Small Cap Value Report (4 Aug 2015) - AMR, NWF, CTO, ZTF

Paul -you may now be interested in Zamano as its gone above £10m market cap after disclosing preliminary interest from an other company yesterday. Stock rank of 91. By my sums on a fcf/EV of about 5 with growth prospects as a bonus. It's a company that has dissapointed in the past, but is turning around yet investors don't want to know.

I'd also flag up a holdings statement in Synety today - Helium rising stars are increasing their position. I'm still excited by this and look forward to interim results.

Paul,

One thing to be aware of with NWF (LON:NWF) is that it is heavily involved in the animal feed sector and with dairy farmers in particular. Disastrously low milk prices are causing huge financial problems for dairy farmers, so whilst the NWF directors are "confident and expectations are in line", I would add a big note of outlook caution to this one. NWF will do very well if they come through unscathed over the next 12 months.

Paul, one does need to be cautious on interpreting the cash flow of contracting companies.
That's because there are likely to be advance (mobilisation) payments to the contractor,
progressive retentions held by customers until the completion of defect liability periods,
perhaps retentions held by the contractor for work done by sub-contractors,
besides possible "pay when paid" arrangements. Unless shareholders are supplied
with adequate information on these elements (as, imo, they ought to be), it becomes a
question of trying to read the runes of company announcements which can be
rather a minefield to interpret. None of that is meant to reflect specifically on
CTO's results announcement, other than that it's regrettable that more info is not given
so that we don't have to be trying to guess at what the position is.

In reply to post #103992

Hi Ian,

Thanks, good point. I checked back to my previous notes, and my report of 3 Feb 2015 covered the issue of dairy farmers.

I wonder if it might lead to more bad debts for NWF? That always worries me with low margin businesses - a few bad debts from customers who go bust, can easily wipe out all the profits for the year.

Regards, Paul.

I am also long CTO which seems, as you say, to be slowly advancing as contracts with more reasonable margins come through. Quite apart from this, I like the management: they are rightly proud of their 75 new apprentices from September; they value the quality and expertise of their workers and are unrivalled in their field.

In reply to post #103996

I know nothing about NWF (LON:NWF) and cant say I like low margin businesses but surely of there bad debt provisions over the years are prudent and sensible then they will have provided for bad debts?

In reply to post #103999

Farming is remarkably cyclical with good times and bad. Dairy, pigs and sheep are all bad at the moment so likely to be a contraction in livestock numbers and more farmers with cashflow problems or going broke. Add this to a low margin and there is very little financial wriggle room. Ian

I've known NWF since its days as a farmers co-op. All its businesses are low margin and all are liable to throw a wobbler from time to time, there being minimal barriers to entry. Quite how it gets such a high rank on Stockopedia beats me - the quant jockeys need to revisit their algo.

In reply to post #103999

Hi Purpleski,

Re bad debt provisions - companies tend to make specific bad debt provisions against known (or likely) bad debts. Some companies then also make a general provision, to cover as yet unknown bad debts. The trouble is, if there is a general downturn in a sector (such as dairy farming) which causes a dramatic increase in dairy farmers going bust, then that could leave NWF (LON:NWF) with unexpectedly high bad debts, in which case they would have to make an additional provision, thus hitting profits.

Another aspect of this is that companies can insure against bad debts, by using a trade credit insurer, although I doubt whether NWF do this, as it's too expensive for a low margin company.

I imagine NWF just use standard credit control procedures - so allowing customers a little slippage on agreed terms, but then putting their account on stop (i.e. no more deliveries) until they pay the old invoices. That way bad debts are at least minimised.

I imagine that NWF would have a fragmented sales ledger though - so probably thousands of customers, none of which is individually that significant. So that helps.

It would be worth getting more information on this from the company though - there's usually some detail about bad debt provisions in the debtors note (which will be referenced on the Balance Sheet with a note number) near the back of the Annual Report. It might also be discussed in the Key Risks section of the Annual Report.

Regards, Paul.

In reply to post #104011

Thanks Paul