Small Cap Value Report (6 Jan 2015) - IND, CHH, JSG

6th Jan '15 by Paul Scott

9 comments 16074 reads

Good morning!

Indigovision (LON:IND)

Share price: 357p
No. shares: 7.6m
Market Cap: £27.1m

Trading update - Scottish CCTV company IndigoVision has issued an update this morning for the extended 17-month period to 31 Dec 2014. Sensibly, the year end has been changed from a totally illogical 31 Jul to 31 Dec, a move which was planned well in advance (so not suspicious in any way). The 31 Jul year end was a nightmare, since the company was trying to close deals when its customers were on holiday! Whereas most companies wind down for a 31 Dec year-end, so now IndigoVision has joined them.

I'm pleased with the speed of the announcement today, which indicates good financial controls are in place.

Sales growth - this was last reported (for the 15m to 31 Oct 2014) at +9% to £43.4m. Today the company updates that sales were +10% for the 17m to 31 Dec 2014, so that's moved in the right direction, slightly. The company is now (as previously announced) reporting in US dollars, so sales were $82.5m for the 17-months.

Translated into sterling at today's date, that is £54.1m, which is £0.1m ahead of the original broker forecast for this year (before the profit warning on 11 Nov 2014). Although recent dollar strength has helped push the sterling number up.

Profitability - the company had already warned that this period's profits would fall short, but didn't quantify that in the trading update of 11 Nov 2014.

Today the company says;

My initial reaction was pleasantly surprised by this. Given that the company had warned on profits a few weeks ago, reporting today that they are slightly ahead of the prior period is not a bad outcome at all. It's not a barn-storming success either, but in the context of a market cap of only £27.1m, these numbers are reasonable.

$4.8m profit for the 17 months works out at £3.15m profit (using exchange rate today of £1=$1.524). That compares with £2.71m reported (also at constant currency) for the 12m ended 31 Jul 2014. So there's been a slowdown in profits in the 5-months to 31 Dec 2014, which looks to have been profitable by about £0.44m - not very good, but not a disaster.

Regional differences - having had a quick chat with the company today, they are frustrated that a sudden & sharp downturn in business in S.America (not…

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Fangorn

6th Jan '15

Superb dissection of IND PP, appreciated.

"I would say we're a lot nearer to a buying point, than a selling point, looking at this chart, and taking into account the fundamentals;"

Agreed. Very much so.

garbetklb

Hi Paul

Minor point, but I read the Johnson statement slightly differently.

The shops slated for closure are described as "109 branches, the majority of which have leases expiring within the next two years" and they "anticipate that branches will close during the first half of the year."

So,on top of the redundancy payments, I presume that they will have to provide for the unexpired portion of the leases.

My mother's a holder for IHT purposes & quite comfortable with JSG as a "steady,no horrible shocks" type of holding - and we need a few more of these!

Andy

Damian Cannon

This is an interesting comment Paul: "Trouble is, I always say that, and it keeps going up even more! I'm not going to chase it at this valuation, but well done to people who held. Maybe it's better sometimes to just pay a bit more than you're comfortable with initially, and then hold long term as the company grows into the valuation?"

Having read some of Ed's thoughts elsewhere I'm coming round to the idea that momentum is under-estimated by investors as an indicator of potential performance (while growth is over-estimated). This makes me feel a bit more comfortable about buying into a company that has already seen a substantial share price increase so long as all of the other numbers stack up (Zytronic for example).

In fact I'm starting to think that maybe I should be using such relative strength as a filter since this avoids catching a falling knife or trying to time the bottom!

Does this mean relegating P/E as a filter and a means of identifying whether a share is expensive? Probably not but it's no longer a first-line filter for me - more important is the dividend yield since a high P/E (and earnings yield) puts a cap on the maximum dividend yield anyway.

Damian

Paul Scott

Hi RandomAmbler,

Fair points, well made. However, the problem with over-paying to begin with for a stock, is that if/when something does go wrong, the drop is considerably larger than for a low rated stock.

Also, surely our aim is to BLASH (buy low and sell high). So we look at the chart, and say "I wish I'd bought it there" - pointing to the low point on the chart. You don't point to the high point on a chart, and say I wish I'd bought it there because it had great momentum!

