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

Monday, Jul 03 2017 by

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.



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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All my own views. I am not regulated by the FSA. No advice.

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Plastics Capital plc is a holding company. The Company is principally engaged in the manufacture of plastic products focused on products for various markets exporting to over 80 countries across the world. Its segments include Industrial, which consists of hydraulic hose consumables, packaging consumables and plastic rotating parts, and Films, which includes high strength film packaging. Its operations are based on the six operating businesses: BNL (UK) Limited, which makes plastics rotating parts; Palagan Limited, which makes high strength film packaging; C&T Matrix Limited, which makes the packaging consumable of creasing matrix; Bell Plastics Limited, which makes hydraulic hose consumables; Beijing Higher Shengli Printing Science and Technology Co Ltd, which also makes creasing matrix, and Flexipol Packaging Limited, which makes high strength film packaging and bags. It has over five factories in the United Kingdom, approximately two in China and over one in Thailand more »

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Quartix Holdings plc is a United Kingdom-based supplier of vehicle tracking systems and services. The Company operates in designing, development and marketing of vehicle tracking devices and the provision of related data services segment. The Company offers subscription-based vehicle tracking systems, software and services in the United Kingdom. Its vehicle tracking systems incorporate instrumentation to identify and transmit location, speed and acceleration data to the Company on a real-time basis. Its vehicle tracking software system provides business critical reporting, and analysis of vehicle and driver data, including timesheets and other customer Key Performance Indicator (KPIs) to customers via any Internet-enabled device. The Company has an overseas branch in France and an overseas subsidiary in the United States. The Company's subsidiaries include Quartix Limited and Quartix Inc, which are engaged in the business of vehicle tracking. more »

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Fairpoint Group plc is a United Kingdom-based company, which provides consumer professional services, including legal services, claims management services and debt solutions. The Company has four segments: claims management, legal services, individual voluntary arrangements (IVA) and debt management plans (DMP). The IVA segment consists of the subsidiary company, Debt Free Direct Limited, which is an IVA that consists of a managed payment plan providing both interest and capital forgiveness. DMP services segment consists of the Company's subsidiary, Lawrence Charlton Limited, which provides DMP for consumers. Claims management segment provides a range of claims management services, including reclaiming payment protection insurance (PPI). The legal services segment provides a range of consumer-focused legal services with lines, such as family law, complex personal injury, personal legal services, and a legal processing center focused on both personal injury and conveyancing work. more »

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  Is Plastics Capital fundamentally strong or weak? Find out More »

12 Comments on this Article show/hide all

Ramridge 3rd Jul 1 of 12

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.

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brucepackard 3rd Jul 2 of 12

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

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Julianh 3rd Jul 3 of 12

In reply to Ramridge, post #1

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.

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davidjhill 3rd Jul 4 of 12

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.

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paraic84 3rd Jul 5 of 12

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.

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Samsgrandad 3rd Jul 6 of 12

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.

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TangoDoc 3rd Jul 7 of 12

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.

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Graham N 3rd Jul 8 of 12

In reply to Ramridge, post #1

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

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FREng 3rd Jul 9 of 12

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).

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ganthorpe 3rd Jul 10 of 12

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?

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GavSmith01 4th Jul 11 of 12

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.

| Link | Share | 1 reply
Graham N 4th Jul 12 of 12

In reply to GavSmith01, post #11

Thanks for that Gav

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About Graham N

Graham N

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified and hold an audited, FTSE-beating investment track record.  Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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