouldn't be at all surprised to see these shares be considerably higher in a couple of years. High risk though, as they could tank if the growth slows, and more cash is required.

MoPowered (LON:MPOW)

An announcement this morning says that the FD has left with immediate effect (which usually means has been sacked) at this car crash IPO, which has now lost almost three quarters of its 100p float price in Dec 2013.

Cash is the main concern here. They didn't raise enough when they floated, and most commentators now agree that the company floated far too early. The market cap is just under £5m now, which based on the figures reported so far is still too high in my opinion.

The company needs to deliver some sales fast, or it could be in real trouble. Investors might not be prepared to back a rescue fundraising so soon after IPO.

I am grateful to Shares magazine for pointing out that contract deferrals from H1 into H2 will also affect the full year numbers because revenues are recurring in nature (i.e. a stream of royalties), rather than one-off contract wins. So my apologies for not being aware of this point the other day, when I thought there was an apparent contradiction in the trading update on this issue. So I'm happy to correct that point here.

AGA Rangemaster (LON:AGA)

There's a reasonably solid update this morning from the famous range cooker manufacturer, here are the main bits;

Good progress for the full year is expected. Group sales and orders have continued to improve although markets remain variable. May was quiet but Junewas strong. The strength of sterling impacts us. A strengthening UK housingmarket is clearly a positive factor and this has fed through slowly intoincreases in spending on cookers.

Order intake year-to-date is up around 6% and sales are up close to 4% - the rate of increase in the second half of 2013. Fired Earth and AGA Marvel inNorth America saw order intake increases of over 10%. AGA and Rangemasterorders were up by over 6%. Waterford Stanley and Grange were significantlydown.

The Group is investing in products and marketing this year to support its growth plan.

There's no comment on performance against market expectations, so we have to just assume that they're in the right ballpark. Broker consensus is for a big rebound in EPS to 12p this calendar year, and 15p next year. So the shares look superficially cheap on a PER basis - at 150p per share that's 12.5 times this year's estimate, and just 10 times next year. Not bad for a company that will probably do well for the next 5+ years if the economic recovery continues. Also, as they sell to the relatively affluent, who are the only significant beneficiaries of economic recovery so far, then that's a positive for the company.

However, there is something bigger than an elephant in the room, there's a blue whale in the room - namely its pension scheme, which is absolutely humungous. A liability of £35.8m was shown on the 31 Dec 2013 Balance Sheet, but this is the tip of the iceberg. Look at the size of the scheme (bearing in mind that AGA's mkt cap is £108m at 150p per share):

There are lots of moving parts with pension deficits, so they can be very volatile.

Just look at the size of the movements in the pension fund liabilities that are shown in the sensitivities analysis from the 2013 Annual Report. These would scare me witless if I were a shareholder in this company. The pension scheme could easily bring down the whole company if something unexpected happens:

I can't find what the current overpayments are on the pension deficit, but a year or so ago it was effectively going to hoover up all the company's profits for the next 7 or 8 years. That might have changed now, I don't know, but it's a massive risk that could resurface. For that reason I consider the shares uninvestable.

Thorntons (LON:THT)

There's a Q4 trading update from Thorntons today. I like their clear quarterly reporting, all companies should report on trading on a quarterly basis, rather than the rather irregular & ad hoc basis that we currently have. There can be long gaps between reporting, and why have a trading update whenever the AGM happens to be? A more logical pattern is needed, and quarterly is the way forward in my view.

On full year trading the company says;

 The Company's UK Commercial channel returned to double-digit percentage revenue growth in Q4 and full year pre-exceptional PBT is anticipated to be in line with the market expectation of £7.1 million compared with £4.7 million (restated) last year.  The Board remains confident that its strategy for the business continues to be effective.

I find it most impressive that the company can give such a precise steer on profitability just four days after the year end date - this demonstrates excellent financial controls, which gives me confidence about the company. Again, why can't all companies do this? Admittedly it's easy for retailers, as they have instant data from the EPoS system, but even so.

I must be missing something with Thorntons, as they seem to have access to enormous bank facilities without any problems. Today it is announced that the bank facility has been renewed to Oct 2018, and has been extended to an astonishing £75m. What's more it is unsecured! The bank seem to have an extraordinary degree of confidence in the company to extend such a massive facility (relative to modest profits), and not even require any security over it. I cannot fathom that at all. It might possibly be due to the freehold property that Thorntons own - I believe it's quite a large HQ site, which might be worth more than book value, does anyone know?

There was a technical breach of the Articles of Association which is being corrected in a General Meeting. This seems neither here not there to me, so it's not something to worry about in my view. Just a technicality.

These shares look reasonable value to me, if you disregard the pension deficit & the debt. With my trader's hat on, it looks to me as if the shares might go higher from here, but it's not something I would put into my long term portfolio due to the weak finances. There are also question marks over whether the brand is being cheapened by selling increasingly cheaply through supermarkets? That said, I was given a box of Thorntons chocolate by family as part of my birthday celebrations, and we demolished the two layer box in under five minutes, with everyone agreeing that they were rather good!

I shall leave it there for today. See you again tomorrow! US markets are closed tomorrow I think, so it's likely to be a quiet day in the UK too, with lots of people taking the day off to enjoy the good weather too probably!

Regards, Paul.

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