Small Cap Value Report (30 Jul 2015) - ACSO, SNCL, KMK, CMS, FDL, SWJ

Good morning!

As usual, today I started reading RNSs in bed, once my iPad started bleeping at 7am. If there's nothing of interest, then a lie-in can be justified. However, on some days, especially Thursdays, there are lots of interesting announcements to look at. One really caught my eye as the stand-out announcement of the morning today, being this one from Accesso: 

accesso Technology (LON:ACSO)

Share price: 617p (up 15% today)
No. shares: 21.9m
Market cap: £135.1m

(at the time of writing, I hold shares in this company)

Actually, there are two announcements from Accesso (an electronic ticketing group, primarily for visitor attractions such as water parks, formerly named Lo-Q) today, as follows;

Trading update - this looks very strong to me:

Based on excellent momentum across all of its business divisions, the Board of accesso is delighted to reiterate its guidance for 2015. In addition, encouraged by strong trading, and excellent new contract momentum across the business, the Board now expects 2016 to be ahead of current expectations, and 2017 to be materially ahead of current expectations.

Valuation - this company has always been tricky to value, so I'll keep it simple and work on broker EPS figures. The latest broker forecast (issued this morning, so including the big contract win separately announced today (see below) shows upgrades as follows:

2016: EPS fc from 39c to 43.1c (27.6p)

2017: EPS fc from 41.5c to 54.1c (34.7p)

Now comes the tricky bit - what PER to put it on, and on which year's earnings? Normally at this stage of the year, i.e. past the half way mark in 2015, I would be valuing the company on 2016 forecasts. However, given that its revenue/profit should be quite predictable, due to the nature of the contract wins, then there is an argument for pushing the boat out here (we are in a bull market after all), and basing the valuation on the 2017 numbers. That's what I'm doing anyway, but feel free to disagree and do it your own way if you wish.

Here are a range of values on various PERs based on the 2017 forecasts:

PER of 20 --> share price of 694p
PER of 25 --> share price of 867p
PER of 30 --> share price of 1041p

I'd say the middle one (bolded) is something I could just about cope with! The only reason a PER of 25 is justifiable here, is because of the contract win announced today;

Merlin contract win - this is the exciting bit, which has driven the above upgrades (although the broker comments that they understand existing contract wins were already pointing towards upgrades, even before the Merlin contract).

Key points;

The initial contract term is for seven years and includes the installation and deployment of the hosted accessoPassport^® ticketing solutions.The installation of the solutions will occur across three years and include more than 100 attractions around the world including such recognizable brands as LEGOLAND^® Parks, Madame Tussauds™, SEA LIFE and The Eye Brand.Under a pilot program, the accesso Passport^® ticketing solutions, which include onsite ticketing, online ticketing and access control, have already been installed in seven attractions across the Merlin portfolio and successfully demonstrated that the solution provides improvements to the guest journey.

Clearly, putting Accesso's ticketing systems into 93 additional Merlin sites is a tremendous coup for Accesso, and looks a game-changing contract win to me. Whilst financial details are not given, they are implied with the upgrades to 2016 and 2017 forecasts.

Also, this scale of contract win will surely make it much easier for Accesso to sell their products and services to other companies, globally, having such big name reference sites, and the obvious confidence of a major attractions operator such as Merlin.

My opinion - I've frequently commented that Accesso shares seemed over-priced in recent years - a PER of 30 or more didn't seem justified for a company whose results were not really that great, and where a lot of the growth was bought in through acquisitions.

However, when the facts change, I change my mind, and once you work through the upgrade figures today, the PER even after today's big jump in share price is actually quite reasonable - less than 20 times 2017 forecasts. So with the valuation now looking reasonable, for the first time in ages, I've bought a few shares in it for my long term portfolio.

I should point out that the Accesso forecasts include some capitalisation of development costs, which at least one broker strips out. The figures I've given above are based on the Accesso accounting treatment, so the more conservative broker calculations are about 15% less than the figures above. It's up to you whether you want to use the broker, or the company's assumptions.

Merlin results - maybe the companies timed their results to coincide, but Merlin has also reported its figures today. I had a quick skim of the narrative, and they comment favourably on the Accesso contract, as follows;

Merlin has signed an agreement with accesso to roll out their 'Passport' ticketing system across the estate over the next three years. This system will allow the Group to standardise and improve its guest purchase journey, delivering a better customer experience before, during and after the attraction visit. The benefit from the new solution, which will replace existing ticketing systems, is expected to underpin existing long term growth forecasts.

Costs related to the implementation are not expected to be incremental to existing expectations.

Merlin says it is the world's 2nd largest visitor attractions operator, so that very much reinforces what a big deal (literally!) this contract is.

