Small Cap Value Report (7 Oct 2014) - NXR, ULT,NFC, BVXP, SNTY, LTC, SNT

Good morning! I've been so busy reading & digesting results & trading statements this morning that I've not got round to writing anything yet! Plus I have a conference call starting at 10am with a company that has reported today, so this report will be a little later than usual - I'll keep updating it until about 2pm today, so feel free to refresh the page later to see the new sections added. Lots to report on today! (I thought this week was meant to be quiet!!)

Norcros (LON:NXR)

Share price: 15.88p
No. shares: 594.9m
Market Cap: £94.5m

This is a bathroom fittings and tile manufacturer. Its operations are split about 60:40 between the UK and S.Africa on a turnover basis, but profitability is more like 90:10 in favour of the UK. To a large extent I feel their S.African operations dilute the quality of what is a very good UK business, and personally I would like to see the S.African operations sold, as the shares would command a better rating if it was just a UK business, in my opinion.

Turnover for vanity, but profit for sanity, and all that.

As you can see from the two year chart below, the share price has been relentlessly declining in 2014;

This price movement didn't make any sense at all to me. The company confirmed it was trading in line with expectations on 23 Jul 2014, and that has been confirmed again today with another update. So presumably the price seems to have drifted down on general negative sentiment - after all, we have been in a bear market for small caps since Mar 2014.

I never make decisions on price movements, but always on an assessment of fundamental value. Hence with the newsflow neutral, this share has become a stronger hold for me as the price fell. That is particularly the case because the price has been falling on very little volume - suggesting that weak holders were just getting bored and moving on. Whereas in other cases, share price falls on larger volume are more worrisome - since that suggests more serious investors are getting cold feet.

Trading update today - I am very pleased to see that the company has adopted best practice of opening the announcement with an unambiguous statement, then with the detail below.

Performance in the first half is in line with full year market expectations.

Great! That's all I need to know really. However, the update today helpfully gives specific figures too on profitability (covering H1, the six months to 30 Sep 2014);

Notwithstanding the adverse impact of the South African Rand we have continued to make solid progress with Group underlying operating profit expected to be 11% higher than prior year at approximately £7.4m (2013: £6.6m). Group underlying profit before taxation is expected to be 13% higher than the prior year at approximately £6.7m (2013: £5.9m).

There is good news about net debt coming down to a level I'm now comfortable with. This also gives them a little more scope for further acquisitions. The Vado acquisition seems to have been a success, so management have a decent recent track record on this. The group's stated strategy is to double the size of the business by 2018.

Closing net debt is expected to be in the region of £20m (2013: £28.8m), and includes the net proceeds after costs from the sale of our Australian subsidiary of £3.8m.

Outlook - this sounds noticeably more upbeat than in the recent past, in my opinion;

With an improved second quarter performance, our strong brands, leading market positions and continued self-help initiatives focused on market share gain, the Board remains confident that the Group should continue to make progress in line with market expectations for the year to 31 March 2015.

Valuation - it really does look cheap to me. The figures below are based on last night's closing share price, so today's share price rise will obviously push the PER up a little, and the divi yield will come down a little, but it still looks strikingly cheap. Indeed Numis say today that the discount is unwarranted, and they have a target price of 30p, which looks about right to me. That's almost double the current share price.

Pension deficit - note that Norcros has a humongous pension fund, but it was about 95% funded last time I looked, so the over-payments are not onerous, and do not restrict the company's ability to pay good & rising dividends. However, a big pension fund is likely to deter any takeover bids, and could unsettle some investors. However, this is a known issue, and is not causing any problems.

My opinion - In my opinion the share price here seems anomalously low. I don't know why that is,  although it has the look & feel of a share where a selling overhang exists in the market. Sooner or later that overhang will clear, and providing the company continues trading well, then in my view there is obvious upside potential.

As always, not a recommendation, just a personal opinion.

Ultrasis (LON:ULT)

De-Listing - Serial jam tomorrow disappointer Ultrasis is finally leaving us - the company announces today that it is planning to de-List as part of a refinancing package. A large shareholder is propping up the company with loans, and presumably doesn't want to continue funding the costs of the Listing.

