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

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 business is now loss-making, with yet another round of restructuring underway.

The adjusted loss is £1.1m (down from a £2.2m adjusted profit in H1 2015).

The full loss before tax for H1 this year is a staggering £32.2m, mainly caused by heavy write-downs of intangibles. Whilst these are non-cash write-offs for now, intangible assets were of course originally cash costs at the time of acquisitions being made.

The balance sheet looks very problematic now. I've already mentioned the troubling level of debt, which has increased after the period end, to utilise the full £15m borrowing facility.

However, I also note debtors looks far too high. This is a big red flag, especially at a company such as this which is financially distressed. My guess is that there's possibly a lot of padding in that debtors figure, which will end up being written off. If debtors does begin to turn into cash, then that would help the company reduce its excessive bank debt.

The most recent 1.5p dividend was paid on 18 July 2016. This was clearly a mistake, given how precarious the bank borrowings situation is. I don't expect this company to pay any more divis, so it's safest to treat this as a nil dividend company for valuation purposes.

The company makes positive noises about the future, but I think it's best to disregard management comments at financially distressed companies. They're always going to make positive noises, they have to.

One bit of good news - the hated "value creation plan" - i.e. legalised theft - has been scrapped, with no plans to replace it. I should think so too!

My view - I would get out whilst you still can.

Am rushing for a meeting this afternoon, so a few quick snippets to finish off with;

Treatt (LON:TET) - this share is up 11.7% today on a trading update, which must be positive. It is, being "comfortably above";

The Board is pleased to confirm that the Group has performed well in the second half of the financial year.  As we approach our financial year end, momentum in the business has continued and consequently the Board now expects to report profit before tax and exceptional items for the year ending 30 September 2016 comfortably above its previous expectations.  

That probably means EPS for this year of 12.5p to 13.5p perhaps? So at currently 211p per share, the PER looks to be probably between about 15.6 and 16.9 - which strikes me as probably about right, in current market conditions (where many companies look historically a bit expensive).

It seems to be a good company though, with a decent track record. High quality scores too, I see from the StockReport.

Trinity Mirror (LON:TNI) - a trading update says that it's performing in line with expectations.

The trend in revenue from traditional sources are alarming though;

Group revenue* on a like for like basis is expected to fall by 9% in the third quarter compared to a decline of 8% in the first half. Publishing revenue is expected to fall by 10% with print declining by 12% and digital growing by 11%. Publishing print advertising and circulation revenue fell by 21% and 6% respectively. Classified digital revenues, which are substantially jointly sold with print, remained under pressure but we delivered strong growth in digital display and transactional revenue of 24% as digital audiences continued to grow.

So it's really a question of whether digital revenues can grow enough to make up for the seemingly inevitable evaporation of traditional print revenues?

Low interest rates also make the huge pension fund here a bigger problem.

It's difficult to see much long term hope here.

Avesco (LON:AVS) - I hold a long position in this share, at the time of writing - a good announcement concerning another non-core disposal, raising £5m cash for a subsidiary which was loss-making in 2015 (to the tune of £1.9m), and expected to only make a small profit this year.

So that looks an excellent outcome, dropping off another non-performing asset, following the sale of freehold land earlier this year.

My view is that Avesco is possibly being prepared to maximise shareholder value, maybe in a trade sale? Its US subsidiary, Creative Technologies, is I think worth considerably more than the current market cap.

Even though this share has risen a lot, it's still not expensive, on forecasts of about 25-27p for this year & next year. It should be debt-free now too. I'm hoping for upside to 400-500p here, in the long run, and it remains one of my core personal holdings. So far, so good!

Brighton Pier (LON:PIER)

Share price: 134p (up 0.4% today)
No. shares: 31.7m
Market cap: £42.5m

Results, 52w to 26 Jun 2016 - a reader has prodded me into having a look at this one. Formerly Eclectic Bars, which was a poorly performing, rather random collection of bars. Highly successful entrpreneur Luke Johnson then got involved, and has bought Brighton Pier, bolting it on, and seeking other attractions to add to the group. His stated aim is to create a "mini Merlin".

The Brighton Pier acquisition was effective from 27 April 2016, so results to 26 June 2016 will only include 2 months trading of the Pier, plus 1 years trading from Eclectic Bars.

It's too early to judge whether the Brighton Pier acquisition was good or not. I've looked at its historic accounts, through Companies House website, which are not particularly remarkable. The narrative today talks a lot about the cashflow generated by the pier, but what about all the maintenance & capex required just to keep it standing, exposed to the elements? It must be very expensive to maintain.

The pier certainly attracts enormous footfall, but I'm not sure that is being monetised effectively, as it's free to stroll around. There could be upside potential there perhaps, to improve the facilities, modernise the rather tatty bars, etc.

As regards the old Eclectic Bars business, this seems to have been turned around successfully. Various cost cutting measures, and negotiating a 2.25% margin improvement from a renegotiated drinks supply contract, have boosted profitability.

Adjusted EPS of 4.2p for 2015/16 is unremarkable, but should rise next year when the pier is included for a full year.

There seems to be about £9.4m of net debt, which looks reasonable to me, considering the group owns a valuable asset in Brighton pier.

My opinion - it's too early to judge how this will work out. The turnaround in the bars business is good news though. The shares no doubt contain a Luke Johnson premium, which is justified.

Broker consensus seems to be for 7.4p EPS next year. That equates to a PER of 18.1 - maybe that's a bit too expensive on fundamentals, but it deserves a Luke Johnson premium.