Small Cap Value Report (3 Mar 2016) - IND, MCGN

3rd Mar '16 by Paul Scott

16 comments 15248 reads

Good morning!

Yesterday was a SCVR marathon day for me, with the usual daily report, plus in the evening I wrote another report from Monday (my sick day). So please click here to read Monday's delayed report, which covers: Waterman (LON:WTM) , DX (Group) (LON:DX.) , RTC (LON:RTC) , and Quartix Holdings (LON:QTX) . As always, your comments below the article are very much welcomed, particularly if you have picked up on something I missed.

Indigovision (LON:IND)

Share price: 167.5p (down 1.2% today)
No. shares: 7.6m
Market cap: £12.7m

(I have held a long position in this share since the beginning of time)

Background - checking back through my articles last year, this Scottish-headquartered digital CCTV company issued a profit warning here on 28 Apr 2015, then reported an upturn in H2 business here on 17 Sep 2015, but then warned on profits again here on 29 Dec 2015.

To be fair, the last update on 29 Dec 2015 still indicated an improvement in H2 vs H1 trading, but just not as great as originally hoped, due to a large M.Eastern project being delayed into H1 of 2016.

The cost base is largely variable, and the company has a history of quickly responding to trading downturns, and restoring profitability, which is what has happened again in 2015.

So overall, another disappointing year for IND shareholders, and the share price has reflected that, halving over the last 12 months.

Results y/e 31 Dec 2015 - note that IND reports in $US now.

Key points;

Revenue $47.1m (down 23% on a LFL basis - pro forma figures for y/e 31 Dec 2014 are the only valid comparison, since the prior period was actually 17 months)

Operating loss $0.74m - a poor result, compared with $4.13m comparator figure for 2014), however this is in line with guidance given on 29 Dec 2015 (H2 profit "to exceed $0.5m" - actual H2 profit is $0.52m)

Improving trend within the year - H1 loss of $1.26m, H2 profit of $0.52m

Final divi of 2.5p - well down on last year, but at least the company is paying something, since it passed the interim divi

Outlook - reasonably encouraging, although as…

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simoan

3rd Mar '16

HI Paul,

That sure is one ugly chart for IND. It's unfortunate that a company that seemed to have a technological lead many years ago has been so consistently badly managed. Technical people rarely make good company managers (particularly in the UK) as they concentrate on the wrong aspects of the business and are generally too conservative. If IND were a US company the approach would have been totally different with the fast money of venture capital being used to drive much harder to market and establish territory in a land grab and then selling the company on to Cisco or someone before the technology became fully commoditised.

Of course, it's too late for all that now and I see no attraction at all in holding the shares

All the best, Si

RayStraw

Looking at companies like Indigovision (LON:IND) it really makes me wonder about Stockopedia ratings. Indigovision (LON:IND) has gone down over 60% in the last 2 years yet it still has a SR of 76? Amino Technologies (LON:AMO) a similar company which was ranked in the 90s has fallen down to 26 after 1 profit warning.

iiimurray

Paul
Do you have any comments on Communisis who published finals today?

Peter

eezymunny

About half the TNAV is inventory, which isn't necessarily liquid, indeed could be very illiquid if it's old models etc!! Otherwise a fair assessment.

jonesj

Technology has the habit of becoming obsolete or superseded by better technology. I have no idea about the competitive position of Indigo, so dumped the stock a while back & put it down as a mistake.

Patrick L

If you had time to look at IPEL that would be amazing :)

Bezhe

In reply to iiimurray on Communisis (LON:CMS): The results seem to be fairly good. However, the main problem here is that a big chunk of their business is in long-term decline. The announcement has this: "About 75% of revenues are underpinned by multi-year contractual arrangements, giving good medium-term visibility in the business. The average contract life is currently five years. Many of the contracts are for personalised, business-critical communications, such as invoices, statements and cheque books". Will cheque books still be around in five years?

They also have a sales category on which they make no margin, i.e. they recover their cost only. This "Pass through" category generated "sales" of £113.4 million out of total sales of £354.2, representing 32% of the total. So, to get a decent overall margin, they have to be good in the other areas.

There are other problems with Communisis (LON:CMS) which Paul highlighted in his last review in Nov 2015: "Personally, I find the balance sheet far too weak to consider this investable. There's a lot of gross debt, and a hefty pension fund deficit. When you write off intangibles, the NTAV is heavily negative. Also, I'm not convinced that direct marketing the old fashioned way, by junk mail basically, is the right space to be in, with so much ad/marketing moving online."

