Small Cap Value Report (6 Nov 2013) - IDEA, HSM, NXR, GDP, VCP

Good morning! It should be a fairly undramatic start this morning, with the FTSE 100 futures currently indicating that we should open up 25 points at 6,757.

 

 

Ideagen (LON:IDEA) has issued a trading update this morning, which reads pretty well. It's a small software group, speciialising in compliance software for health, and other sectors. I've commented favourably on it here before, saying on 16 Jul 2013 that the shares looked potentially interesting at 20.75p.

This is what they say about current trading (as usual, my bolding below);

 

Trading during the six month period continues to be robust with revenues and adjusted EBITDA* expected to show significant growth over the same period last year.

Revenues and adjusted EBITDA* have increased significantly due to the acquisitions of Plumtree and MSS combined with strong underlying organic growth**.  

Furthermore, the Balance Sheet remains robust with a strong cash balance, which provides the Company with the financial platform to make further complementary acquisitions.

The Company continues to trade in-line with market expectations for the full year to 30 April 2014.

 

 

So a thumbs up, as the key phrase "in with with market expectations" is used here. This is much better than the vaguer "in line with management expectations" sometimes used by other companies. Of course the market doesn't really know what management expectations are, since we're not told! So we just have to assume that they will be similar to broker forecasts. It's all a bit daft, there must be a better way.

Far greater transparency is needed in the UK, and best practice is for companies to inform the market of the range of expected profit outcomes for the year, and then update (and narrow) that range as the year progresses. As a former FD myself, I know that this is how companies work with internal forecasts, and therefore it's how they should also report to external investors.

Going back to Ideagen then, broker consensus seems to be for 1.6p adjusted EPS this year, and 1.8p next year, so that puts the shares on a PER of 14.2, dropping to 12.6. That's not expensive for a company with net cash, but it's not especially cheap either, especially as the company has had some hiccups in the past. The maiden dividend of 0.05p is just a token gesture at 0.2% yield, which I think was probably a mistake - they should have been a bit more generous, or not bothered. However I suppose this year's insignificant dividend is next year's platform for a large percentage increase!

 

 

 

 

Next I've been looking at interims to 30 Sep 2013 from tiny, upmarket bathroom fittings company Samuel Heath and Sons (LON:HSM). This share was last mentioned here on 17 Jul 2013, when I couldn't get excited about it very much. The market cap is only £6m at the current 235p per share, although it's noteworthy that the shares are at their YTD low, so seems to have been overlooked in the bull run this year for smaller caps.

Their results today read well - sales are up 8.3% to £5.5m for the six months, and a profit of 326k is reported, strongly up from last year's H1 result of only £77k. Although there was a one-off £58k investment gain this year. The outlook sounds uncertain though.

Their Balance Sheet overall looks sound, although it's dominated by the pension scheme deficit, which seems to be eating up most of their profits, given that overpayments of £350k p.a. are required. The company typically makes around £500k p.a. profit, so that pretty much rules it out for me. I can live with pension deficits where the overpayments are up to say 25% of profits or cashflow, but in this case it's more than half the profit. Whilst pension deficits should shrink in the future as interest rates normalise in 2014 or 2015, or at least rise somewhat, there are so many moving parts with pension schemes that you can't really be sure what will happen.

On the positive side, Heath do maintain a 5.5p interim dividend, so if the final divi of 6.3p is maintained, then the yield is an attractive 5.0%. However, I'm generally a bit sceptical of companies where dividends are only maintained (not increased), as this tends to indicate that too much is being paid out in dividends, and a dividend cut is usually just being deferred. So placing too much emphasis on the yield can come back to bite you on the bottom in future!

A reliable dividend yield needs to be well-covered by earnings (preferably twice covered, or more), and consistently rising each year. I'd rather take 4% in that situation, rather than seek out a wobbly 5%+ yield that could be cut in future.

I note that Norcros (LON:NXR) shares have ticked up today, for no apparent reason (unless they've been tipped somewhere?). This might possibly be because the improved sales performance for bathroom fittings at Heath has been read across to indicate an improving outlook for Norcros too?

 

As a post-script on Heath, something I missed earlier is that their Balance Sheet now shows £1.9m in net cash, so that's almost a third of the market cap. This is the proceeds from the sale a financial asset which was in last year's Balance Sheets within current assets. So on reflection, now that the company has a strong cash balance, the dividend is probably safe. So at 5% yield, this one might be worth considering.

Although it has to be regarded as high risk, given the tiny £6m market cap, and hence the chance that the dominant family shareholders might decide to de-List the company at some point - it can hardly make sense to absorb the c.£150k total typical costs of maintaining a Listing. On the other hand, it does mean there is a market for shares when people want to sell, and of course Inheritance Tax exemption once you hold for 2 years or more, which is handy when death planning (I'm sure there is a nicer term, but it escapes me).

