Small Cap Value Report (30 Jun 2016) - REDD, VNET, AVG, SPRP, COST

Good morning!

Let's have a day where we don't mention Brexit!

Pensions administrators & Companies House

A friend tweeted yesterday that he'd just been informed that the pension administrator for his SIPP has gone bust. No financial loss is expected, but it could be a bureaucratic nightmare retrieving his investments, and parking them somewhere else. Will he be able to trade in the meantime? Possibly not.

I looked up the accounts of the company in question at Companies House, using their fantastic (and free!) accounts look up service. There was nothing in the figures to suggest that the company was likely to go bust. Mind you, accounts filed at Cos Hse can be 18 months old, or more, so a lot can change in the meantime. Although the accounts for that particular company were clearly the accounts of a very small company, with only a handful of staff, and little in the way of assets.

This got me thinking, I really should check the accounts of the administrator for my own SIPP. I was horrified to find that it only had net assets of £1! However, on closer inspection, it's a subsidiary of Charles Stanley. I checked the group accounts, and they're absolutely fine.

I'm sure many readers have SIPPs, so I strongly suggest that people look up the accounts of the pensions administrator which does all the back office stuff for you, and make sure they are decently solvent. If not, then it might be worth talking to your broker about moving to a different, more financially strong administrator?

Also, I think it's good to get into the habit of checking out private company accounts at Companies House. We lost some money a few years ago, to a local company that fitted expensive blinds. They went bust & we lost a hefty deposit (having paid by cheque, unfortunately - no protection unlike credit cards). Later, I checked out the company's accounts, and it was obviously insolvent. If only I'd checked the accounts before paying them, then the money would not have lost, as I wouldn't have paid it over.

Redde (LON:REDD)

Share price: 153.3p (up 4% today)
No. shares: 303.9m
Market cap: £465.9m

Pre close statement (trading update) - this is the latest in a long series of positive trading updates from this insurance services outsourcing company;

...trading for the final quarter ending 30 June 2016 has continued the positive trend shown in the first 9 months of the year. Indications are that the operating results before exceptional costs for the financial year ending 30 June 2016 are likely to slightly exceed market expectations.

That sounds good, providing there's nothing untoward in the exceptional costs mentioned.

Redde has been an absolute cash cow, paying out very generous dividends, and that continues;

Based upon trading to date the Board would expect to announce a further dividend at that time of not less than 5.00 pence per share making total dividends for the year ended 30 June 2016 of not less than 9.50 pence. This would represent an increase of 15.2% on the prior year (8.25 pence excluding the 2015 special dividend).

That's a 6.2% divi yield for this year - clearly very good indeed, in a low interest rate environment.

My opinion - this share looks great, if you assume everything will continue in the current vein forever. Personally, I have worries about its business model, and whether that is likely to be sustainable in the long term. The problem with this sector, is that businesses can be damaged, or even wiped out overnight if the Govt changes legislation or regulations.

That's the general problem with essentially unnecessary intermediaries like this. Redde is making hay whilst the sun shines, but we don't know whether that will remain the case forever. It might do, or it might not.

For now though, clearly the divi yield is very attractive. The PER isn't particularly cheap, mind you.

(insert valuation graphic here)

Vianet (LON:VNET)

Share price: 92.4p (down 0.6% today)
No. shares: 28.0m
Market cap: £25.9m

AGM statement (trading update) - this update covers April & May, being the first 2 months of the new financial year. They sound positive;

"Trading across our continuing operations in the first two months of the current year is in line with expectations and is noticeably ahead of the comparable period last year with all business areas progressing well.

Vending Solutions, in particular with its coffee vending telemetry systems and contactless payment solutions, has continued to make good progress and is demonstrating solid growth.

This comes as part of the Group's continued development of its Internet of Things capability, which aims to provide increased value to its customers through both strategic insight and, importantly, actionable data.  The Group believes this will be a significant driver of growth for Vianet in the coming years.

A word of caution here. Whilst I like management here, they've been promising growth for years now, and it's been painfully slow to happen. There's also the headwind of declining installations for the core profit generator, brulines.

Outlook comments today mention Brex... err I mean current events;

"The Board is confident of the medium and long term prospects of the Group and this is reflected in its decision to recommend maintaining the final dividend at 4p per share.

Whilst the economic uncertainty and exchange rate volatility resulting from Brexit is generally unhelpful, the Group's continuing progress to date, leads us to look forward positively to the remainder of the year and beyond, and the Board remains confident of delivering value to its shareholders."

My opinion - it's been a good steady dividend payer for a few years now.

I can't get excited about the growth though, as it's offsetting declines in the core business.

Avingtrans (LON:AVG)

Share price: 186.5p (up 12.7% today)
No. shares: 27.8m
Market cap: £51.8m

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

Update on return of funds to shareholders - this is an interesting special situation. As we already knew, the group had sold off its largest division, in aerospace. This left a smaller engineering company, and a big pile of cash, roughly equal to the market cap.

The house broker indicated a little while ago that c.100p per share was likely to be returned to shareholders. They don't make this stuff up - the company tells them what they are intending to do.

Sure enough, AVG today announces that it intends to give shareholders 100p per share, c.£28m, by way of a tender offer. No details are given about how the tender offer will work. We'll have to wait until Sept for that, at the same time as results for y/e 31 May 2016 come out.

Outlook/Directorspeak is interesting;

The balance of the net proceeds will be used to pursue the Groups new strategy to invest in the Energy and Medical markets served by its Metalcraft and Maloney Metalcraft businesses, and more specifically to strengthen Metalcraft's position in the nuclear sector and to pursue other related opportunities in the engineering sector.

Steve McQuillan, Chief Executive Officer of Avingtrans plc, commented "I am pleased to be able to provide more detail on the return of substantial value to shareholders while also reiterating our intention to make additional investment and acquisitions in the Energy and Medical businesses. The Board believes there are several exciting prospects which have the potential to deliver significant further value for shareholders."

My opinion - I'm really impressed with the performance of management here. They seem to have done some good deals, both buying & selling businesses. Plus, the potential contracts in the nuclear sector do sound interesting.

I'm quite tempted to not tender any of my shares, as there could be a better long-term outcome here, based on past performance. It would be interesting to meet the management properly. I saw the Chairman at a function recently, but didn't get a chance to speak with him. He gave a short presentation though, and seemed very knowledgeable & experienced.

Sprue Aegis (LON:SPRP) - says that trading is "slightly ahead of management's expectations". As such, H1 loss is expected to be "slightly lower than the £1.9m operating loss previously indicated".

The NEDs have been carrying out a review of the business, following the mishaps earlier this year, with product recalls, etc.

A separate RNS outlines a warranty claim that has been made against the Chinese battery manufacturer which caused Sprue's products to fail early. It is only for £0.1m in 2016, and comes in the form of free replacement product. Further free batteries will be given over 2 years. This seems trivial compared with the scale of Sprue's own losses.

I think it's likely to take time for confidence to return here. I'm not keen to revisit this share, given its very unpredictable past performance.

Costain (LON:COST) - a solid trading update today. H1 performance is "strong" and in line with full year expectations. Order book is at a record high of £3.9bn (up from £3.7bn a year ago). The Chairman has spent £111k buying shares today.

I quite like it, whilst remembering that it's a very low margin contracting business, so things can go wrong. The valuation is probably about right, at 316p, which gives a PER of about 11. I think that's probably high enough.