Small Cap Value Report (7 May 2014) - VLX, NPT, IDEA, EKF, AXS, TRI, ASY

7th May '14 by Paul Scott

18 comments 23314 reads

Good morning! It's quite busy for trading updates today, but as usual it's like detective work, picking through each sentence, trying to gauge the real meaning. All too often trading updates are largely hot air, designed to create a positive impression, without giving away much in specifics. Some companies that have been attacked by shorters seem to issue upbeat sounding statements on an almost daily basis - which just makes them look increasingly desperate in my view.

The other thing you have to be careful about is growth that comes from acquisitions. There are a lot of companies that are regularly bolting on other companies in acquisitions, which of course flatters the results, which show good growth. However, very often little to no organic growth is actually going on (so the businesses should really be valued on a low PER), but the impact of continued acquisitions means that an illusion of growth is created. Well, it is growth, but it's bought-in growth, not organic. Therefore that business should also be on a low PER, but often isn't. If there isn't any organic growth, and you're paying a PER of above 10-12, then you're probably over-paying!

Also the key sentence that matters, is whether they company is falling short of, meeting, or beating market expectations for profit. Everything else is background noise. If they don't say anything about market expectations, then it means they are trading in line (probably), so the RNS is not price sensitive, even if it sounds positive.

Finally, the other point to bear in mind is that a stream of positive-sounding announcements that are light on statistics can be an indicator that the company is trying to ramp up its share price, ahead of a Placing.

Volex (LON:VLX)

In my opinion this maker of electrical flexes is pretty adept at talking up its own share price. We had a trading update on 9 Apr 2014, which stretched credibility to breaking point - it was headed up;

Trading Update

Revenues and net debt better than market expectations

Execution of the Volex Transformation Plan on track

So you would think that they were about to deliver good news, right? Wrong! It was actually a mild profit warning, with the key sentences saying;

...increased focus on…

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MGinvestor

7th May '14

Hi Paul - if your not interested in trading updates today...cos their hot air (lol) - may I suggest reading an RNS on a significant acquisition for Trifast (TRI)? Sounds very interesting as its fairly large, profitable and earnings enhancing. your thoughts would be welcome as always.

Thanks!

Ramridge

Hi Paul - Another bit of puffery to add to your list is a statement such as "... results beat management expectations..." By omission, it invariably also means the results are below broker forecasts.
Regards, Ram

bsharman

Hi Paul. I note that Mark Slater increased his holding in Netplay to over 3% on the 28th of April. Perhaps the tax change will have a smaller impact than feared and is priced in?

Paul Scott

Hi bsharman,

Thanks for pointing that out. Mark Slater is certainly one of the brightest fund managers out there, so if he's buying NetPlay TV (LON:NPT), then he will have done his homework. So as you say, maybe the bad news is already priced-in? I'd certainly be interested in seeing any research notes that have looked at this issue.

Regards, Paul.

Hi Paul -
Re. NPT. The company has gone some way in describing the likely impact of the new Point of Consumption (POC) tax in their annual report on 8 April.
" As a leading operator within the UK gaming market, NetPlayTV will pay such POC tax on the majority of its net revenue. We estimate that the potential effect of the POC tax on the Group, if the regulation had been in place during 2013, would have been a reduction of circa £1.7m in profit for the year after incurring a gaming tax charge of £4.2m and implementing applicable contractual offsets and cost base efficiencies as outlined in points 1 and 2 below. "
This is further elaborated in the report. Despite reporting excellent results for the financial year, the share price dropped sharply by some 11% on the day due to the perceived negative impact of the POC tax. So one could argue that the current price has already factored in the likely tax impact.
Regards, Ram

AlanJenkins2

No clear at all on how HMRC is going to persuade foreign cos operating from outside of Europe to pay their point of consumption tax.The UK don't have the same sort of influence as the USA,and preventing advertising within the UK isn't as important as it used to be what with internet chatter.It wouldn't break SBObet to be unable to sponsor West Ham,or 188bet to be unable to sponsor Wigan ! Perhaps the idea is to keep the tax low and hope they'll pay,but if some choose not to pay then the UK based outfits will soon start complaining about level playing fields.Any thoughts,anybody ?

Hi Ramridge,

Thanks for those very useful points on NetPlay TV (LON:NPT). It seems I'm a little out of date on this one - they were trying to avoid the issue of the tax changes last year when we met management at a Mello event, but it looks like they have come clean on it now, as you point out.

So £1.7m impact on £4.2m reported profit before tax for 2013 is a pretty major impact, I make that a 40% hit to PBT. Their adjusted profit figure of £4.87m looks OK, as most of the amortisation charge is Goodwill, although excluding Share based payments is a bit cheeky I always think - after all it's just another form of employee remuneration, so should really be taken into account when valuing the company.
So on adjusted profit, we'd be looking at a reduction from £4.87m to £3.17m, a fall of 35%.

Overall then, the forward PER of 9 for this year would probably move to a PER of about 14.6 by my calculations, based on taking 37.5% (average of 40% & 35% figures above) off the 2014 forecast EPS of 1.93p down to 1.2p.

So I reckon the price looks about right, allowing for a bit of risk that management might have been too optimistic in their assumptions.

It might be worth putting on the watch list, and buying on any panic when the tax changes are actually implemented - there must be quite a few shareholders who have missed this issue altogether, as plenty of punters don't really do any research at all, especially in bull markets!

Regards, Paul.

Fegger

Alan the only thought is that a lot of companies will look at Starbucks and the adverse effect that it felt from the campaign against it for paying low UK tax against the UK small coffee shops subject to full tax.

