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

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 we know from the past, there's limited visibility, and performance is erratic, so it's best not to get excited about short term trading improvements;

The return to profit in the second half of last year was encouraging, and steps have been successfully implemented to adapt to current conditions.

The start of 2016 has been better than last year, although as the corresponding period last year was particularly subdued, this should be seen in context.  Sales are marginally ahead, operating performance efficiencies continue to be realised, and the order book is up.  The board therefore currently expects that 2016 will see improvements over last year.

Balance sheet - a key strength. Net assets of $23.3m includes a deferred tax asset of $4.9m, which people might want to exclude, and $72k in intangibles (IND has always been very prudent, capitalising nothing in development spend, even when it clearly could have done so) which would bring NTAV down to $18.4m, or £13.1m (at £1 = $1.407).

Note that the NTAV (excluding deferred tax asset) is more than the market cap. Given that nearly all NTAV is liquid stuff, working capital basically, then the business itself is really being valued at nothing - no premium to its own working capital, an extremely pessimistic valuation in my view, given that the company has already returned to profitability.

The market is taking a very jaundiced view of IND right now - perhaps understandably, given the company's repeated disappointments in the past few years. There always seems to be some reason why the figures disappoint, and investors are tired of it. My view is that the company must deliver consistently better results, or accept that it will be swallowed up by a larger group.

The year end net cash position of $2.8m, which is healthy, especially as there is headroom from an unused $4.0m bank facility. So there are no worries about solvency, this is a financially secure company - providing sales don't continue plummeting of course.

My opinion - these figures are not as bad as I had feared. The continued falling share price worried me that the figures & outlook might be a car crash, but they're not at all - results for 2015 are exactly in line with the last trading update.

The company is trading profitably again, after a poor H1 in 2015, and the outlook comments sound reasonably encouraging.

Management have put a lot of things right, if you drill into the detail of the business, as obviously I have. However, I think they've missed their really big opportunity, when 12 years ago the company was world-leading on product, it's not any more. However, it's still up there with the big players, has a good range of products (end-to-end, still a considerable advantage - i.e. IND sell everything from the software to the hardware), and its software is well-regarded.

The hardware is really a platform to sell the software, and IND now has a much better way of doing things - concentrating on software development, and buying in hardware from market leading manufacturers, designed to IND's spec.

So the way I look at things, IND is still very much in the game, and it's a case of either ramping up sales, or be swallowed up by a competitor. From a £13m mkt cap, that should give upside either way for patient shareholders. Therefore, whilst accepting all the company's failings, a lot of which are industry headwinds such as price deflation, I personally am not even considering selling at the current valuation, now the company is back into profit (albeit modest), and the current valuation is fully supported by NTAV.

As I often point out, the market doesn't know or care what price any of us paid for our shares. All that matters is what happens in the future, and how the company is valued now compared with its future potential. So emotions don't come into it. I think there is a good chance of achieving a better selling price for my shares in future than the one on offer today, so I'm sitting tight. Other shareholders have to make their own judgement call on their own position.

Microgen (LON:MCGN)

Share price: 118.2p (up 3.2% today)
No. shares: 59.1m
Market cap: £69.9m

(at the time of writing, I hold a long position in this share)

Results y/e 31 Dec 2015 - time is running short, as I have to jump on a train to London shortly. However, a very quick skim of these figures confirms my positive view of this software group.

What attracted me to the shares originally was simply that it's been an absolute cash machine for shareholders. This is alluded to in today's commentary from the company;

In early 2015 the Group returned approximately £20 million to shareholders via the B/C Share Scheme. This completed the programme initiated in October 2008, during which Microgen returned approximately £70 million, equivalent to 190% of the market capitalisation at the time of initiation. Pursuant to the above return to shareholders, the Board has assessed the prospects of the Group and, in view of the resilience of the Group's financial performance, considered that the total cost of the dividend should be maintained at the level prior to the B/C Share Scheme and accompanying share consolidation. The directors therefore propose the payment of a final dividend of 2.8 pence per share (2014: 2.2 pence), making a total of 4.2 pence per share for the year (2014: 3.3 pence), an increase of 27% per share. The proposed final dividend will be paid on 3 June 2016, subject to shareholder approval, to shareholders on the register at 29 April 2016.

Adjusted EPS for 2015 was 9.2p, up an impressive 28%.

The PER is currently 12.8, hardly demanding.

Balance sheet - looks solid, and is in an overall net cash position of £5.4m.

The company doesn't seem to be capitalising development spend - there is nothing in the investing activities section of the cashflow statement. So that's good news too.

My opinion - it looks very interesting. I need to do more research on this company. The key question is over sustainability of profits/cashflows?