Small Cap Value Report (3 Jul) - SID, BEG, SDM, OFF, ITM

3rd Jul '13 by Paul Scott

10 comments 15034 reads

Good morning. Apologies for the technical gremlins this morning, hence am running a bit late. So here's a quick rattle through the announcements & market events which have caught my eye in the small cap space today.

There has not as yet been an update from Silverdell (LON:SID) on what has happened there, after yesterday morning's suspension of the shares. It's too early to pass judgment on the situation or the Directors, because we do not yet know the full facts. I'm amazed at some of the comments on bulletin boards & elsewhere - how can people be so emphatic when they don't have the full facts?

Although what I do know, from a reliable source close to the company, is that a further announcement will be issued shortly, probably some time today. It appears that there has been some sort of disastrous sequence of events concerning a Winding-Up Petition for a fairly trivial amount of money, which appears to have triggered much bigger problems with the Bank and/or the Court in some way, and has resulted in a subsidiary of Silverdell, Kitson's being put into Administration.

We don't know what will happen next, but it sounds to me as if there's some chance that the situation could be salvageable. We'll have to wait & see what their next announcement says.

Next I've been looking at results from Begbies Traynor (LON:BEG) for the year ended 30 April 2013. They seem to have come in slightly below broker consensus, but not enough to make much difference. Revenue fell from £57.7m last year to £51.1m, so that's an 11.4% drop, and the third consecutive year of declining turnover and profits.

Adjusted EPS came in at 5.3p (vs 6.0p last year), slightly below forecast of 5.45p.

As the business has shrunk, due to continued subdued conditions in the insolvency sector, each year there have been significant exceptional costs, mainly associated with redundancies & office closures. When these costs happen every year, you have to question at what point do they stop being exceptional?

On the positive side, the 1.6p final dividend has been maintained, which gives 2.2p for the full year (same as last year), yielding a thumping 7.2% at the current 30.75p mid price. In my…

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Gostevie

3rd Jul '13

Hi Paul,

I hold BEG and agree with what you have written. I just have one small moan about them though. The dividend was announced today but doesn't go ex-divi until 9th October and the divi isn't paid until 7th November - four months hence. Only a small thing but four months does seem a bit excessive.

Steve

Fangorn

An old City friend is visiting me in Brighton, for our annual exceedingly boozy lunch. So nobody is likely to get any sense out of me for the rest of today

Good man. Hope you both have a cracking brunch. Day looks dreary,and with US closed tomorrow, sounds as if your time will be well spent . :)

SevenPillars

Paul

I think you are perhaps being a little too kind to Silverdell. True, the full facts are not known, but especially for anyone holding these shares (I don't own any) what happened yesterday was a total shot out of the blue. Of course, in the absence of facts there will then be speculation and a degree of anger, the usual emotion that rears its ugly head when people see their money being lost.

In this case it would appear the speculation that the problem may be to do with the winding up order of Kitson and what followed may well be the responsible fact as you also suggest above. What is unknown is the series of events that lead to this, who knew what, who did or didn't do what they should have done. The company had maintained it's bullish line through all this and many investors believed everything was hunky dory. The only "known" issue was the rumour of a cash call, denied by the company who made it clear it could fund its growth up to 15%

It was interesting to note that one of the biggest critics of the company yesterday also happened to tip it as a "nifty" buy about a month ago. I believe that the IC also tipped it recently as well, so quite a few people who you would expect to have done their homework seemed to have bought into the undervalued case for the company. However, I doubt whether anybody would have done enough research to imagine that the company could be suspended over a "trivial amount of money" that resulted in a winding up order for part of it.

And there's the problem for investors in this company who may now face losing everything, or, if and when the suspension is lifted a much reduced share price. At the very least it looks like a cock-up of gigantic proportions, but in the absence of a company statement and until the facts of what happened and when are known the investor is in the dark and that will result in speculation based on what is in the public domain. Hopefully the company will come clean on what happened, when and if they survive maybe the market will take pity on them. However, I think many Silverdell investors have resigned themselves to what is going to happen.

DarwenLad

Paul, Glad to hear your reassuring views on Begbies. Nothing much wrong with the figures given the continued surprisingly weak insolvency market. Dividend held, debt down, and margins and market share also maintained in an extremely tough operating environment.

My one concern is the more than one fifth increase in effective financing cost of BEG’s new banking facilities from 4.6% to around 5.6%. It is said to reflect “current market rates” but seems a rather large increase.

Hard to see the circumstances in which the UK insolvency market could face another substantial contraction from its current depressed levels. Given BEG’s success in cutting its operating costs to match its reduced revenue base, 2012/13 should mark a low point in its profit cycle.

Unless I am missing something BEG’s current valuation ( a historical p/e of under 6 and a yield of 7%) looks badly out of kilter with the rest of the market.

Now that Caledonia IT has dumped its sizeable stake over the last year, it is surprising that there are no well known institutional investors with sizeable stakes on Begbies's share register if the shares are such a bargain. Is this not the sort of share which should appeal to small cap income funds?