The shares are down about 71% today to 0.19p. That still values the company at £3.3m, which is about £3.3m too much in my opinion.

I remember buying some shares in this at the height of the dot.com bubble in early 2000, and thinking that the story sounded interesting. They've not managed to commercialise it over the last 14 years, so time to call it a day as a listed company anyway. I'm sure there is a small lifestyle business there for the employees.

Another timely reminder of the dangers of story stocks, and why they are best avoided altogether, especially if they don't have plenty of cash in the bank for fund operations through to breakeven.

Also another reminder of how savagely the market marks down the share price of any micro cap that announces it is going to de-list. There will probably be lots more de-listings in the next year or two in my view - so plenty more accidents waiting to happen, for people who ignore reality and refuse to give up on the story.

It's also a reminder that once a story stock has become stale, then it's not likely to succeed. If a company has been trying to commercialise a new product for 5 years or more, then the chances of it becoming a big commercial success are virtually nil. If it was going to happen, it would have happened already by then.

Next Fifteen Communications (LON:NFC)

Share price: 122p
No. shares: 60.8m
Market Cap: £74.2m

This PR group is changing its year end to 31 Jan 2015, giving rise to a one-off 18 month accounting period. For this reason the company reports today on the six and twelve months to 31 Jul 2014. Seems a strange way to do it. I would have just expected 12 month figures today.

Profitability - the headline twelve month figures look good - turnover up 6% to £101.5m, and adjusted profit before tax up 36% to £10.5m.

I'm not keen on the Balance Sheet here, which is somewhat on the weak side.

The accounts are altogether too messy for me to want to dig into them - too many adjustments & complicating factors, and it's therefore uncertain what the true trading positions actually is. I much prefer nice clean accounts, with no funnies, and buckets of cash being generated. That said, the cashflow statement here looks reasonably good, so it is generating real cash.

It's been a reliable dividend payer in recent years too, although at 2.3% the yield is nothing to write home about.

Looking at the valuation, it's probably about right, so I'll move on. The PER is about 12, which seems about right for a company in this sector with a not particularly good Balance Sheet.

Bioventix (LON:BVXP)

Share price: 612p
No. shares: 5.0m
Market Cap: £30.6m

This is a very interesting little company which moved on to AIM a few months ago, having previously been Listed on ISDX.

Take a look at the graphical history below, to see the remarkably steady growth, and huge profit margins the company makes. It is in a specialised niche in biotechnology, making antibodies derived from sheep. The products are like annuities - taking a few years to develop, but then churning out profits. I've seen management present at an investor event last year, and thought it sounded interesting. There is a good stream of dividends too.

Results for the year ended 30 Jun 2014 are out today, and look very good - turnover up 31% to £3.5m, and profit before tax before exceptionals of £2.2m. That's got to be one of the highest profit margins I've seen in a while!

The shares are very illiquid though. The company has an excellent Balance Sheet.

That's about as much I know about the company. ISA millionaire Leon Boros is a keen holder of this share, so I will be asking him about it when I interview him for my next Sunday evening webcast, this Sunday 12 Oct 2014.

Synety (LON:SNTY)

Share price: 190p
No. shares: 8.4m
Market Cap: £16.0m

This is one of my favourite more speculative investments. It's cloud-based telephony integrated into CRM software. I won't go through a full description again, but please refer back to my previous comments on it for more background, if you wish.

This is another share which has been relentlessly falling this year, and people have been getting jittery, assuming that there must be bad news on the way.

Thankfully there isn't bad news. Today's quarterly KPIs announcement was buoyant, as expected (the Chairman had previously indicated that he was expecting a decent upturn in Sep 2014, after a rather quiet month in Aug 2014, and that is exactly what has happened - reassuring to hear.

It is obvious that there is a selling overhang in this share too, indeed Commerzbank seem to be dropping 100k blocks of shares into the market from time to time, looking at the "holding in company" announcements.

One man's selling overhang is another man's buying opportunity, is the way I view it, if you've got the stomach for a 50% drop in price without breaking into a sweat, which personally I do - that's just how things are sometimes with illiquid micro caps - there is huge volatility, but in the long run it's just background noise.

