Small Cap Value Report (6 Apr 2016) - HSS, BLTG, CYAN, ACSO, STY, SVR, TPT, RM2

6th Apr '16 by Paul Scott

28 comments 23221 reads

Good morning!

Writer's block has hit me this morning - it does sometimes, you just can't think of anything to write, or get your head round the numbers. So today's report may not be very good, I'm afraid.

HSS Hire (LON:HSS)

Share price: 82.25p (down 5.2% today)
No. shares: 154.8m
Market cap: £127.3m

Results, 52 wks ending 26 Dec 2015 - the company says that it has performed in line with revised expectations. Although of course expectations have been dramatically lowered - from 11.5p EPS forecast for 2015 in Apr 2015, down to only 2.48p forecast EPS now.

Today the company reports 3.2p adj. EPS, so it looks as if they're a bit ahead, or possibly that the forecast data is prepared on a different basis, or hasn't been updated recently, which sometimes happens with smaller caps. Anyway, EPS has come in roughly where it was expected to, after the 2 profit warnings last year.

Outlook - sounds reasonably upbeat:

Directorspeak from the CEO says:

"We expect to see the full year benefit of the cost reduction programme implemented in H2 2015 delivered through 2016. We also expect to reduce our capital expenditure, following two strong years of fleet investment and the opening of our new National Distribution and Engineering Centre in H1 2016. Together with the cost reduction programme, we expect these actions to improve our cash generation and financial performance."

Dividends - this company has a very weak balance sheet, so it only pays modest divis. The final divi of 0.57p adds to an interim divi, to give 1.14p total dividend for the year - a yield of only 1.4% - very poor for this sector.

Balance sheet & net debt - you expect hire companies to have some debt, to finance part of their hire fleet. However, in this case, the company has no equity at all - it's actually negative NTAV of -£21.7m. So in effect, the entire hire fleet is funded with debt. That's a very imprudent capital structure, and makes this share uninvestable for me.

Net debt is an eye-watering £218.1m. That compares with £183.2m total property, plant & equipment. So it's effectively a LTV on the hire fleet of 119%. I would normally look for a LTV of about 50%. The difference works out at excess debt of £126.5m - which coincidentally is…

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daveinthelakes

6th Apr '16

Paul,
Re HSS and Speedy Hire

If they haven't made money during the housing, general construction and buy to let boom of recent years then they will be in even worse shape when the carousel stops. Wouldn't touch these at this stage of the cycle.

Dave

BEN12358

Scm - Apologies and cheer up. I wasn't intending to be disparaging....the thesis for holding blancco is unproven as yet hence the term 'story'.

To be clear, I do currently hold Blancco so personally I do think this story/thesis may be sound (but DYOR I guess).

dscollard

That depends on definitions: for me "story stocks" are those massively covered (and hyped) by media and sentiment. I use a combination of fundamental and technical analysis.
Story stocks as I define them rarely behave well on either fundamental or technical grounds. The media circus and Social/BB hyping often leads to very erratic price movements. They often attract a lot of short interest which can cause big price dislocations especially on squeezes. In most cases gravity eventually kicks-ins (the fundamentals) and that can hurt and very fast. LinkedIn lost almost 50% in a day in Feb. a good example of bubbles bursting. Many will argue that Tesla will do similar

With good money management and tight control on capital allocations some are be worth a bash. But there are easier and more predicable ways to make money

back2value

Paul,

Considering you claim to have had writer's block, you still came up with an interesting and readable report. Don't be so down on yourself!

Thanks as always for your well-researched thoughts.

B2V

smallcapman

Hi Ben,

Thanks for that. I've got a cappuccino and a pastry, so I feel better now.

I thought I had RGS until I logged in after 08:00 this morning...

When there's a blancco button on every phone, PC, laptop and tablet we can celebrate...

I'm assuming you're a couple of years younger than me, in which case we may be alive to see it.

Buffy

ExpectingValue

What construction boom? We haven't researched 2004-2008 levels of spending in real terms, despite having a population over 5% larger and seeing some level of pent-up demand and deferred work through the recession.

Construction jobs represent ~6% of employment vs. a fairly steady 7% pre-crisis.

