Small Cap Value Report (6 Oct 2016) - SRT, NETD, WAND
Good morning!
IG TV
As mentioned yesterday, I dropped into IG's offices to record a (now quarterly) video slot to discuss interesting small caps which have caught my eye. Here is the video link or if that doesn't work, the YouTube version. It's nice to fly the Stockopedia flag!
As always the shares mentioned are just ideas, and I hold a personal position in most of them. The key point remains doing your own research - mainly because I don't want to be blamed for the ones that go wrong! Also, given that I cover over 500 shares, there are bound to be things that I miss, so I feel much happier if people have done their own research before taking positions.
There are hardly any small cap results or trading updates today, so a short report. Then I'm off out for a nice relaxing lunch with the boss of Research Tree - a very useful service for providing broker research to private investors. I really hope it succeeds, as this very much helps level the playing field.
SRT Marine Systems (LON:SRT)
Share price: 40.6p (down 7.8% today)
No. shares: 127.6m
Market cap: £51.8m
Trading update - this covers the 6 months to 30 Sep 2016. It's not good;
Revenues for the first half were £2.7 million, resulting in a loss before tax of £1.2 million and a cash balance of £1.8 million as at 30 September 2016.
First half revenues were derived almost exclusively from the core business of individual vessel transceiver shipments. During the period there was material progress with several projects which will result in the completion of significant project deliverables in the second half. Upon completion the Company will make further announcements and provide market guidance accordingly.
I'll be attacked for saying this, but I'm afraid that once again, it's jam tomorrow promises. Shareholders here will be used to lumpy performance, it's just the nature of the business.
My opinion - there is clearly a decent product here, but shareholders have been waiting for years now, for a decisive uplift in financial performance.
My feeling is that the £51.8m market cap is looking very aggressive, considering this weak H1 performance. So H2 had better be very much stronger, otherwise I could see the valuation being rebased back down again, sooner or later.
If the big project pipeline does eventually turn into blockbuster profits, then great, everyone will be happy.
NetDimensions Holdings (LON:NETD)
Unsolicited bid approach - this was issued yesterday, and led to a large rise in share price;
The Board confirms that it has had an unsolicited approach regarding a potential transaction, which may or may not lead to an offer being made for the entire issued share capital of the Company. It is emphasised that there can be no certainty that an offer will be forthcoming or as to the terms on which any offer might be made.
It looks as if people are profit-taking today, as it's down 8%.
My opinion - I've looked at this company before, and didn't quite understand the attraction. Growth doesn't seem to be happening at the required pace perhaps?
It depends who the bid approach is from, and how serious it is, which is not stated by the company. In this type of scenario, I usually sell half, to lock in the gain. Or sell out completely, if I was looking for an opportunity to exit at a better price. Many preliminary bid approaches fall through, then you're back to square one.
WANdisco (LON:WAND)
Reinstatement of David Richards - an odd announcement here. Apparently 58% of the institutional shareholders have given their "express backing" to his reinstatement.
A trading update is also given;
The Company confirms that WANdisco continues to trade in line with the expectations referenced at the time of the Company's Interim Results published in August 2016. There is a good pipeline of bookings and cash costs continue to decline which, combined with the new equity funding secured in June, have enabled WANdisco to remain on a path toward cash flow break-even.
Forecasts are for huge losses, so trading in line with expectations is not actually a good thing at all!
Private investors clearly don't share the 58% of institutions enthusiasm for Mr Richards, as the share price is down 21% today to 176p.
My opinion - the historic figures for this company have been utterly lamentable. It is however reducing its cost base somewhat, to stem the losses. Trouble is, where's the growth? Losses can be tolerated for a while, if there's strong growth, but there isn't here. I think it's very high risk, and a bargepole job for me.
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21 comments
re SRT, casual observers never do "get" SRT - you need to do deeper research to understand why revenues/profits are small compared to market cap.
The market for it's products is niche but substantial. SRT have spent the last five or six years developing a suite of products that are best in class and are now able to offer a complete maritime domain awareness system from the transceivers on boats (ranging from ocean going large ships to the smallest one man fishing boat), transmitters for buoys marking shipping channels or wrecks, land based receivers and satellite data providing more distant vessel locations and the display systems that equip control rooms to monitor all traffic in the customer's waters.
Customers increasingly are national governments keen to protect their fishing rights and to identify criminal or terrorist activity. The $100m order announced in March is one of a number of such national systems and others have begun including, Bahrain, and Philippines with more in a pipeline of anticipated projects in Asia, Middle East and South America.
No other single supplier can supply all the components of a system in the way SRT can. No other supplier can offer reliable satellite signal detection to the standard that SRT can. No other supplier can match the reliability and functionality of SRT kit. These are just some of the reasons why SRT is the dominant supplier in this market with prestige customers such as the Panama Canal opting for SRT.
Revenues and profits have been constrained by the fact that this has been embryonic market but it is clear from this trading update that things are changing and those investors who follow SRT closely believe there will be a step change over the next couple of years as national projects which have been planned and negotiated for years finally come to fruition.
Merely looking at past numbers tells you little about SRT's future. Boredom with the apparent lack of progress also causes investors to lose interest but this is a well run company with first class products, sitting at the same table as national decision makers across the world which has played a long game to secure pole position in negotiating the contracts that will flow.
All IMHO as a holder of SRT since 2010. Please DYOR
Excellent video
Great video, I've seen many others of you, but I always forget how posh you sound !!!
Good video Paul,
What was the second outsider punt you were going to mention at the end when you ran out of time? You were cut off after Johnstone Press.