 

 

 

 

Due to popular demand, I'll report on Goldplat (LON:GDP) next. This is an African-based gold recovery business - i.e. it reclaims the gold which is caught up in machinery used by gold mining companies. Something like that anyway. It also branched out into a small amount of direct gold mining, but its own mine has been mothballled.

At 7.9p per share, and with 167.37m in issue, the market cap is £13.2m. Their results for the year ended 30 Jun 2013 don't look too bad, in the context of a large fall in the gold price this year, which has brought serious problems for many gold-related companies, especially miners with high costs.

The narrative with today's figures all sounds pretty sensible. Within the "Financials" section, they point out that operating profit of £2.6m (prior year £4.5m) was mainly impacted by a £1.3m deterioration from profit into loss in their gold mining activities. So stripping out that factor, the core gold recovery business has performed reasonably well in the circumstances.

The outlook statement sounds surprisingly upbeat, with "substantial growth potential for the year ahead ..." in the core gold recovery business in South Africa and Ghana. Also, the Balance Sheet here is strong, with current assets of £11.9m being a very healthy 284% of current liabilities. There are only £733k in long term liabilities.

Goldplat has continued paying a dividend, but greatly reduced at only 0.12p (down from 0.6p) per share. That means that the previous attractive dividend yield has now fallen to 1.5%. Not bad, but it might cost you two years' dividends just to cover the bid/offer spread, given that this is a small cap.

I don't really have to expertise to assess the future for Goldplat, but I do think it looks potentially interesting, given that the core business has remained decently profitable, even in a much lower gold price environment. Also the upbeat outlook statement intrigues me. On the other hand they must surely be affected negatively by gold miners reducing production or even closing down?

Overall, this one is going back on my watch list, so it might be something I'd revisit if the price came down some more. Gold generally makes me nervous, as I've never bought into the bull story on gold. It always seemed obvious to me that it was a bubble, and a wild speculation, rather than a safe haven. It's only a safe haven against hyper-inflation, but there's never been any question of hyper-inflation. So 3% compounding inflation in paper currencies didn't go anywhere near to justifying the gold price 6 or 7-bagging. It was more likely driven by demand from the buoyant Far Eastern economies, and a good old fashioned speculative bubble - e.g. look at the creation of all those Gold Funds & ETFs, etc, which were almost all long. That created a lot of additional buying demand, which becomes self-fuelling, like any bubble. Then the bubble bursts, and it doesn't usually pay to revisit a previous bubble in the hope of it reinflating any time soon.

So on balance, I have absolutely no idea what the price of gold is likely to do, or the impact it will have on the sector. Although Goldplat seems a sensible stock in this sector, given that it seems to make money regardless of what the gold price does. Although it's small, and based in Africa, so has to be seen as high risk.

 

 

 

 

Victoria (LON:VCP) interim results look quite interesting. This company has really struggled in recent years, but it looks as if their turnaround plan is beginning to work. I probably won't buy any shares in it, because there's probably not a great deal of upside even when economies do recover - making carpets is not likely to ever be a high margin, or high growth area.

The most striking thing in today's results is how they have dramatically reduced net debt. This was a worry in the past, but seems no longer to be the case. Net debt is now only £3m, and this has been achieved by a substantial reduction in stock levels from £25.4m last year to £17,2m this year (both at 30 Sep). I like the way the Chairman describes stock as "dead money".

The cashflow statement is not only good because of the reduction in stock, but also it has a £2.7m p.a. depreciation charge on the fixed assets too. So providing there is not a lot of additional capex needed, then this company should generate decent cashflow even if trading doesn't improve much more from its current level of a bit above breakeven. They can stretch to £0.8k for H1 if you ignore exceptionals, but to my mind the business is essentially running at around breakeven.

As an asset play I like it. Also, the divis look quite good, with a yield of 3.7% forecast (the final divi is a lot bigger than the interim one). On the other hand, how much upside is there for a carpet manufacturer? In a bull market I could see this rising to say 300p, which is about a 30% potential upside on the current price, but I'm not sure how much speculative money is going to find its way into a carpet manufacturer, when people would rather chase up mobile App & cloud stocks to crazy valuations in this type of market.

So on balance, I'm not likely to buy any for the time being, although it was a close call.

 

 

 

OK, that's it for today - some quite interesting things to report on today. It just shows, there is still some value out there, but you have to look harder for it!

See you from around 8 .a.m tomorrow as usual.

Oh, just in case you're wondering why I haven't put anyy graphics into this week's reports so far, it's because I'm away from home visiting family, so am typing up these reports on a little Chromebook, which doesn't have the necessary software on it to easily put in screen shots. I'll be home tonight, so graphics will reappear as from tomorrow.

Regards, Paul.

(of the companies mentioned today, Paul has a long position in NXR, and no short positions)