I don't see particularly well invested infrastructure around the country and, debates about rents and cap-rates aside, utilisation of office buildings and residential real estate is fairly high in spite of the rents charged.

It doesn't smell like a boom to me. Which isn't to say it can't contract from here, but it is to say that there is probably room for upside as well as down.

pastybap

In Tom Burnet's call with Paul, I recall him stating he would never buy a company from anyone who was looking to sell. So I have followed his lead and sold half of my ACSO holding today!

I think if you look at the results for house builders, construction companies and those in the supply chain such as Michelmarsh Brick the sector has been making great profits as indicated by the high occupancy rates you refer to.

Speedy Hire and HSS mainly service individuals and small builders. When house prices are strong owners do up their properties and many sell and move on up the ladder. Similarly the boom in buy to let has been helped by house price rises as landlords main form of profit is from such price increases and not via the rent which mainly covers mortgage and other costs. Much of the work to upgrade properties prior to letting is done by the type of small builders who use HSS and Speedy.

simoan

Paul,

How utterly hilarious!!! I had no idea that Cyan was still a going concern. It seems they have re-invented themselves somewhat and now sell smart meters to far off lands. For the life of me I have no idea how the company still exists, or why it is still listed? As someone that works in technology, one of the few good deeds I performed in your TMF Pub many years ago was letting people know that the original microcontroller business was a complete no-hope dead end. Of course, back then the share price was 15p not 0.15p so let's hope no-one from those days is that far underwater!

Despite that, it's good to see that the company has been able to re-invent itself and I wish them the best of luck.

Good luck with your trade too! All the best, Si

Henry Walpole

Re Regenersis (LON:RGS) / £BLTG

Paul said:"My worry would be if management decide to dump their shares in the tender offer, as that would be negative for the share price afterwards".

From the Circular on the company's website:

6. Directors’ participation in the Tender Offer
6.1 The following Directors have notified the Company that they are currently intending to tender some or all of their Ordinary Shares:
(a) Jog Dhody
(b) Frank Blin
6.2 Additionally, Hanover Investors Management LLP (with whom Matthew Peacock is associated) has notified the Company that it is currently intending to tender some or all of its Ordinary Shares.
6.3 Rob Woodward has notified the Company that he is not currently intending to tender any of his beneficial holdings of Ordinary Shares.
6.4 Notwithstanding the above, the Directors do not intend to be and shall not be bound to tender or not tender their shares in accordance with the above.

I guess we won't know until after the offer whether it was 'some' or 'all'.

Paul Scott

Hi Webpax,

Great spot! The RGS Directors & Hanover are slippery characters in my opinion, so if they've given themselves wiggle room to sell "some or all", then I'd be very wary. It's particularly important to "follow the money" with that lot, as they're sharks.

Regards, Paul.

carmensfella

In Tom Burnet's call with Paul, I recall him stating he would never buy a company from anyone who was looking to sell.

pastybap.....I think there is a big difference between buying or selling a whole company and simply reducing your interests in a part of it however if you feel the need to sell some there are plenty of buyers as the price is actually higher than where they sold.

Is there really a big difference? There is almost always assymetric information between directors and other shareholders, in the same way as between sellers and buyers of a private business. I'm not saying that they know something we don't, but on the other hand if they knew there was positive news to come such as the earnings upgrades that have become the norm, would they have sold such substantial stakes?

I still like the company, but I have halved my holding in the same manner as the directors (albeit a tad fewer!).

Hi,

Yes, I don't blame you at all for selling some of your accesso Technology (LON:ACSO) shares.

As I said in the article above, I was uneasy about the big Director selling. I pondered this some more on the train to London after writing the above article, and decide to sell a third of my ACSO shares, which I did this afternoon. Am happy to continue holding, but at a reduced level - same as the Directors.

Regards, Paul.

In my view a very big difference and the founder did it twice before at much lower prices if you go through RNS history. When directors sell they tend to leave something for the buyers and the directors are not exiting just selling about a third of their long term committment.

If some think it is wise to sell a few too then that is no problem as there are plenty of buyers. That is exactly why it is also a good point at which to do deals like these. If they go to £15 or list on the Nasdaq or do another Merlin type deal then this will be long forgotten.