William Sinclair Holdings (LON:SNCL)

At the request of the company trading on AIM for the under-mentioned securities has been temporarily suspended from 30/07/2015 7.30am, pending clarification of the company's financial position.

Remember that Directors have a legal obligation to call in Administrators, if they know that their company is insolvent. Otherwise if the company continues trading whilst insolvent, then the Directors themselves become personally liable for the company's debts.

Readers here have been warned - I've been consistently negative on the shares since May 2014, flagging up the weak balance sheet & dependence on continued bank support. In my report of 30 Jun 2014 I explicitly flagged that the company looked bust, so I really hope no readers got caught on this one.

Hopefully some jobs can be saved if the company's assets are sold off to a new owner, but there's likely to be a deficiency against creditors, which would leave shareholders with nothing (since shareholders rank behind all creditors). That's not certain yet, but very likely, in my opinion. I doubt any new investors would want to take on the pension fund deficit either, hence why insolvency is the most likely outcome here.

Kromek (LON:KMK)

Share price: 29.6p (down 15% today)
No. shares: 108.2m + 36m Placing shares (+ up to 8m Open Offer shares)
Market cap: £32.0m pre-fundraising, £42.7m post Placing, up to £45.1m post Open Offer.

Fundraising at 25p - the company today announces that it has arranged a firm Placing at 25p per share, of 36m new shares, raising £9m before costs. This is at a deep discount, 29%.

Open Offer - I'm delighted to see that the company has also included an Open Offer, under which existing shareholders can also participate in buying new shares at 25p if they wish, on the basis of an entitlement of 2 new shares for each existing 27 shares.

Remember that Open Offer shares are not tradeable - so you either take up your entitlement (and can sometimes apply for more, if there is a surplus available), but you can't sell your entitlement, as you can with more costly Rights Issues.

Myself and others have campaigned to see Open Offers included with all deeply discounted Placings, as it's the only fair way to do things - after all the principle of pre-emption rights for existing shareholders is a core legal concept in UK company law. So to set it aside, really should not be done, unless there is an over-riding & urgent need to do so.

It's great therefore to see fundraising such as this one, where this duty to protect the interests of existing shareholders has been recognised & acted upon. There's obviously a problem that Placings are firm, whereas Open Offers are can fail (if there is a low take-up). So combining the two is the best way to do things - the Placing gives a company the money it needs, then the Open Offer is the icing on the cake which treats existing shareholders fairly.

Therefore bravo from me to this company & its advisers, for doing this fundraising the right way.

Results y/e 30 Apr 2015 - figures are out today too. The company is a bit too jam tomorrow for my tastes, as mentioned earlier this week I'm really trying to focus these reports a bit more closely on profitable companies.

However I like to keep an eye on up & coming companies too, for opportunities which arise. Kromek looks as if it's making progress - it's still loss-making, but turnover is up 36% to £8.1m, and the gross margin is very good, at 69% (but this is before labour costs, so it's not really a true gross margin - if you manufacture something, then the labour involved is surely a cost of production?!). I'd like to find out what the gross margin is after all direct costs involved in manufacturing.

The adjusted EBITDA loss almost halved (i.e. improved) from £3.0m last year to £1.6m this year.

Outlook comments sound positive, including that 60% of current year expectations is already contracted.

My opinion - it looks potentially interesting, but personally I want to avoid adding any more loss-making companies to my portfolio at the moment. That said, with the initial hype having flopped (as with almost all jam tomorrow IPOs - why do people keep buying them?!), the share price down a lot, and fresh funding in the bag after today's fundraising, it looks more attractive that at any time to date, in my view.

Although a £45.1m post-fundraising valuation looks rather aggressive considering that turnover is still small, and the company still loss-making. However, I haven't looked into the potential for the company's products, and that's what the valuation is really all about for this type of share. Clearly the Institutional roadshow went well, and I note that Directors are picking up a little stock in this fundraising (but already have a meaningful stake anyway). The Institutions supporting the Placing could be follow-on buyers in the open market too, if the newsflow from the company is good later this year & into 2016.

It's not for me, but it's not a basket case either, so worth a deeper look maybe for people who like speculative shares.

Communisis (LON:CMS)

Share price: 49.8p (down 0.2% today)
No. shares: 207.5m
Market cap: £103.3m

Interim results - these look quite good, at first glance. Adjusted EPS is up 15% to 2.01p, and it would have been more had it not been for currency headwinds (the constant currency increase is stronger, at 23%).

The adjusted operating margin is considerably improved, up from 5.2% to 6.0%. The adjustments look reasonable - excluding pass through revenue, exceptionals, and goodwill amortisation.

Note that finance costs are quite hefty at this company, taking a good chunk out of profits.

