Small Cap Value Report (6 Sep 2016) - SOM, ITQ, KNOS, G4M

Tuesday, Sep 06 2016 by

Good afternoon!

Clarification - Fundamental Asset Management

I seem to have accidentally caused some confusion, for which I apologise. Fundamental Asset Management has asked me to clarify that the only part of their business I was involved in was a minor portfolio service called the Small Cap Value Portfolio.

So the SCVP had nothing to do with FAM's core business of IHT portfolio management, which is of course continuing completely as normal! (and is an excellent, well-run, strongly performing service).

One reader apparently misunderstood, and thought that FAM was shutting down, which obviously it isn't! This has caused a few red faces, for which I profusely apologise.

This is my last report from Greece, as am flying back tomorrow morning. We had thunderstorms last night, and it's very overcast/rainy today, so I'll be spending most of the afternoon indoors writing this report. Therefore please refresh this page later, and you will find more sections added.

Talking of which, I added 3 new companies to yesterday's report last night - here is the link to recap on that. One section completely disappeared - on Carr's, but it wasn't very interesting, so I didn't bother rewriting it.

I've been learning a few phrases in Greek, so that I can at least say a few simple things to locals, in their own tongue. It's so worth it - they really appreciate visitors making the effort. Marina herself, at Marina's Tavern (my favourite place for dinner here in Corfu old town), beamed at me, and flamboyantly roared,  "You're Greek now!!" when I told her that dinner was "poli kala" (very good)

It's interesting how English is used here as the standard language when talking to tourists from all countries. This infuriates the French! A rather pouty French lady nearby asked the waiter how much, "C'est combien?". He replied in English, "Seven Euro". She frowned, and replied, "Sept?". She nearly exploded, when he replied, again in English, "Yes, SEVEN!". That amused me.

Although you can see the stresses of a 30% drop in GDP, high unemployment, and crushing tax increases, on the faces of most locals. Talking to another restaurant owner, he said that most people are struggling. There are a lot of anarchy symbols painted on walls around the town. It wouldn't surprise me if Greece descends into civil disorder at some point. We certainly haven't had the last Eurozone crisis, that's for sure.

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Somero Enterprises, Inc. is a manufacturer of laser-guided equipment. The Company's equipment automates the process of spreading and leveling volumes of concrete for commercial flooring and other horizontal surfaces, such as paved parking lots in North America. The Company's products include S-22E, S-15R, S-15M, STS-11M, S-840, S-485, CopperHead XD 3.0, Mini Screed C, PowerRake 3.0, 3-D Profiler and SiteShape. Its Somero Floor Levelness System monitors Laser Screed performance, operator performance and reports alert percentages of issues. The Somero SiteShape System allows for grade shaping automatically using users' motor grader, dozer or other grading machine. The Somero 3-D Profiler System allows automatic paving of contoured sites using a Somero Laser Screed equipment. The CopperHead XD machine encounters applications, such as chaired rebar, low slump and poor subgrades. The Somero eXtreme Platform (SXP) allows users use their Laser Screed equipment. more »

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  Is LON:SOM fundamentally strong or weak? Find out More »

24 Comments on this Article show/hide all

Julianh 6th Sep '16 5 of 24

Thanks for keeping at it while on holiday. Though of course that is one of the disadvantages of being a private investor - we have to read the RNS's every morning. I have been reading the news on my portfolio in my villa on the Azores island of Sao Miguel. And it is beautiful here.
If you get a chance, could you have a look at Tasty -TAST. It's a restaurant chain roll-out. They have two main brands - Dim-T and Wldwood. I like Dim-T a lot, not so impressed by Wildwood. Today's update includes lots of good news but also a large impairment charge on 5 underperforming restaurants. Presumably primarily a non-cash though there may be costs attached to exiting a lease, making staff redundant, etc. Other than that the store opening programme is proceeding. I can't decide between being impressed that they are evaluating their restaurants and taking decisive action or disappointment that they can get things so wrong on a few of them. Gearing is low. Turnover and EPS have been growing consistently. Any thoughts?

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Julianh 6th Sep '16 6 of 24

P.s. Happy to wait until you are safely home.