It's ok Paul, take the rest of the day off - Bezhe and herbie47 have things under control here.

andrea34

From a cursory look at MCGN, overall revenue looks to be +7% and non-exceptional operating profit up only 3%; perhaps I'm missing something, but this is fairly pedestrian growth...?

Beginner

Yes, the growth is pedestrian, but that is not the point of investing here. Growth is slow, but steady and regular. There have been a series of small, profitable acquisitions. The crux of the matter is that the company is in the habit of returning spare cash to shareholders, usually by way of special dividends. These make the accumulated yield rather handsome. This won't make you rich, but it will make you richer. (Should say I am a happy long-term holder in Microgen (LON:MCGN) ).

zho

Hi Bezhe,

Re CMS

>>The results seem to be fairly good. However, the main problem here is that a big chunk of their business is in long-term decline>>

I’m puzzled by your comment. Yes, some parts of the business are in LT decline (cheque printing, for instance) but new business has more than compensated with turnover (excluding pass through) increasing from £170m in 2011 to £241m in 2015.

Hi Paul,

Can I say how much I enjoy reading your reports. I’m not usually logged in, haven’t got a clue what my log in details are off the top of my head, and always experience a twinge of guilt reading your pieces without so much as a ‘thumbs up’.

homosap

Paul, you commented in some detail on H & T (LON:HAT) last August despite it not being a business you really wanted to be involved in. Their Preliminary results to December 15 are out today and show profits before tax up 23.6% and diluted EPS up 26.1% at 14.86 - very much in line with estimates last August. The final dividend proposed of 4.5p boosts the dividend by 66.7% and is at the top end of what you speculated last August they might achieve. Today's results announcement have led to a rise that just about returns the share price to its August 15 level.

Given the continued improvement do you feel any more positive regarding this share than you did last August in the light of its solid balance sheet ?

Paul Scott

4th Mar '16

Hi Homosap,

I like that you have summarised the key numbers for H & T (LON:HAT) above, which is much more interesting & useful than people just asking me to look at a company, without giving any info themselves. So thanks for that, and others who ask me to look at companies, please note!

Unfortunately I was busy this afternoon, as had to come up to London for an appointment. So didn't get a chance to look at HAT. Will try to check it out over the weekend.

Regards, Paul.

Hi Paul,
Sorry - I was one of the naughty ones that asked you to review IPEL without giving my own thoughts! I was being a bit lazy because I know you were long in the share before.

The 2015 results appear to have been above broker 2015 EPS estimates of 75p (March 2015) at 88.6p adjusted EPS. That values the shares potentially cheaply given the SP is 810p at the time of writing this. However, I think the reason why the SP hasn't risen on the back of the results is because the outlook comments aren't massively encouraging, in particular warning about the impact of NHS agency staffing changes and the impact of the living wage although I am not sure what % this represents for the business. It'd be interesting to know if you agree there is reason to be concerned by the outlook statement. However, in terms of NHS impact, I also note that there is some evidence from the Health Service Journal news magazine that the NHS is bypassing the Government's agency rules. In short, the Government have put in limits on how much you can pay agency NHS staff but some hospitals are getting around this by simply offering agency work at higher grades which allows them to offer more pay to people who should really be working at lower grades! In other words, the Government's changes might not actually impact on IPEL as dramatically as some might expect. IPEL's progress over the next year is probably also a play on the economy which investors may still be worried about.

Frankyboy

As an old, long term TA man, it disturbs me that you've held this share since the 'beginning of time'.... I like that expression, applied to shares :) With your greatly superior Fundamental knowledge, wouldn't a better strategy to be to put that share that you've fundamentally researched to the extent that you think it's a worthwhile punt, into a watch list?

That chart, for example, is crying out for a line of resistance. Rather than tie up one's cash for all that time, say from the 2014 top, in a price that's in a downtrend, I'd watch it until others see what you have seen in it and it breaks out. I think it pays to put some sort of time limit to allow the share to behave!

Time is money in shares and it's a double loss when you have your money in a share whose price is descending from the time one bought it, when it could (with luck) have been in a share whose price had been rising since the time one bought it.

There were a couple of false breakouts in Sept and Nov 2015. The good news is that it's on a 'support' level now, if you like, as it's at a 2011 low of 164p. Just don't follow it down to the next major support of the 2002 low of 12p! Ouch!

On a positive note, some of the TA tea leaves look as if they just might be on the turn....but I'd wait to see another breakout.....false or not!!! :) Maybe your review will give it the shove it needs!.... not that Market Makers would move prices in concert with influential reviews, would they? :)

Cynical? Moi? :)

Frank

Small Cap Value Report (3 Mar 2016) - IND, MCGN

Indigovision (LON:IND)

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Paul Scott

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