Small Cap Value Report (5 Dec) - HHR, VNET, QPP

5th Dec '13 by Paul Scott

20 comments 18311 reads

Good morning. I was taken aback by the news this morning from Helphire (LON:HHR) of a large Placing to raise £60m, as the business was already well--financed, having cleared all its bank debt in a refinancing earlier this year. However, they seem to be taking advantage of the amazing willingness of investors to finance IPOs and Placings right now - wave after wave of deals is happening on a daily basis - which has to be good news for the economy, as growth is now being properly financed by the equity market.

I don't think there is any sign of indiscriminate funding for IPOs, but certainly the quality, and valuation, of some deals looks a bit on the iffy side. So a potential warning sign of a market that is getting a bit too frothy in places. A lot of people are buying into IPOs on the basis that many are immediately going to a premium when the shares start trading. However, history shows that a lot of IPOs in buoyant markets go on to be pretty awful investments, as the founders are usually cashing in at a high valuation (why else would they want to sell?!) which probably won't stand the test of time. So it's certainly an area where one should only proceed with caution in my view. Or, for the more risk tolerant, a case can be made for making hay while the sun shines! Whatever floats your boat.

In the case of HelpHire, there's big dilution, with the new shares representing 42.3% of the enlarged share capital. So by my calculations that means that the number of shares in issue (1,677m) is being increased by almost 69%, which is a massive amount to do in one go. So the key issue is what price the new issue is at, and in that regard this deal looks remarkably good - the price is 5.2p, which is no discount at all to the market price before the deal. Therefore existing holders are not being disadvantaged, providing the funds are put to good use.

Cenkos raised the money for HelpHire, and they certainly seem to be one of the key players at the moment in raising money. Funnily enough, I was at their offices yesterday, to have a half hour Q&A session with…

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hayashi22

5th Dec '13

Be interested if you have time to look at Ensor. Tks

Sharechap

Paul- many thanks indeed for your work with VNET yesterday. Fantastic service for those of invested in small caps such as VNET where news flow is sometimes erratic.

carla77

Paul,

Love the reports, please keep up the good work.

Can't understand why you are so negative about QPP, my understanding is that they have won an enormous amount of business recently and should have a good base to generate increasing earnings, also it is good that the owner has a lot of his own cash in the business. I believe QPP have stolen a march on the competition this past year, my main concern is that they don't go chasing too many more clients before they start delivering for the existing ones.

Regards

Peter Barrett

Paul Scott

Hi Peter,

I'm negative on Quindell (LON:QPP) mainly because I don't think their business model is viable in the long run, for the reasons given in the main article above.
Also, it doesn't generate any cash, and has had various other issues which put me off.

On the other hand, it's difficult to argue with the huge volume of contract wins that QPP has secured, and also the £200m Placing at market price was very impressive & shows major support from the City for QPP, which was lacking before.

Therefore, whilst I still have reservations about QPP, I'm not as negative on it as I was, for the reasons given above.

Regards, Paul.

intuitive6191

Insurers could stop bogus claims almost immediately if they made whiplash an exclusion to the standard policy. Bogus claimants would then presumably have to prove their case directly against the other driver in court - which would probably put them off.

Admittedly the small (very small) number of genuine whiplash claimants would be disadvantaged - and obviously this wouldn’t be very good for Quindell.

rick

Paul,

Shorting ASOS LON:ASC into the Xmas and New Year trading season looks like a kamikaze bet to me. Trading up +3.5% today and potentially heading into new 52-week high territory. Was the logic behind the trade just based on value, or is there another component?

Paul,

Many thanks for your prompt reply.

Regards Peter

kevanp

Paul

Good grief! Sweett (LON:CSG) now down to 52p (bid)! Aren't you tempted back into them yet?

Kevan

ericb

didnt stay there for long .. thanks to weak holders ive picked up another load.

Paul

On Helphire (LON:HHR), they look rather interesting, but are you really saying that their future profits are going to be boosted by their involvement in promoting fraudulent insurance claims? I didn't think I had too many qualms in the businesses in which I invested (tobacco, gambling, oil — you name it) but I have to admit even I have some reservations about insurance fraud.

Or am I misinterpreting your remarks?

Best,
Kevan

Eric, you talking about £CSG?

cig

I don't think that would work. Look at Paul's story: it's not the whiplashee's insurance who pays up, but Paul's, under third party liability rules. And it's the law not the insurer which decides what is a valid third party claim -- so if Paul's insurance had excluded third party whiplash claims, Paul would have had to pay up out of pocket, which is not solving the problem. Insurers would have long done it otherwise...

So it needs government intervention, which I can imagine is tricky as politicians first need to wake up to the problem, and then may fear the PR "whiplash" from genuine cases getting caught in the crossfire.

At least it makes the cost of motoring higher for everybody, which is good for the environment. :-)

Hi Rick,

I'm short of ASOS purely on valuation grounds. Great business, but it's currently priced way, way too richly. Liberum have followed me (!!!) recently, and put out a sell note, saying that ASOS is only worth 3000p. I think it's worth about 2600p, and even that's a heroic valuation on a PER basis.

