Small Cap Value Report (6 Nov 2014) - CSG, ZZZ

Good morning! A short report today, as I have to travel from the south coast up to Derby for the Mello 2014 extravaganza! I'm looking forward to seeing lots of you there. See yesterday's report for details on how to get a ticket for Saturday for only £10.

Sweett (LON:CSG)

Share price: 24.25p
No. shares: 68.7m
Market Cap: £16.7m

Another stock on my Bargepole List which has cratered - down 32% this morning on a negative update.

It beats me why anyone would be holding this stock, given the seriousness of the allegations against it, and the ongoing investigations by the authorities in the USA and UK.  Any company that is being investigated for wrongdoing is likely to find it difficult to win new business - surely that is obvious? The CEO resigned on 6 Oct 2014 too, which is nearly always a precursor to more bad news.

I reported on the last accounts here on 1 Jul 2014, explaining why the shares are uninvestable. So hopefully no readers got caught on this one. We have thousands of shares to choose from, so why pick one with a huge cloud over it?

Profit warning - not good;

Trading in the first half of the financial year has reflected good progress in our UK market which accounts for over half of the Group's turnover and mixed trading in our overseas businesses.  Following a recent review, the Board has identified challenges in certain overseas operations and the Board now expects that the Group's results for the year ending 31 March 2015 will be materially below market expectations.

More detail is given, with the problem areas being Hong Kong, Australia, and the M.East.

Net debt - I don't like this one bit;

The Group will now report net debt such that it no longer includes funds being held on behalf of clients. As a result, and accounting for the working capital requirements of the continued growth in the UK and China, net debt at 30 September 2014 is likely to be approximately £10.0 million versus a reclassified figure at 31 March 2014 of £8.1 million.  Improving working capital management is the Group's key focus during the second half of the year.

That's a huge red flag. Working capital being a key focus is code for we're in financial trouble. So don't be surprised if the company is forced into an emergency equity fundraising. Or goes bust.

Investigation - this concerns the allegations of corruption made by the Wall Street Journal in 2013;

The current stage of the independent investigation commissioned by the Board into the allegations made in the Wall Street Journal in 2013 is nearing completion. The Group's unaudited interim results for the six months ended 30 September 2014 will include a material charge within exceptional items reflecting the costs of the investigation to date.  The Group continues to cooperate with the SFO.

My opinion - to summarise, this is highly indebted group, which is trading poorly, and is being investigated for bribery allegations. Why on earth would anyone want to hold shares in it?? It's way to risky to even be considered as a potential investment. My bargepole rating is heavily reiterated - these shares are probably worth nothing.

Snoozebox Holdings (LON:ZZZ)

Trading update - There's a positive update from the company today. In my opinion the company is likely to succeed second time around, with the re-designed v2 units having far better economics than the v1. It also has adequate funding to build them, and launch is later this month.

I will have a chance to see a Snoozebox unit in real life, as they are bringing one to Mello 2014 in Derby, which is one of the things I am looking forward to.

No doubt the company is hoping the share price will move significantly above 10p, as then holders of the 10p Warrants are more likely to exercise them. The expiry date of the Warrants is 15 Dec 2014, so it's a close call now with the share price hovering at 10p offered in the market, 9.75p bid.

Lease financing is a much better way of growing the company, and a significant deal was done on that front for the first time not long ago. So the company isn't relying on the Warrants being converted, but no doubt it would help.

Right got to dash, as I'm off to Derby.

Tomorrow morning should be interesting!

Regards, Paul.

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

A fund management company with which Paul is associated may hold positions in companies mentioned)