Small Cap Value Report (30 Sep 2016) - VLK, TET, TNI, AVS, PIER

Friday, Sep 30 2016 by

Good morning!

First of all, a bulk apology. I've accumulated a huge backlog of emails & other messages requiring attention. So if you're waiting for a reply from me, then please accept my apologies, I'll try to catch up over the weekend. It's been manically busy of late.

Brighton ShareSoc

This is now a monthly meeting, on the 2nd Tuesday of each month. So the next meeting is on 11 October, at the same venue, the Caxton Arms, which is very handy for Brighton mainline station.

It was great fun last time, and people came from far and wide to support the event. I really enjoy these events, and at each one I'll be giving a 30 minute talk on the most interesting small caps that I've come across in the last month.

Plus, we get to meet a small cap company each month too. This month, 1pm (LON:OPM) will be giving a presentation. This is an interesting growth company, which helps small businesses finance their asset purchases.

Please could people book a.s.a.p. if you wish to join me at the next meeting in Brighton, as the organisers need early bookings to be able to press ahead and organise the food, etc.

Pension deficit information

Good news! Stockopedia now includes data on company pension deficits. This is something that many of us have been requesting for a long time, so it's brilliant that this has now been added.

This short video from Tom at Stockopedia explains all.

Or, this article also from Tom explains it in text format.

Vislink (LON:VLK)

Share price: 8.95p (down 44% today)
No. shares: 124.6m
Market cap: £11.2m

Interim results to 30 Jun 2016 - John Hawkins' disastrous stewardship of this company continues, with more terrible news for shareholders today. The situation looks extremely precarious, and I think that the company will need to do an emergency fundraising pretty soon, or end up potentially going bust. It's jammed up against the overdraft limit currently, of £15m, with covenant breaches being waived by the bank (so far). That makes it uninvestable, in my view, so I think anyone still holding this share is at large risk of further, maybe total, losses. So it's definitely one to ditch now, as too high risk, in my opinion.

Turnover, and order intake have both fallen sharply. So the…

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Pebble Beach Systems Group plc, formerly Vislink plc, is a software and technology company. The Company is engaged in the collection and delivery of video and data from scene to screen. The Company's Pebble Beach Systems division is a developer and supplier of automation, Channel-in-a-Box and content management software solutions for television broadcasters, cable and satellite operators. For the broadcast markets, the Company provides wireless communication solutions for the collection of live news, sport and entertainment. The Company's products include Marina, which is an enterprise level playout automation platform for multi-channel applications; Orca, which is an Internet Protocol (IP)-enabled cloud-based integrated channel delivery solution; Dolphin, which provides multi-format integrated channel delivery solutions based on information technology (IT) hardware, and Stingray, which is a self-contained Channel-in a-Box. more »

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Treatt PLC is a United Kingdom-based ingredients manufacturer and solutions provider to the flavor, fragrance and consumer goods markets. The Company's geographical segments include United Kingdom, Rest of Europe, The Americas and Rest of the World. The Company's products include Essential oils, Citrus, Treattarome, Functional ingredients, Chemicals, Organic essential oils, Vegetable oils and Treatt brew solutions. Its Essential oils include Amyris Oil, Angelica Oil and Aniseed Oil. Treattarome products include Pineapple Treattarome, Honey Treattarome and Cucumber Treattarome. Its Citrus products include citrus oils, CitrustT, TreattZest and Citrus add-back range. Its Functional ingredients include beverage specialties, fragrance ingredients and sugar reduction products. Its chemicals include aroma chemicals, natural chemicals and Treatt Flavour Wheel. Its Vegetable oils include Borage Oil and Baobab oil. Its organic essential oils include Organic Aniseed Oil and Organic Lime Oil. more »

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Reach plc, formerly Trinity Mirror plc, is a national and regional news publisher. The Company is engaged in producing and distributing content through newspapers and associated digital platforms. It operates through four segments: Publishing, which includes all of its newspapers and associated digital publishing; Printing, which provides printing services to the publishing segment and to third parties; Specialist Digital, which includes its digital recruitment classified business and its digital marketing services businesses, and Central, which includes revenue and costs not allocated to the operational divisions. The Publishing segment publishes paid-for national newspapers and paid-for and free regional newspapers, and operates a portfolio of related digital products. The Printing segment operates five print sites with approximately 20 full color presses. Trinity Mirror Digital Recruitment operates three specialist job boards: GAAPweb, TotallyLegal and SecsintheCity. more »

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30 Comments on this Article show/hide all

mendelsohnf 30th Sep '16 11 of 30

re Zambeef Products (LON:ZAM)

Like most African agri businesses, Zambeef aren't too bothered about welfare standards that apply in the EU / UK. They own one of the largest battery hen farms (factories, more like) in southern Africa.
I wouldn't touch these shares on those grounds alone.

