Small Cap Value Report (31 Jul 2017) - SPRP, XPP, FDM, RBG, SRT, UTW | Graham Neary

31st Jul '17 by Graham Neary

67 comments 26472 reads

Hi again - it's Graham covering Monday updates.

Not too many names reporting today but I'll start with Sprue Aegis (LON:SPRP), FDM (Holdings) (LON:FDM) and Fidessa (LON:FDSA).

Edit: prioritised XP Power (LON:XPP) instead of Fidessa (LON:FDSA) following a request.

Cheers

Sprue Aegis (LON:SPRP)

Share price: 232.5p (-3%)
No. of shares: 45.9 million
Market cap: £107 million

Trading Update

I was a a bit too cautious on this fire alarm manufacturer as the recovery continued and the share price has made great gains.

It's now nearly double the April 2016 low. (The high in 2015 was 350p).

Issues with suppliers and overstocking caused the problems in 2016, and appear to have been dealt with.

As such, the full year result is expected to be in line with expectations.

As announced on 15 June 2017, Sprue has made a positive start to the year and for H1 2017 expects to report sales of approximately £26.0m (H1 2016: £25.9m) and operating profit* of approximately £1.5m (H1 2016: operating loss of £0.9m before share based payments charge). The strong return to profitability has been achieved through a significant improvement in gross margin and a net reduction in overheads.

Sounds great. The problems did indeed prove to be temporary.

The operating profit figure is a bit misleading, however, as the company routinely adjusts for share based payments. It should stop doing this, in my view (or pay bonuses in cash instead of shares).

Sprue has been investing for the future and remains on track for its longer-term ambitions.

The StockRank is 74, thanks to good contributions from Quality and Momentum.

Value is a bit thinner and indeed I'd argue that the positive EPS Growth and low (cheap) PEG ratio below don't help, as last year's results were artificially lower (based on one-off problems).

If you trust the company, it could still be worth paying up for, of course. Maybe it's a QARP stock (quality at a reasonable price)?

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shipoffrogs

31st Jul '17

XPP - I assume that if it's a big exporter, then stripping out currency gains the business has just gone backwards the last 5 years.

InvestedGeordie

You haven't read the statement issued today, have you?

IG - No, I haven't. I looked at XPP a few years ago. And just looked at the figures for the last 5 years here on Stockopedia - over that period they don't seem to have done much at all. Eps up 5% in 5 years.

Wol

Thanks, Graham. You and Paul give a truly great service. So much appreciated

gsbmba99

Looks like IFRS 15 (Revenue from Contracts with Customers) has claimed another scalp. This time it's Utilitywise (LON:UTW). Probably not a surprise. Turns out they had been taking 85% of the contract value for renewal contracts to revenue in the period when the contract was signed (and not when the contract commenced which could be years later). They will now take 80% of contract value to revenue when the contract actually commences. We did however learn the other week that these contracts are subject to clawback if usage is overestimated so not sure whether the new policy reflects any level of prudence. From today's announcement, it looks like they booked £24.3m of revenues in the years ending July 14, 15 and 16 for renewal contracts that hadn't commenced in any of those periods. Indeed, 5% of the amount relates to periods beginning after 1 Aug 2020 (ie financial year ending 31 July 21 and later) meaning this revenue was recognised between 5-7 years too early! How can you claim revenue for a contract that doesn't start for another 5-7 years and how does that get past auditors? I can't find the quote from Woodford but the essence was that they had examined all aspects of Utilitywise (LON:UTW) accounting policies and were fine with them. Did they not understand or did they think this was ok?

Ramridge

Re Utilitywise (LON:UTW) This has got to be a black mark against Woodford which will dent his reputation. You cannot take a 29% stake in a company without going through their accounts, history and management with a fine tooth comb.

bestace

Interesting RNS released just before close of play: a 200p possible takeover bid for Revolution Bars (LON:RBG) !

https://www.investegate.co.uk/revolution-bars/rbg/statement-re-possible-offer/201707311622556392M

simoan

Just shows all the naysayers - value will always out.

Well done Paul. It was worth all the flak!!

Cheese! Si

Graham Neary

Cheers Julian!

G

Trident

Re: Revolution Bars (LON:RBG) Seems to be a bit of a killer bid, if offer firms up. Designed perhaps to appeal to the institution shareholder base. Be interested what the Directors reactions will be. Do they think its worth more?

It looks like institutions hold the majority of shares, so no blockers from any founders that I can see.

vik2001

Paul must be licking those vodkas back tonight. he stood buy what value he saw in the share, well done.
what happens from here, has the share got further to go if the bid is not accepted?

"Be interested what the Directors reactions will be. Do they think its worth more?"