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grb 6th Sep '16 7 of 24

Looks like another busy day for results. Paul - I'd be interested on your views on 1pm (LON:OPM) - which I hold. That's looking like a convincing growth story.
I noticed £G4M too - very high growth, but very low margins, so hardly like Fevertree.
Meanwhile Mobile Streams (LON:MOS) is up more than 200% today after its update. I cut my losses there a long time ago.
Interesting comments on the state of play of the housing market in £BKG's update this morning too, which may have passed your radar.

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Brackendale 6th Sep '16 8 of 24

Thanks Paul. Somero Enterprises Inc (LON:SOM) I must admit I am slightly disappointed that there was not a more marked uplift on the SP today.
Somero Enterprises Inc (LON:SOM) scares the living daylights out of me, because I cannot see a downside, yet the market seems very cautious. I have that uneasy feeling I am going to get taught a lesson somehow....
Consistently fantastic ROCE, great margins, they have had and beaten competitors in the past (and I see they have increased gross margin again which suggests pricing power) so they seem to dominate their niche. And solidity of balance sheet seems the crucial point to me. During the financial crisis there was (apparently) real concern that SOM would completely go out of business because their debt position was poor, rather than a dropoff in demand (anyone's views on that welcome). When the next one arrives I am not convinced that everyone is going to withold their orders for a perfectly flat facility because presumably they have invested in the robots/tech etc that need it. Seems to me that is the way the world is going. So like you I think the drop should be less.
Elsewhere on Stockopedia (under Discuss tab) someone kindly summarized some fairly systematic sell offs by some of the institutional shareholders over the past year - perhaps this is what has been holding back the share price. Or perhaps they know something we don't!!

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FoolishBen 6th Sep '16 9 of 24

Glad to see you still like Somero, I've held it for a while although I agree with Beckendale that the lack of uplift today is a bit dissapointing.

I'm also a member of Motley Fool's Hidden Winners service and they recommended Somero  a while back. I have noticed that most of the shares they recommend that have also had a positive review from you (Not recommendation I acknowledge) have done very well for me so far. A few examples being Vertu Motors, Inland Homes and Somero Enterprises. I guess you both look at investing from different perspectives so when you both agree on a share if gives me a little extra confidence. I am new to investing but have quite a lot of money on the table so tend to cross reference a number of sources and pick shares that a variety of industry experts are backing. That said I do give a little extra weight to the shares you like I must say. I've made a pretty penny since Brexit on companies such as Persimmon, Galliford Try, FlyBe, Vertu Motors, Avesco and Hostelworld. Still waiting for Norcros and Laura Ashley to come good but I am keeping faith especially as they have good to great yields.

Anyway I just wanted to share my appreciation for the work you do. I owe you a beer or ten.

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Ramridge 6th Sep '16 10 of 24

grb -
I had a look at 1pm (LON:OPM) just now (was travelling on Brittany Ferries - their wifi is terrible). I liked it. The only thing that I got hung up on is a huge receivables increase of £12.6m which is almost exactly = revenues of £12.5m . I looked at past years and the ratio is around 100% too. I guess this is a feature of money lenders and this ratio represents the weighted average length of time they have to wait to collect their loans? Speculation from my part.
Since it has not been a problem in the past, I decided to give it a tick.
So my calculation says the following. Reported eps for FY2016 = 5.51p (Broker forecast 5.1p). Applying similar growth for the following year, I make forecast eps for FY2017 around 7p. SP as I see it right now is 71p which gives a forecast PE of approx. 10.
Cheap enough for me to take a long position.

All IMO and please DYOR

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IR35 6th Sep '16 11 of 24

Following on from the discussion about brokers forecasts on Morningstar I have had another email from them confirming that it would be in breach of the regulations to provide them. They also said this:

"However, we have added a new Quantitative Report under the “Morningstar Research” tab which provides good valuation information to offset this loss, available to our Premium users."

I haven't found a single small cap with the “Morningstar Research" tab let alone any Quantitative Research. On the other hand they have started displaying consensus forecasts on the home page for each equity (only for premium users) beneath the financial summary.

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Laughton 6th Sep '16 12 of 24

Sorry to be "off topic" but something to help brighten your journey home Paul - Boohoo.Com (LON:BOO) closed at 89p which I think makes it a 1 BILLION pound company.

Phenomenal and many thanks for pointing me in its direction.