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TMFMayn 30th Sep '16 12 of 30

In reply to post #152312

"I managed to get out as soon as the management announced the ""Value"" ""creation"" scheme but I've had other investments in the past which have gone as badly wrong. I'd be interested to hear from those that have a system of red flags if Vislink (LON:VLK) was exposed as being in danger. "

If you have bought loads of shares that have since gone "badly wrong", then it could be very useful to go back through them all and see if there is a common denominator that's creating the aggro. True, nobody likes to revisit their mistakes -- but prospering in the market is just as much about avoiding losers as it is picking winners.

Small-cap red flags can include:

* too much debt vs profit
* poor profit-to-cash conversion (especially too much cash being absorbed into working capital -- i.e. customers not paying, stock going unsold etc)
* substantial tangible/intangible capex and consistently much greater than the associated depreciation/amortisation charged against earnings
* frequent and/or significant acquisitions (especially where the purchase cost is greater than the annual profit)
* poor/haphazard past operating record
* dependence on handful of or powerful group of customers
* dependence on single/few products, with significant R&D required to remain competitive
* operating in an industry that is suffering obvious structural decline (e.g. newspapers)
* unproven or colourful or greedy management
* a chief exec without direct hands-on experience of the product or industry (i.e. avoid financial engineers and accountants turned bosses)
* anything you read where the main bull case is based on a "cheap valuation" or "turnaround potential", and skirts around any business qualities
* anything foreign

Looking back through the archives from 2013... seems VLK caught the attention due to its valuation, net cash position, stated financial targets and apparent market leadership in certain product areas. Looking back I wonder if that market leadership was really genuine, given the business had apparently been a "serial disappointer under previous management".

During 2013, VLK's current boss had only been in the job for two years, so I guess we could have in hindsight waited until his abilities at VLK became a little clearer. Also, a quick check on his CV showed a colourful history at a previous role:

Ah, so perhaps that was the main red flag that should have kept everybody out of VLK in the first place.

So, try and recall why you bought your losers, then write down what caused each to implode, and then see if that could have been spotted when you bought. Usually the warning signs were already flashing.

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JohnEustace 30th Sep '16 13 of 30

In reply to post #152312

You and I sold at the same time - that "value creation" plan was certainly a big red flag.
My biggest take-out from it was the one highlighted by TMFMayn - the need to carefully check the previous track record of management to see whether they have created value for shareholders or just themselves.
The alignment of management and shareholder interests is a strong reason to favour companies where the founders or their families have large stakes as recommended by Lord Lee among others.

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JohnEustace 30th Sep '16 14 of 30

In reply to post #152324

I remember one of his Sunday Times articles about it. I think the issue he had in Eclectic Bars was that students and recent graduates are drinking less now that they are burdened with huge debts so he is looking to develop an alternative leisure offering.

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TMFMayn 30th Sep '16 15 of 30

In reply to post #152354

Me again.

Just noticed that VLK shares were c30p back in 2013

...and appeared to touch 60p last year. So perhaps some people did well on this share before the real problems emerged. But it is instructive to read through the above link, and the further links, to see the story unfold and read why people had initially bought etc. A lot of it centres on 'value'.

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herbie47 30th Sep '16 16 of 30

In reply to post #152363

Yes Paul and I both held and did quite well, it's one that went down quite quickly though, some shares you really need to keep an eye on.

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Paul Scott 30th Sep '16 17 of 30

Vislink (LON:VLK) looked a pretty good turnaround back in 2011-2015. It started off as being cash rich, with a nice dividend. Then Hawkins' usual approach of gearing up the balance sheet, and making acquisitions, has led us to where we are now.

Revelations about Hawkins only working part-time, taking wildly excessive remuneration (which included even getting the company to pay his personal tax bill!), and then for me the VCP was the last straw, so thankfully I ditched this one before the big falls.

The red flags here really all centre on Hawkins. As you say, his track record is not good - he made a total mess of things at Anite, which he glossed over in presentations. It became increasingly obvious that Vislink was a vehicle for him to plunder for personal enrichment - which I've mentioned a number of times before in my articles here, not just recently.

I agree with TMFMayn's points that financial engineers like Hawkins are the wrong people to back. Smaller companies need entrepreneurial management, with a big personal stake in the business, preferably the founders.

I think financial engineer type management become addicted to doing deals, and often build groups which are shambolically run, and have no real synergies. They often overpay too. You then end up, as is the case with Vislink, with a top heavy balance sheet with worthless intangibles that need to be written off, but a big pile of debt at the bottom of the balance sheet. Then the bank force them to raise fresh equity, at a bombed-out share price, diluting away existing holders to bug*ery. Sepura (LON:SEPU) is another recent example of things going wrong at acquisitive & debt laden companies. So is Lakehouse (LON:LAKE) .

