Small Cap Value Report (3 July 2017) - PLA, QTX, FRP, TRAK

3rd Jul '17 by Graham Neary

12 comments 12605 reads

Morning folks,

Before getting into some updates, I thought I'd point out there was a really high-quality discussion in the thread for Friday's report, with a lot of comments on Game Digital (LON:GMD).

I'd particularly point out comments by Paul (who has a long position) and bestace.

I'm planning to update c. four stories by lunchtime.

Cheers

Graham

Plastics Capital (LON:PLA)

Share price: 115.5p (-3.3%)
No of shares: 38.9 million
Market Cap: £45 million

Final Results

Results for the year ended in March from this niche plastics manufacturer.

Plastics raised net £3.5 million at 117p recently, and suspended its dividends.

Paul and I have mostly been sceptical about this share, so perhaps I shouldn't dwell on it. Briefly:

As you can see, underlying EPS is growing at a much slower rate than EBITDA and revenue, and that underlying measure involves quite a few adjustments.

The "like-for-like organic growth" reported by the company is 6.7%, about the same as underlying EPS growth.

It's a big exporter (45% of sales) and is set to benefit from the expiry of currency hedges.

Subsidiaries are classified by two divisions: Industrial and Films (plastic films!).

Of these, Industrial has produced the far more interesting growth rates this year: 27% organic revenue growth across the entire division, or 16.5% at constant currencies. Meanwhile, Films was up less than 2%.

Capital allocation for the year is summarised as follows:

In total, therefore we have spent approximately £6.7 million in these investment areas [GN note: capex, acquisitions and integration] compared to the £4 million estimated 12 months ago. We also spent £0.4 million to restructure and relocate of Chinese operations. Finally we paid £1.1 million out in dividends. All of this amounts to a total of £8.2 million and was funded by free cash flow of £3.7 million and an increase in net debt of £4.5 million.

I don't like being a perma-bear but I just can't get interested in a company which has the specific goal of doubling EBITDA (this goal being linked to management share options).

Targeting EBITDA usually means balance sheet expansion, rather than high-quality organic growth. Plastics has both raised new equity and increased its borrowings, which is perfectly consistent…

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Ramridge

3rd Jul '17

Hi Graham re. Plastics Capital (LON:PLA)
By coincidence, GrinderTrader has written a good post today deriding companies whose accounts are heavily adjusted.

Here is an extract from PLA's accounts published today.
" Earnings per share
Basic earnings per share were 1.5p compared to 3.5p in FY2016. This is based on the shares in issue of 35.5 million shares (FY2015: 35.3 million shares). Adjusted earnings per share of 11.5p increased from 10.8p in FY2016.
"

Note the huge gap between the statutory earnings and the adjusted earnings. And with a sleight of hand, a fall from 3.5p to 1.5p on a statutory basis is transformed into an increase, from 10.8p to 11.5p on an adjusted basis.

These kind of companies go straight into my personal Room 101.

brucepackard

Thanks for flagging Quartix Holdings (LON:QTX) very interesting to compare it with Trakm8 Holdings (LON:TRAK)
QTX on 7.85x sales versus TRAK on 1.40x - I enjoy looking at similar companies and seeing if the valuation divergence makes sense.
I'm a little bit sceptical of the high level of profitability on QTX, because I'd prefer to see a small company in a fast growing, high potential sector not worry too much about reporting high returns....But that's a personal preference.
Disclosure, I'm long TRAK

Wol

And the reason for the 'adjustments' is all too clear:
* an EPS of 11.5p shows up as a p/e ratio of circa 10.5 - i.e. relatively cheap)
* an EPS of 1.5p (statutory I.e. real EPS) would give us a p/e ratio of circa 80 - horribly expensive and only justifiable for a really good high growth business with a strong defensive moat.
Your conclusions are spot on. Companies with large and frequent adjustments go straight into the bin.
Thanks to you Graham and to you Ramridge for the analysis.

davidjhill

In response to the Fairpoint comment : I'm not sure why you draw the conclusion it is a 100% loss.....