It is a different area but feel any company might now be wary. Especially as the UK tax payers wont hesitate to use it against non tax payers in publicity.

And with regard to EKF Ive been looking for a lower entry point for a while -so took advantage of todays opportunity. I have heard of high rating for management here and the news today did not justify the fall.

Braam53

Hi Paul
My one broker has offered me to subscribe to the Saga Share IPO/offer
Can you perhaps look at let us know if this is worth participating in?
Thank you
Braam

rmillaree

Alan - Ref Netplay
"No clear at all on how HMRC is going to persuade foreign cos operating from outside of Europe to pay their point of consumption tax."

Presumably money laundering rules and taking action against the money transfer agencies will suffice - any reputable money transfer agency will not want to be complicit in money laundering - presumably there would be an offence committed by the card provider if they transferred funds to a company know to be acting illegally.

Tell Betting Bob in the UK he can't use his bank debit card to deposit and must in future use North Korea money transfer are us Limited (made up name) and Bob will soon take his business elsewhere (i presume).

Hi Braam53,

'Fraid not, large cap IPOs don't interest me, you'll have to DYOR!!!

Regards, Paul.

Actually, I should say, that the only interest I have in large cap IPOs is to short them, if they are ridiculously over-valued.

I am currently short of two large, recent (i.e. last 6 months) IPOs, and have made a nice profit on them. There was a window when these things were greatly over-priced, so the opportunity is to be on the short side I think, not the long side, now that market sentiment has got a lot more sceptical of late.

Stockopedia's Editorial policy prohibits me from mentioning any stocks that I am short of, so I have to leave it there I'm afraid.

As a general rule though, if the seller is a shrewd Private Equity firm, and we're in a frothy bull market where valuations are near historic highs, and you are the buyer, who do you think is going to do best out of the transaction?!!! Clue - it's not going to be you! ;-)

Regards, Paul.

Post script to NetPlay TV (LON:NPT) - an announcement has just come out saying that the CEO has exercised 1.5m share options at an exercise price of 4.28p, and sold the lot at 17.25p.

Doesn't exactly fill you with confidence does it? Follow the money, that's what I say.
He has 3m shares remaining, so this was a material trade. I could understand him selling half to pay the tax, but selling the lot sends a lousy signal to the market, especially as it comes on top of several million quids worth sold in 2013.

Sorry, not good.

The FD also exercised some options, and did not sell them, but relatively immaterial amounts.

Regards, PP.

Hi,rmillaree.Apologies,Paul,for not having addressed this to you in the first place.A main way of putting money into accounts with Asian-type bookmakers like SBObet and 188bet is by using E-wallets.If it's the customer's money [the E-wallets use identity checks],then it isn't money laundering. Is it illegal ? Well,when the USA said it was illegal to take bets from their citizens,they made that stick,because they have a lot of clout.One or two other European countries have dissuaded some bookies from taking bets from them.However,there is one big difference,here.Those guys all said 'don't take bets from our country'.The UK are asking for a slice of the cake.Only,how on earth are HMRC going to know which bookie has taken which bets,and from whom ?

shauniekent

8th May '14

No-one has mentioned European Islamic Investment Bank (LON:EIIB) final results today. Price to tangible book value 0.66. Ambitious plans to grow Assets under management. Possibly about to break out of price range. Also talk of distributions to shareholders in the future.

Hello Alan

When the new rules come in any company that still accepts uk customers will presumably be breaking the law (or at a minimum not paying taxes that are due). It will be pretty obvious which companies go down this route - any financial institution that wants to stay legit will be pretty stupid to pass funds across to that company in the knowledge they are illegally withholding taxes. There may be an argument i guess that as a remote operator they have no obligation to UK PLC - so its all guesswork on my part as to how it will all work in practice but similar US action did the job in dropping the amount of US players on legit sites to a trickle. If you will lose 90% of your customer base anyway you might as well stay on the right side of the law by banning uk customers or paying taxes due.

Tamarix

Hi Paul - re Accsys
They make Accoya, which is a form of rot-proof wood. This is fantastic for doors and windows - the main market, where it is guaranteed to last 50 years - a lot longer than UPVC. The Timber Research and Development Association, a respected trade body, say it is good for 60 years.
It is good for garden decking, boat building and all sort of places where timber is exposed to the elements.
I have found that it is now getting into the joinery works. I am an architect, and a couple of years ago, when I mentioned it, they would have never heard of it, but now they are pushing it. Certainly I specify it myself a lot.
Being suspicious of people talking things up I have looked for faults. As far as I can see they are : fairly high price, basic wood is a sustainable softwood, so not wildly strong. No problems really.
The CEO is Nick Clegg's brother.

Hi again,rmillaree.As with many things in life,it isn't as black and white as that.The Asian and offshore outfits will likely declare some figures,pay some tax,and claim that they are complying.The E-wallets will just say 'fine,they say that they are paying' and carry on collecting their commission ! HMRC might,perhaps,say 'hmm,that seems a bit low - let's see your figures' - whereupon the Asian outfits will no doubt supply them with some figures.
The key point,here,is that HMRC will have no way of verifying those figures,because the Asian/offshore outfits,and also the E-wallets,are all outside of the UK's jurisdiction.So there might be a bit of haggling/horse-trading,but eventually the UK taxman will probably have to accept - reluctantly - what he or she is being told,on the grounds that something is better than nothing.That will enable HMRC to claim that everyone is paying the point of consumption tax.They will carry on taxing the UK -based outfits,who will be the ones left holding the short straw.

Small Cap Value Report (7 May 2014) - VLX, NPT, IDEA, EKF, AXS, TRI, ASY

Volex (LON:VLX)

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Paul Scott

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