These things with acquisitive management are just best avoided in my view, as they so often go badly wrong.

Regards, Paul.

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Heisenberg 30th Sep '16 18 of 30

In reply to post #152369

Looks like Vislink needs a refresh at the top, starting with the Executive Chairman - he has had long enough to sort this company out and he has made a complete mess of it; textbook lesson in how to destroy shareholder value. However, judging by the Board with 2 appointed nearly a decade ago it doesn't look like a company that embraces change; more like an old boy's club.

Market cap is now less than what they paid for Pebble Beach in 2014.

When I read the words VCP... time to keep looking for opportunities elsewhere.

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2020vision 30th Sep '16 19 of 30

Paul what's your view on SEE. They have issued 3 RNS in the past few weeks, a new chip for use in automotive which will be the key offering of their automotive spinnoff and today 2 new distributors for the fleet product with an initial order of 1,500 units worth A $4.3m. ?

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JohnEustace 1st Oct '16 20 of 30

In reply to post #152369

How do you square this with your holding in £VCP?

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Paul Scott 1st Oct '16 21 of 30

In reply to post #152426

Hi John,

Re your query on Victoria (LON:VCP) - I think it's all down to what results are achieved.

In the case of VCP, its strategy seems to have been spectacularly successful - just look at the financial results. That's why I hold shares in it! Profit is going through the roof.

So if Directors deliver results, then they're worth backing.


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FREng 1st Oct '16 22 of 30

In reply to post #152336

Perhaps there should be a law that all Value Creation Plans must be symmetrical, so that the management have to pay the shareholders for any value destruction.

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Carey Blunt 1st Oct '16 23 of 30

I've looked at Avesco (LON:AVS) briefly before and it's still on my watchlist. is their any danger that their revenues are lumpy, coming along with big events like the olympics only to be followed by a "fallow" year? Also the sale of their property this year ma also provide that same effect? It seems like it may do well this year but then maybe drop next? Anyone any thoughts? One to trade rather than hold for the long term?

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JohnEustace 2nd Oct '16 24 of 30

It looks as if the Avesco (LON:AVS) business is being tidied up to facilitate a trade sale so there may not be a long term to wait for. I'm a holder in any case.

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gus 1065 2nd Oct '16 25 of 30

In reply to post #152465

.... Or the management may just be doing their jobs and cutting out the unprofitable business segments to focus on those that are profitable and have the best growth potential to facilitate a re- rating of the stock price. It's unusual for management to dress themselves up for sale unless there is a strong outside influence (dominant shareholder, potential hostile takeover pending etc.) - a bit like turkeys voting for Christmas.

Either way, hopefully more upside to come for Avesco (LON:AVS) shareholders.



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crazycoops 2nd Oct '16 26 of 30

AVS is also difficult to trade as there is often a largish spread and the shares are quite illiquid. I hold.

Blog: Share Knowledge
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Maddox 3rd Oct '16 27 of 30

In reply to post #152336

John Rosier capitulated back in August: " Vislink (VLK) issued a profit warning early in the month and I did what I should have done a year ago. I cut the holding, realising a significant loss, and reinvested the proceeds into stocks that I think have better prospects. I experienced the usual feelings of tranquillity and relief at no longer having to see, or worry about, this dog in my portfolio. "

Similarly, IC's Simon Thompson persisted in tipping VLK despite acknowledging the greedy VCP scheme. He bailed out with a SELL recommendation on the 6th July.

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herbie47 3rd Oct '16 28 of 30

In reply to post #152693

Thanks for that, I'm no longer a subscriber to IC so did not see that. I rather fell out with Simon Thompson over Globo and few others like Stanley Gibbons (LON:SGI). Yes Simon does tend to support his tips all the way down.

I see his has a large stake in Crawshaw (LON:CRAW).

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herbie47 3rd Oct '16 29 of 30

In reply to post #152477

I did not find the spread too bad, it's about 2% but yes if you want to trade over 1,000 shares you may have problems. I'm still holding on.

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V4Value 4th Oct '16 30 of 30

Re, Vislink, (I'm a holder unfortunately). I've held for about three years now and the news flow has always been positive until the infamous VCP. Whilst this was a major red flag for a lot of shareholders, and rightly so, the management must have thought they would actually be rewarded from the creation of this plan and hit the targets set. Therefore, what I don't understand is how things could have gone so wrong ever since. A VCP does not in itself damage a company, so the profit warning came as a surprise to many. I recall this was too much for some and they got out, John Rosier included - good for them as it was the correct decision. I held, and I am mildly shocked at the capitulation from what the commentators agreed was a good value-play company. Given the relative small size of my holding (now!) I'm going to grin and bear it. To bail now while everyone is heading for the exit may be a panic move. Only time will tell, but I'm increasingly paying more attention to the Stockopedia ranks going forward and Vislink had a low quality score.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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