AIB have offloaded the debt, presumably at sub par to Doorway. Doorway now own the debt and any repayment schedule and have also provided what appears to me to be new factoring facilities. That debt will inevitably need to be repaid at par plus interest.
Doorway are a specialist lender to law firms and know this particular market and the capital constraints very well. I suspect that the Directors have been dealing with them to take over the AIB debt (as hinted in previous RNS) for whom it is non-core and probably lack specialist skills required to properly assess the business.
Auditors could not sign off accounts due to lack of certainty around AIB. That is now cleared up.

There is no mention that the debt needs restructuring to wipe out equity.

So whilst I do agree with you that there is not really enough information in public domain at present there remains several possibilities with regards to the equity. I would imagine a further RNS is not far away when we will find out.

Tortoise investor

As a company providing 'debt solutions' the Fairpoint (LON:FRP) situation is very ironic...

I sold out last November but the two lessons for me from this sorry tale are:

- Be even more sceptical when a company isn't being transparent about the performance of its business. It started when the Government made changes to whiplash and small claims and Fairpoint (LON:FRP) refused to reveal what it expected the impact on its business to be. Even when it did eventually provide some clarification it was in terms of revenue not profit impact.
- Be more wary of businesses growing through acquisition especially if it's not being funded through cash.

Samsgrandad

Two very interesting announcements today for Tristel (LON:TSTL) one being an update on their EPA and FDA submissions in US, the other being an investment in an Israeli company producing a portable mobile phone based diagnostic system for HPV for which Tristel portable disinfecting products are an ideal partner enabling hospital standards of hygiene in portable applications.

TangoDoc

I'm inclined to agree with davidjhill on this one. I can see no possible reason why Doorway would even consider it, particularly as they have backed competitors. I assume they judge that Simpson Millar ought to make a recovery, as a nationwide firm of reputation at a time when it is envisaged we will need more commercial lawyers to help with the problems of Brexit. Of course, what implications it all has for FRP as such are another matter.

The whiplash issue was fast becoming a drying well, long before the government began to mention it. Insurance companies, once awash with funds, would pay up on bogus claims because that was cheaper than fighting. As one who, for a while, supplied medical reports for such cases, spoke up at a joint meeting of docs, lawyers and insurance companies at a symposium at Barts. Each side wanted the other to be more proactive against the 'problem". Our trouble, as medics, is that we were highly sceptical that such a condition was common and we did not like the reaction we got if we put our scepticism into any report. It seemed to us that the lawyers and the insurance companies were cosy about it. Then, suddenly, insurance companies were poorer. Was that the changes brought about by Gordon Brown? Councils began to fight claims for tripping over paving slabs.

Similarly, the Government making it easier for any of us to go informally bankrupt was not kind to FRP

On balance though, I still don't see our need for lawyers disappearing any time soon.

Graham Neary

Cheers for that comment Ram. Me too, Room 101. Companies like this rarely go very far in the long-run.

FREng

SQS Software Quality Systems AG (LON:SQS) is up today on a trading update. It seems a sound company with conservative management (I'm long).

ganthorpe

I wonder if Doorway have in some way "ring fenced" Simpson Millar? It seems odd to throw money at them without covering themselves with Fairpoint getting any benefit that results from the cash injection. Perhaps the devil is in the detail?

GavSmith01

4th Jul '17

Two things that stand out for me in Trakm8 Holdings (LON:TRAK) results - a large negative tax charge, and a large (and increasing) amount of capitalised development spend, both of which significantly flatter EPS. Last year they capitalised over £2m more than they amortised, which is significant relative to operating profit.

Thanks for that Gav

Small Cap Value Report (3 July 2017) - PLA, QTX, FRP, TRAK

Plastics Capital (LON:PLA)

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Graham Neary

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