What happens in the meantime doesn't concern me. I've allowed for the possibility that the share price could just keep going up, so I'm prepared to sit tight on my short for as long as it takes, and have sized the position so that it would only start to hurt at about 7500p per share.

At some point people will look at the percentage growth rates at ASOS, realise that they are now slowing as the business gets larger, and therefore a forward PER of 80 (per Stockopedia) is far too high a rating, in my opinion.

Cheers, Paul.

I've had another look at Helphire's website and it seems to be even worse than I thought. If I'm following another component of the business model is to give poor Porsche owners who had a "non fault" accident a replacement Porsche (otherwise they may be reduced to drive a Polo to get from A to B for a few weeks, the horror!) at an inflated price (hence the in-house rental service rather than outsource that to regular car hire companies at fair prices, a point that had puzzled me for ages) and then charge the whole inflated thing, plus no doubt inflated legal costs, to the driver "at fault" or their insurer. That anyone can think that such people have any intention of returning cash to shareholders is fascinating...

Thanks Paul,

I tend to agree with you regarding the valuation, it seems very rich, although experience has taught me not to fade a trend (and ASOS is in a strong one), but wait until it falters.

The problem with shorting stocks like ASOS, Rightmove et al. is that the bulls think that like Amazon they will be the ones that "own" the internet in their specific retail space in several years time, and that they will only become "good value" at the point at which they have finished their massive growth phases.

I am not sure if ASOS will run to £80 or even beyond £100. But I'm not going to bet against it, even though I cannot find it within myself to be long at these levels.

good luck, Rick.

Hi cig

Some thoughts in response

"t's the law not the insurer which decides what is a valid third party claim"

In most cases the insurer just decides to pay up rather than contesting. In fact I believe Quindells whole business model is built on this - by settling claims on behalf of the insurer and then invoicing the insurer. Obvioulsy the free loaders are aware of this and take advantage of the fact that their claim is probably going to be rubber stamped.

"Paul would have had to pay up out of pocket"

Only if the the other party proved their case. I doubt that a criminal crash gang would take their innocent victim to court .Far too risky.

Of course, insurance companies could still offer whiplash cover as an excess. Some policy holders may deicde to pay this - but I suspect it would be quite expensive.

The underlying premise is that the vast majority of whiplash claims are pure fraud. If people had to continue this fraud into court I would imagine that many would think twice. As it stands its far too easy .

Going forward the days are numbered for insurance as a shared risk business. My original post iwas a bit provocative - but dont be surprised if the underlying thinking behind it is the way the industry develops. Rich people will still be able to fully insure themselves against most perils. The rest of us will have to pick and chose which insurance we can afford/not afford to have.

Funnymoney

ASOS - I wouldn't buy it now, but the data shows that the November traffic showed a greater increase than it did in 2012 vs 2013. December data is not large enough to really infer much, though it is off the scale increase-wise but I guess that is entirely related to how the week fell last year.
If you want to short stocks all the analysis shows that the market leaders are the worst ones to short and the laggards are the best. I didn't believe until I started keeping records twenty years ago.

It's not the criminal gang who would have sued Paul, it's the ambulance chasers like Quindell/Helphire who represent the "no fault" driver and are themselves (technically) legal businesses with cunning lawyers, which the opposing insurer know will give them a hard time. If it goes to court they just need to get the driver to turn up and say "me neck hurts" and the court is ill equipped to do anything other than accept it as it can't be tested and there's that small chance their neck really hurts. Surely the insurers on the receiving end would go to court if they thought they could win.

The actual criminal may not even get much of the loot, it would be interesting to see how much Paul's got out of the £9k...

And in any case, even for normal real accidental accidents, where the driver is really not at fault, the business model of inflating claims and maximising recoverable expenses, against other drivers whose fault is usually a legality (few people actually cause accidents just for fun) is pretty scummy. In civilised society shit happens and you don't try to turn any bad thing into a worse thing for petty benefit.

I also doubt you can opt out of third party liability insurance, it's usually a condition to be allowed to drive a car (to protect the public from insolvent drivers causing damage they couldn't pay for), so I'd be surprised if insurers were allowed at all to offer exemptions to specific liabilities.

Agreed it's long term not good for the public, or the insurance industry. The rich can self-insure for most things (risk sharing is only economic for outlier risk compared to your net worth), so the insurers may just end up with an ever shrinking market.

I can't edit my previous post but I realise it should have said "2011" instead of "2013" - i.e. this year's increase is greater and therefore momentum is not necessarily slowing at this particular moment.

6th Dec '13

Hi Cig - your comment below highlights the problem in a nutshell.

Surely the insurers on the receiving end would go to court if they thought they could win.

Apparently not. Thats why its a £2 billion a year problem. Sums like Pauls 9k were probably just paid out without much discussion. Its too small a sum for an insurer to contest.

Small Cap Value Report (5 Dec) - HHR, VNET, QPP

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Paul Scott

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