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IR35 6th Sep '16 13 of 24


The forecast of 8.7p for ITQ is from Panmure Gordon and is dated 29 June so should take into account the profit warning of 27 June. However back in June they were saying it was indecision due to the referendum. It looks more like they were sold a pup 3 years ago when they bought ECOM. Still if they have sorted it out and the forecasts are right they look a bargain.

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jraitt 6th Sep '16 14 of 24

Paul - for your interest your heading has G4S - should be G4M? Both Head of article and Company report.
Any comments on SDM? They seem to be optomistic despite the loss of big customer in June - recovery?

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jonesj 6th Sep '16 15 of 24

English is the global language & will remain so for the forseeable future. Educated people in almost every country on the planet learn English as their second language. If people in Korea do business with people in China, it's in English. When the Japanese do business with the French, it's in English.

Even more amusing is to watch the French attempting to use their own language in their former colonies, such as Cambodia & Vietnam. No one below 50 has bothered learning French, as they do English first, then perhaps Mandarin or Japanese after that. .

The idea that people might learn French is preposterous, since it is only used in France, plus parts of Switzerland, Belgium & the backward part of Canada. Mandarin & Spanish are much more widely spoken languages.   

French is not even in the top 10 for native speakers on the planet.   This comes in at about number 17 or 18.     When it comes to second languages, English has about 1.5 billion speakers to 274 million French. 

I've pretty much wasted my time learning German, but at least they have a successful economy.

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jonesj 6th Sep '16 16 of 24

Hello Paul,

Do you have any thoughts on the Tasty PLC interims ?
I think this might benefit from your accounting expertise. Impairment charges reported against 5 sites, which is about 10% of the total.


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poughtibridge 6th Sep '16 17 of 24

Only comment I have is that I recently tried to buy an expensive bass guitar amp through g4m... I ended up buying through another company because of poor web site user experience and poor service when I phoned up for advice... Not sure if they are in the same league as other customer focused internet businesses...

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VegPatch 6th Sep '16 18 of 24

In reply to post #149514

please have a look at my follow up post in my Somero summary from this morning. Have a look at the 2nd comment. It shows the historic margins of this business

I disagree re the lack of demand drop off! Revenues fell from $52m to $24m in one year between FY08 and FY09. GMs fell from 55% to 48%. It was brutal. I dont expect a recession of the same magnitude in future, but I am very happy to predict that the US WILL have recessions in the future. Of this, I am 100% certain. I just cant tell you when. I am not trying to be facetious, rather to say this company IS cyclical. So just bear that in mind. and when you think "its different this time"...SELL !

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Brackendale 6th Sep '16 19 of 24

Vegpatch, thanks very much indeed for putting both of those posts together, there is much food for thought there. In a perverse way I find it a comfort to read evidence disproving my theories! I also like the strategy you mention for countering cyclicality by taking profits and countering with the likes of BAT. Good advice & much appreciated. Not sure I should have read it just before bed though!

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PhilipHanson 7th Sep '16 20 of 24

I took a small position in £G4M yesterday and it is increasing a bit again this morning. The revenue growth is terrific and having now achieved profitability I think this could re-rate significantly. However the share is very thinly traded so difficult to build a meaningful position (and slightly risky anyway, given the lack of liquidity).

As regards the comment above about customer service, the 18,500 odd reviews on Trustpilot seem to tell a different and much more encouraging story:

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Phil Dunphy 7th Sep '16 21 of 24

HI Paul, Gamma Communications (LON:GAMA) released another set of robust results yesterday. It would be good to understand your thoughts on this company? Great set >3 times in a row.

I know it narrowly missed Ed's NAPs portfolio based on the Stock ranking system.


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herbie47 7th Sep '16 22 of 24

In reply to post #149634

Yes I'm very surprised this has not been discussed before, it's maybe too large for Paul now?

One thing that puts me is one director has sold over £6m worth of shares this year.

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arfournier 7th Sep '16 23 of 24

In reply to post #149580

Well  the backwards part of Canada note your bigotry and wish you a lovely day.

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Phil Dunphy 7th Sep '16 24 of 24

In reply to post #149640

Yes that's correct herbie47, Andrew Stone is their Non-Independent Non-Executive Director, although he has halved his holdings it looks like an early sell. It would mainly concern me if their leadership team start selling and other members follow. As it's a sole agent and NE, I have put it down to withdrawing some play money.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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