I think momentum looks great at the tail end of a bull market (which is possibly where we are now, who knows?) but might look disastrous once the trend has turned. I know people say they will be stopped out by then, but stop losses would stop you out repeatedly in the up phase unless you set them so wide that actually they wouldn't protect you very much at all.

It's a tricky one. Overall, I will only pay top whack for a share if I absolutely LOVE every aspect of the business. I liked, but didn't love Churchill China (LON:CHH) so I didn't buy any.

Although it's worth pointing out that I did find a better value & higher quality competitor stock and bought that instead, namely Portmeirion (LON:PMP) which has also done very well.

Regards, Paul.

Hi Paul,

Thanks for the reply. I think that the problem with BLASH is you only know where the 'low' and 'high' points are in retrospect and plenty of shares keep on rising beyond where they seem to be good value.

For example Next (LON:NXT) have been powering upwards for years and have amazing momentum; I wish I had bought years ago! However having looked at the margins on Next Directory sales, and the fact that this segment is now producing as much profit as the retail arm, I decided to make an initial purchase a few weeks ago. Now Next (LON:NXT) aren't cheap but I think that they're priced reasonably given that they're yielding around 4% when you take the frequent special dividends into account.

OTOH I've looked at Crawshaw (LON:CRAW) as well and the momentum there is astronomical - but then so is the value being placed on the company! So much here depends on them executing their expansion flawlessly and I'm just not prepared to pony up for this future promise.

So momentum definitely isn't a magic wand but if you do find a great company which ticks all of the boxes (like Portmerion) then I think that waiting for a possible 'low' point may mean never buying into the shares at all. I suppose that this means I'm looking for an excellent company at a reasonable price, rather than the reverse, and this is a bit of a change for me!

Cheers,

Damian

Paratyman

Important day for me - one that exemplifies the significant added value of your blog on this site, Paul. I am a one year old PI, starting in January 2014 with some baby steps - and some pretty infantile mistakes. Stockopedia has kept me more or less on the straight and narrow and I decided early on to build separate Value and Momentum portfolios and run them for 12 months (with a couple of solid funds as benchmark). I just about made a profit despite having inevitably high trading costs (my baby steps were fairly baby holdings!) with the Value Portfolio just beating the Momentum Portfolio by a whisker.
But I thought I'd write because for me your analysis of IND was an almost perfect example of not only how to ask the right questions but also how to use Stockopedia charts and data to answer (most of) them and form a point of view.
Then RandomAmbler's comment on Momentum vs Value (or Growth?) hit one of my most vexing nails on the head. For me at least its all about comfort levels and why we're investing at all.
If I've learned anything in 2014 it is that I have to be very clear about what my investing strategy is and stick to it.
I'm going to keep on learning - thanks to you Paul and all your very smart and helpful readers - and hopefully continue to make money.
Thanks again.

illiswilgig

7th Jan '15

Although it's worth pointing out that I did find a better value & higher quality competitor stock and bought that instead, namely Portmeirion (LON:PMP) which has also done very well.

Hello - Paul,

I actually sold a small CHH holding and bought more PMP before the recent rises. In the longer term I think I am more comfortable with PMP's brands and diversication across markets than I am with CHH. Though I've not been back to take a closer look at CHH so that may be a superficial viewpoint.

Your comment about paying a bit more for shares which keep growing is pertinent - but how to do it? I'm not so sure that momentum on it's own is a good indicator as it says nothing about the quality or robustness of the growth in different markets. Actually I'd be looking for companies where the recent and forecast growth is not (yet) fully reflected in the share price momentum? Then perhaps I'd be willing to pay a premium?

really just to say thank you for the insightful articles. I am learning all the time and you are a great source - thank you and please keep it up.

cheers

Mark

imranawan

Hi Paul

Great write up as always. I wondered whether you were still going to include the table you were writing up detailing the regional growth figures for Indigovision (LON:IND) in the article above?

Best wishes,
Imran.

Hi Imranawan,

I tried to finish the table tonight, but abandoned it, because the information is not presented consistently from each update. Some give figures, other say "good", etc. Then there are sales shown in different currencies - sterling, dollars, or constant currency. So it got too fiddly & incoherent. Never mind.

Regards, Paul.

Small Cap Value Report (6 Jan 2015) - IND, CHH, JSG

Indigovision (LON:IND)

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Paul Scott

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