Ordinarily, a potential bidder would not be allowed to conduct due diligence unless the board were happy with the price and willing to recommend it.

Re: Revolution Bars (LON:RBG). Paul's last estimated range of value was: 200-240p per share.

Paul Scott

I was just having a sleep, to shrug off the remnants of my cold/chest infection, and woke up to see the fabulous news on Revolution Bars (LON:RBG) - potentiall 200p cash bid from Stonegate. The same thing happened a while back with Avesco, and my first thought in both cases was whether I was actually dreaming - as I frequently do dream about specific shares, and wake up confused about whether what I imagined actually happened or not. Anyway, a couple of coffees later, and the good news is sinking in.

Funnily enough, I looked at Stonegate a few weeks ago, because it bid for WalkAbout, the pubs group that RBG's new CFO used to work for. The price offered for WalkAbout seemed very generous, and I remember thinking at the time that Stonegate looked an obvious bidder for Revolution Bars too. It's an obvious candidate for a takeover bid - with an ungeared balance sheet, and fantastic cash generation. So a bidder could introduce some debt, and use that to pay for a good chunk of the acquisition. Plus a trade buyer such as Stonegate could squeeze out a lot of cost - in particular drinks supplies, which are structure around volume discounts ("retros"). Therefore the enlarged group's buying power would add to RBG's already high margins. Strip out a load of HO costs too, and I think Stonegate are probably thinking in terms of pushing up RBG's EBITDA to c.£20m p.a. Put that on a multiple of 5, and you get £100, or 200p per share. So it's a lovely purchase for Stonegate.

It's odd how investor sentiment on RBG was so irrational. I could barely find anyone who was even prepared to look at the figures at all. Almost everyone just dismissed the share idea before I had even got onto the figures. Just shows - there can be opportunities where investor sentiment is dismissive of a value share, or sector.

Anyway, well done to everyone who crunched the numbers, did your own research, and saw the value at RBG!

Let's hope the bid goes through. I'm happy with 200p, for a clean exit, at a nice profit - after averaging down post profit-warning, which got my average buy price down to about 144p. So again, another investing rule disproven - the "never average down" rule. If the value is good, then averaging down (after properly checking all the numbers, and making sure you're right) can be very lucrative. After all, the market doesn't know, or care, what price you originally paid - it's irrelevant.

Regards, Paul.

cojode

RBG.Well done Paul....an unwarranted pull back in the share price based on "fixable issues" had the ne'er do wells and doom merchants out on the "boards", so full marks to you not only for justifying your positive initial view of the company but also topping up when the S/P hit the fan!! As the saying goes "form is temporary class is permanent". Congratulations.

ds1980

Can anyone explain what happens to my shares in RBG if it is taken over. I bought as I saw the income possibilities here. Fair enough if I just get the cash and a small profit above my initial purchase price but I still think long term the income from RBG will be very good and would like to hold onto them? Ta

Brilliant Leader

Well done on RBG Paul and to other subscribers who stuck with it, averaged down or caught a falling knife. It wasn't for me but pleased to see others getting a good outcome. Bubbly on a Monday, whatever next!

It's odd how investor sentiment on RBG was so irrational. I could barely find anyone who was even prepared to look at the figures at all. Almost everyone just dismissed the share idea before I had even got onto the figures. Just shows - there can be opportunities where investor sentiment is dismissive of a value share, or sector.

Anyway, well done to everyone who crunched the numbers, did your own research, and saw the value at RBG!

Paul,

I agree how negative sentiment got on the day of the profit warning. It was exactly what attracted me to load up from a relatively small starting position in Revolution Bars (LON:RBG). IMHO not all warnings are created equal and the last three times I've bought after a warning (Keller and NCC too) and broken Ed's rule I've made out like a bandit... doesn't mean it will work every time though...

Perhaps there is life left in value investing still - I was beginning to wonder!

All the best, Si

rhomboid1

Well done on RBG Paul, I was bearish on the company from the start but as you say the acquisition makes perfect sense for Stonegate. What I would also say is commentary both positive & negative is what makes this site worth visiting, there are no right or wrong answers just infinitely variable financial outcomes for investors depending on timing. Anyhow congratulations to all RBG holders as you are better off by far than you were at 4.21pm!

JonBirdy

I bought on the high in March (Grrrr). Then averaged down when the price started to recover last week. Should the takeover go through I'll be up just 13%, such was the hit I took in May!

Still breathing a big sigh of relief though. Phew!

Small Cap Value Report (31 Jul 2017) - SPRP, XPP, FDM, RBG, SRT, UTW

Sprue Aegis (LON:SPRP)

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Graham Neary

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