Dividends - attractive, at 4.5% yield. Note there has been a good progression in divis in recent years, and they appear well covered.

Balance sheet - this is where, for me, it all goes wrong. I just couldn't invest in any company with such a weak balance sheet. Net tangible assets are negative, at -£74.7m, which is a large shortfall to have, relative to the market cap.

There's a lot of bank debt, and a pension deficit too. So these things need to be factored in to the valuation, and help explain why it's on an apparently low PER.

Broker forecasts - I'm not going to put in the graphic here, as I've been having technical problems, especially on this computer here in London (am back in Hove tomorrow), but it shows that in the last 12 months broker consensus has fallen steadily from 7.1p EPS to 5.4p EPS - that's quite a reduction. So with 2.0p in the bag for H1, this group must have an H2-weighted seasonality. I've just checked, and yes that was the case last year - H2 was a lot stronger than H1, and the H1 results today look to be consistent with the 5.4p full year consensus forecast.

Valuation - it's attractively priced on a fwd PER of about 8.5, and has a good divi yield of 4.5%, but this is because the financial position is weak - with a lot of bank debt, and a pension deficit.

Outlook - this sounds pretty upbeat to me;

The Group's continued success in winning and retaining multi-year contracts for customer communication services, together with it's growing reputation for delivering brand activation services across Europe, is building a strong pipeline of work and opportunities with an increasing number of blue-chip clients. With the prospect of ongoing revenue growth, improving profitability and cash generation, the Board is confident about the Group's prospects for the remainder of the year.

My opinion - it's up to you to decide whether the weak balance sheet is adequately factored into the low valuation, or not. In my opinion the market often tends to over-price companies with weak balance sheets, and under-price companies with strong balance sheets, so that's one of the reasons I prefer to focus on companies with strong balance sheets.

Also, a strong balance sheet means you have downside protection if something goes wrong - e.g. I had nasty profit warnings in my portfolio in the last year from Spaceandpeople (LON:SAL) and Flybe (LON:FLYB) but in both cases I was happy with the balance sheet, and the remedial action being taken by the companies, and sure enough their shares have come back up again (not fully recovered, but well on the way).

Whereas if management with a weak balance sheet are fighting for the company's survival after a profit warning, they are less likely to make the right decisions for the long term.

So in this case, I quite like Communisis, but it's not something I would want to invest in unless they properly sort out the weak balance sheet with an equity fundraising. This consideration may be less important to you though, and I can certainly see the logic in being more relaxed about balance sheets given where we are in the economic cycle - i.e. with a solid recovery underway, banks are not likely to withdraw funding from profitable companies that are reporting good results, such as this one.

Overall then, I'm warming to it, despite the weak balance sheet.

Findel (LON:FDL)

Trading in line with expectations - I'm flagging this announcement mainly because the company has done something I don't recall seeing before, and I rather like!

Instead of giving the usual "Trading Update" or similar title for the announcement, they actually called the announcement "Trading in line with expectations". Therefore you don't even need to open the announcement at all, to get the key message. How innovative. I like it, but it's potentially dangerous, in the wrong hands!

That's a great idea, providing companies can be relied on to be completely truthful. Think how much easier it would be if all trading statements had to have one of three titles - which I would suggest could be;

1) Trading ahead of expectations,

2) Trading in line with expectations, and

3) Profit warning.

Or, you could refine that list into more categories, such as subdivide "profit warnings" into slight (sub 10%), medium (10-30%), and serious (more than 30% below expectations), 

That would enable us to much more quickly go directly to the announcements which are most of interest to us, in that hectic time every morning before 7-8am.

My opinion - I don't like Findel's business model, and think it's still carrying too much debt, so it's not of interest to me.

John Swan and Sons (LON:SWJ)

Takeover at £13.50/share - shareholders in this obscure Scottish sheep auctioneer should win an award for being the most patient value investors about. I vaguely recall one of the major shareholders in this company telling me around the time of my Dolly the Sheep ShAG (was it 2001 or 2002?) that there was hidden value in John Swan.

Much to my amazement, the same chaps are still major shareholders today, and have finally seen patience rewarded, with a 1350p per share cash takeover offer, so that's great to see!

I have to leave it there for today, am too tired to dissect any more results. Sorry I didn't get round to Victoria Carpets, or Impellam. Centaur Media, All Leisure, or Bon Marche. There's a possibility I might get a second wind after a nap. If not, then see you in the morning.

Regards, Paul.

(of the companies mentioned today, Paul has long positions in ACSO, FLYB and SAL, and no short positions. A fund management company with which Paul is associated may also hold positions in companies mentioned.

NB. These reports are just Paul's personal opinions. They are never financial advice or recommendations)