Re SRT Marine Systems - have held this company for years( Up 200% ) - was tempted to sell when price went over 50p but saw an RNS that Director share options would be triggered when share price exceeded 50p(already triggered) 75p and 125p so decided to hold.
Weissdl, Hummm.... I held my shares in Vislink too long as they subsided for rather similar reasons. I thought the Chairman would not have pushed through the controversial reward scheme unless he was pretty confident the share price would trigger his reward. Since then the share price has collapsed as a result of a collapse in profits. Wild optimism on the part of directors is not always a reliable guide to future share price performance.
Caselaw
Ps I maintain a reduced holding in SRT.
Nice interview Paul, just watched on YouTube. The best thing about your output is the introduction to new stock possibilities. It's all too easy to stay within the FTSE100, when there are good smaller businesses out there that are too obscure to find without pointers. So, many thanks!
Nice video Paul.
Pleased to see that Fairpoint (FRP) has clawed some losses back this morning, a Paul Scott bounce?
Me too. I bought in at April, just in time to see it go south!! Talk about bad timing.
SRT Marine Systems (LON:SRT) is a stock I always keep an eye out for, although I am not sure why! It's been in operation for 10 years now, yet over that time we've seen no profits, very little revenue growth and only promises of jam tomorrow. A £55M market cap for a company that has been unable to develop a business of any consequence makes little sense to me. The annual reports are just baffling too, all we get told is revenue, cost of sales, finance costs, and admin expense. No breakdown on revenue mix, no breakdown on things like R&D cost, etc. The lack of revenue in Europe/America also concerns me, it makes me question the sustainability of the business and whether the products themselves are any good. Perhaps someone here can correct me, I really am only looking at this company from afar.
Hi tabhair
Re SRT. The high market cap for a perennially loss making company is a response to SRT reporting very big contract orders and an even bigger "validated pipeline" of possible new business. The relevant section of the last annual report said;
"£70 million contracted future order book"
" Growing validated sales opportunity pipeline of over £200 million"
In their recent webcast (available from the company website) the CEO says that:
* the £70m contract orders will take place over the next three years with most of the profits coming in year three
* the validated pipeline of future sales opportunities relates to countries whose budgets are available and where discussions have been detailed and are getting close to contract
Compared to an annual turnover of £10, these figures are large and (if the projects are completed successfully and profitably) would drastically change the fortunes of the business.
But, as always, there's many a slip between cup and lip, and SRT has made optimistic noises before without delivering.
Hope that helps.
Only problem with Easyjet is that Ryanair is outcompeting them and is taking on more routes that were previously Easyjet only. Additionally, at some point the oil price headwind may increase.
All the same, it's certainly one to consider, I almost pressed buy the other day but chickened out.
easyJet (LON:EZJ) has said they only overlap with Ryanair routes on about 5-6% of their routes. Could be more of a competitor in the long term but not at the moment. Plus I know a number of people that would refuse to fly Ryanair (all the hidden costs especially) but happy with EasyJet.
I'm sure you will get people saying the opposite, I flew with easyJet (LON:EZJ) once about 20 years ago and vowed I would never fly with them again and I have not. Maybe a lot of the routes not overlapping is because they tend to use different airports, such as EZY uses Luton and Gatwick whilst Ryanair is more Stansted based.
In larger cap news I think easyJet (LON:EZJ) is looking good value at the moment. It seems a fundamentally good company, witnessing record passenger figures, but is faced with a number of headwinds that have reduced profitability as detailed in their trading update today. To me these look like temporary problems and the currency fluctuations might conceivably boost UK passenger numbers from people looking to still go on holiday but save money by traveling with a cheaper airline. Decent dividend too. I thought I'd just flag for value investors (I am long).
In larger cap news I think easyJet (LON:EZJ) is looking good value at the moment. It seems a fundamentally good company, witnessing record passenger figures, but is faced with a number of headwinds that have reduced profitability as detailed in their trading update today. To me these look like temporary problems and the currency fluctuations might conceivably boost UK passenger numbers from people looking to still go on holiday but save money by traveling with a cheaper airline. Decent dividend too. I thought I'd just flag for value investors (I am long).
Yes, I've been monitoring easyJet (LON:EZJ) too but there seem to be a few too many headwinds and turbulence ahead for my liking. The negative correlation to weaker sterling and higher oil prices is about as bad as it gets at the moment and the uncertainty over continued access to EU open skies policy after Brexit is a concern. BTW I'm always reminded of the Warren Buffet quote about airlines:
“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down.“
All the best, Si
Good company, but there are still so many headwinds that I think the SP will go lower yet, and also the dividend is under some threat - maybe not this next time (to show confidence) but sooner or later.
Sorry I meant to refer to easyJet (LON:EZJ).
Hi Paul
As you state, there were very few interesting RNSes this morning.
One that you haven't yet commented on is Stanley Gibbons (LON:SGI) where, with the SP having been majorly trashed in recent years, a large number of options with an exercise price of 11p have now been issued.
If nothing else, it looks like a stunningly effective method for upsetting any remaining private investors.
Regards, Martin
Hi Paul,
I saw this on my news feed today and wasn't impressed with the reported losses. For me I can't see this changing anytime soon....
I also saw interim results from Morse's Club. What were your thoughts there?
Q
Hi QDog (and everyone),
Pls can you always give the company name or ticker to which your comments relate, as there are several companies mentioned in each report, so it can get confusing!
I'm guessing you're refering to SRT Marine Systems (LON:SRT)
Thanks, Paul.