The continued absence of blue chip institutional investors, together with the weakness of the Begbies board (just one really independent NED and he used to work for Caledonia) makes me a tad wary about increasing my stake in what looks like a hopelessly undervalued share.

Perhaps Rick Traynor, who owns 29%, and his managers, should think of taking the company private if the market continues to refuse to rate this company more highly?

That said it was a real relief that Begbies held its dividend. It was only last year that Morson, another "undervalued" Manchester company with a big family shareholding, scrapped its dividend because of the weakness of its market.

Within months the Mason family had taken their company private at 50p a share - a more than two thirds discount to Morson's 160p IPO price blaming the markets' failure to rate the company properly.

It really put me off investing in small caps with sizeable family stakes.

Cisk

Paul, of course you're completely entitled to your own opinion - however my view hasn't changed in 24 hours:

"Whilst we don't yet know what actually happened; a charitable view is that it looks like there was a fundamental misunderstanding of what it takes to run a plc, and what should be disclosed to the market and when; a less charitable view might think that the directors be hung out to dry - fined, barred from directorships, imprisoned etc".

If you're correct and it was an admin mistake - then heads need to roll. Obviously if it's worse, then heads will roll anyway as the company will no longer be.

The BOD spectacularly mishandled the recent Edison note - implying that a rights issue was in the offing, and then they later denied it. This is from a sponsored report! Add this behaviour to the mess yesterday, and it all adds up to a Board who are out of their depth - either inexperienced or not in control of events in their company. It's such a shame as I believe there is a good company underneath, with excellent prospects.

Maybe Babcock International (LON:BAB) will buy them - they will have deep enough pockets to fund the growth.

However this mess leaves a nasty smell all round - and I notice that the spotlight has been turned on the 'Mello' group on the ADVFN BB and their recent meeting with management. It just goes to show how important doing your own research is (something I know you always advocate).

This episode has also made me think of what the ideal number of stocks is to have in your portfolio.

Too small and you never get to know any company well enough - but then a single failure doesn't wipe out a significant part of the portfolio. Too many - well the risk is spread but it's impossible to keep track of so many holdings.

Would welcome any views on what people find is the ideal number of companies to be in a portfolio...

Vis Begbies,

Perhaps their insolvency biz might be looking up if this article holds any weight...

"Number of businesses with serious cash flow problems hits new high"
Although the number of ‘zombie businesses’ – those that can only pay the interest on their debts – has fallen over the last year from 146,000 to 108,000, the rise in businesses with acute cash flow problems indicates that the outlook for struggling businesses is deteriorating.

http://www.creditman.biz/uk/members/news-view.asp?newsviewID=18277&id=1&mylocation=News&chksrc=NNow4251

Beginner

Thank you for today Paul, and I hope you have a good lunch. Regarding Silverdell (LON:SID), it is perhaps worth comparing the situation with Vianet (LON:VNET). The former seem to know something bad is in the offing, do nothing, say nothing, and seem to be rather reticent about the whole thing. Result: share price and sentiment crash (probably). The latter have a section in a statement where they choose to highlight something that MAY happen, and seem to be genuinely very circumspect and open about the possibilities. Result: share price and sentiment crash (definitely). I think this just shows companies can be on a hiding to nothing, no matter how they handle matters. The market is unforgiving under all circumstances. I hold both these, and prefer the Vianet (LON:VNET) approach myself. I knew about the case against Kitsons, but bought in anyway. The amounts involved seemed to me to be probably small, as the supplier is not a big concern. Anyway, you live and learn (said the Chariot, Zytronic, Vianet, Silverdell, and Goldplat owning newby!!!!!!!!!!!!!!!!!)

That brings me to Cisk's question about the size of a portfolio. Mine has grown very quickly to be an acknowledgedly ungainly twenty strong. But this is because I buy VERY small amounts, adding later if things pan out well, or letting them sit if things go badly. This means I am rapidly getting stuck with remnants that I do not want to sell because they will show an obscene loss!!! In truth I think less than ten companies, well spread, is plenty.Good luck to one and all!

V4Value

In his great book, "Fooling Some of the People...", David Einhorn quotes Joel Greenblatt in "You Can Be a Stock Market Genius", "...After purchasing six or eight stocks in different industries, the benefit of adding even more stocks to your portfolio in an effort to decrease risk is small." Non market risk can be reduced 81% with 8 stocks, 93% with 16 stocks, 96% with 32 stocks, and 99% with 500 stocks. The point being, the marginal benefit reduces with an increase. I would suggest 8-12, based on my readings. There is clearly a trade off between the amount of research you can perform given the time you have. Research suggests the average is 2 stocks!! Don't be average!

Monty9

4th Jul '13

In my active (i.e. punting) portfolio I aim for 8 and usually have about 12 as I tend to fail to sell off losers. SIPP is a bit different as I am trying to preserve value and generate income. Punting porty has significantly outperformed SIPP this year as you might expect.

Begbies is a core holding in my SIPP (thanks for the write up Paul). Should fly when interest rates finally go up. Meantime management seem to be running a very tight ship and with shareholders' interests in mind.

Small Cap Value Report (3 Jul) - SID, BEG, SDM, OFF, ITM

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Paul Scott

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