Anyway as a 14 year shareholder that has introduced probably over 100 investors to the company I am clearly quite relaxed in my views. The company and directors owe me nothing and the proceeds of previous sales have probably got me into ten more good companies and I am still a significant ACSO shareholder.....that is what investing and de-risking is all about. Directors need to sleep at night too you know !

Hi ee,

Nice to hear from you!

Thx for the thoughts on Cyan. This ties in with the comments from SmallCapMan - that sometimes shrewd investors can pick up on early stage progress at micro caps, and do very well on it.

I agree with that. Horses for courses. The reason I put Cyan into the report today, is because I think it's one to watch, there are some interesting signs - although I'm not sure it shooting up to £20m mkt cap today, when it will need more cash, is necessarily a good thing.

Anyway, I've bought some stock in it today, on a speculative basis, as it looks quite interesting as a speculation. No harm in doing a bit of speculating on the side of a more sensible portfolio! (which is what "smallcapman" below alludes to - I agree - if you're good at speculating, then go for it. Although in my experience, there are quite clear period where speculation works, then the window slams shut. 2013-14 was a great period for story stocks, for example. It's still quite good for well promoted story stocks - they nearly end up in disaster, but shrewd traders can make money on the greater fool theory with most of the crap that gets floated on AIM)

Regards, Paul.

7th Apr '16

smallcapman,

You said;

"shrewd investors who keep an open mind can do very well on, what seem to be disparagingly referred to as, story stocks"

I agree with this actually. Some shrewd, and sometimes manipulative traders, can find story stocks & spin them to great effect, to less experienced investors.

There are certain times in markets, when story stocks collectively go through the roof, for maybe 6 month periods. So if that's your bag, fine, try to make money that way.

My suggestion is to make a LIST of every story stock you hear about. I do. I have a spreadsheet. I make a note of the date, the person who told me the story, the share price then, and the live share price on googlefinance.

As time goes on, the losers on this list rapidly outweigh the winners.

What does that tell you? Also, you tend not to get any more phone calls from the promoters who wanted to ramp the price of the generally rubbish stocks.

I pick my lunch guests very carefully, and have long ago jettisoned the phone numbers of people who tried to ramp rubbish stocks to me. AIM is full of it.

My reports are designed to arm people with the skills and knowledge to fend off such attacks on their wealth.

Paul.

mikehunt

The Accesso guy ramped his company to hell on the interview you did with him Paul, then dumped loads of shares a few weeks later - comical really

Thanks for your excellent suggestions Paul. Adopting them will make my prospecting more efficient. I make my own notes and put companies on my IG watchlist when I read about a prospect, but I always fail to record the date and source. Your reminder has spurred me into action. Relying on my memory isn't the most sensible way to proceed as I get older!

There are indeed many sharks out there. I've learnt to listen to everyone, as gems turn up from unlikely sources. Slowly the list of respected sources gets whittled down though.

I run a family portfolio in which several of us have a share, and which has run for three generations. This is entirely composed of companies with long term high returns on equity and investor focussed management, and they all pay dividends which I routinely reinvest. My own portfolio is somewhat racier.

The biggest lesson I ever learnt was good position sizing. I'm sure many of us learnt something about that in 2008. My family folio did little business during that time (except top up at some excellent prices) but my portfolio certainly was subjected to some serious activity.

I guess we all trade; the only variable is how long we hold for. I have the sort of personality that wants action, and so the second important lesson was to learn to sit on my hands.

You are clearly far superior at drilling down into companies, and I could never do what you do. I've tried to identify and develop a circle of competence, to which I can add the competence of others.

Anyway, here's hoping the pre and post Brexit vote period throws up some bargain prices. The perception will likely differ from the reality. That's what makes the market of course.

I'd better stop there, as I'm aware that I'm waffling on a bit!

Regards,

Scm

Paul Burkitt

28th Apr '16

ACSO - a did have doubts after the recent selling by senior management, but decided to sit on my hands - its now started to tick up nicely - and Peel Hunt just given a 1280p price target. What always attracted me was the long contzract and therefore a high visibility on future revenues.

Small Cap Value Report (6 Apr 2016) - HSS, BLTG, CYAN, ACSO, STY, SVR, TPT, RM2

HSS Hire (LON:HSS)

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Paul Scott

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