At the moment Synety is loss-making and cash-burning, so it's got to be seen as highly speculative. There should be enough cash in the bank to get to breakeven in just over a year though.

Maybe the market needs a few more quarters results in the bag, to be more comfortable about re-rating it? I'm looking beyond the short term on this, and think it presents an exciting opportunity with a 2-3 year view. So far it's been quite a rollercoaster ride (see two year chart below);

Latchways (LON:LTC)

Share price: 830p
No. shares: 11.2m
Market Cap: £93.3m

I've been patiently waiting for this share to come down to the right price, and indeed my last comments on 5 Aug 2014 proved prophetic - "The PER is not yet into bargain territory, but it's not a million miles what I would be prepared to pay. Hopefully there might be another profit warning here, which might allow me in at 700-800p per share, which is the price that would float my investing boat.We're not there yet, so I'll continue watching from the sidelines."

Profit warning - a half year update (since the year end is 31 Mar 2015) today gives various detail about various things that have gone wrong, but this is the key part;

The negative revenue impacts outlined above are of a temporary nature, but the operational gearing of the business means they are of such impact as to lead us to expect that full year earnings will now be materially below last year's levels. We expect full year profit before tax to be in the range from £4.5 to £5.5 million. We have taken steps to limit spending except on sales resources and new product development, where investment will continue.

Despite these setbacks the company remains cash generative with a strong balance sheet. Cash balances at the end of September were in excess of £10 million. Given the temporary nature of the current challenges, we expect to maintain our dividend for the current year with the expectation of resuming profitable revenue growth next year.

Valuation - That's not good. A £93.3m valuation for a business that is only going to make about £5m pre-tax profit this year is not cheap at all. I make that only about 35p EPS, way down on current forecasts of 62p EPS.

It's all very well management saying that these factors are temporary, but a series of profit warnings does make you wonder if something more serious is going wrong behind the scenes? It's all very well blaming various factors, but if your product isn't selling as well as you expected, then it means customers don't want it for some reason - is it too expensive, or are competitors doing something better at lower cost? Or were previous levels of stronger demand just a purple patch that isn't going to be repeated? Who knows.

My opinion - yes it has a good Balance Sheet, and the dividend is being maintained - although by my calculations it won't be fully covered by earnings, so the divis must be at risk if a recovery in trading does not materialise as expected.

As I discovered with Xaar (LON:XAR) recently, when things go wrong, they can keep going more & more wrong for much longer than you, or the company itself, expect . Therefore in view of weak current trading, and a valuation that looks expensive given the greatly reduced profits expected for this year, I'm not convinced this has got into bargain territory yet. So I will continue to watch from the sidelines, and wait for some sign that things have stabilised or started to improve.

Sabien Technology (LON:SNT)

Prelims for the y/e 30 Jun 2014 look poor - sales down 13% to only £2.1m, and a swing from a £0.3m profit last year to a £0.3m loss this year.

However, it has a decent Balance Sheet, and pays a divi, surprisingly for a £6m market cap minnow.

What does intrigue me is the outlook. The sales pipeline was £4.6m at 30 Jun 2013, rose to £5.8m at 30 Jun 2014, and has risen again to £6.9m now. 

Outlook - the company says;

"With the stronger pipeline likely to be bolstered by the new overseas Sabien 'Tech Centres' and the introduction of M1G to the product range, we are confident that operational and financial performance will improve significantly during 2015, enabling us to achieve our targets for the year."

Interestingly, the company is forecast to make a profit of £0.73m next year. If it does that, then there could be scope for a re-rating.

My opinion - tiny, illiquid share, but looks potentially interesting as a bit of a fun money punt maybe? It has been modestly profitable in the past, and the product - which makes energy savings for clients by better controlling commercial boilers, sounds interesting. I like products which pay for themselves, as they should be a relatively easy sell.

There are a couple more shares on the list, but I've run out of energy to crunch any more numbers, so will have to leave it there for today.

Regards, Paul.

(of the companies mentioned today, Paul has long positions in NXR, SNTY, SNT, and has no short positions.

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