Small Cap Value Report (7 Oct 2015) - BDI, PLUS, IGP, GRA

Good morning!

I added several more sections to yesterday's report in the early evening, so you might wish to revisit that report here.

There have been some spectacular upward moves in oil & resources stocks this week, on a bounce in the price of oil - apparently due to news that supply is tightening, according to one of the morning notes I read today. So that's an interesting area - but not one I follow here. Although it could have spin-off benefits, as rising resources stocks will pull up the main Indices, and hence improve overall market sentiment.

There are some interesting price movements going on for companies that are "in play":

Bond International Software (LON:BDI)

Share price: 104p (up 2.5% today)
No. shares: 38.0m
Market cap: £39.5m

As I reported here on 20 Mar 2015, the company reported a good outlook, and effectively put itself up for sale. As you can see below, that fuelled a dramatic surge in share price, as investors anticipated a takeover bid, but here we are over six months later, and nothing has come of it. Note the sharp price fall in the last few days. Is Mr Market telling us that a deal is not happening now? Looks like it.

As regards its strategic review, the company recently said (on 28 Sep 2015);

In March 2015 the Group announced a strategic review to evaluate the Group's future strategy to maximise the potential of its market leading software and services and take full advantage of the Group's growth potential. This is a wide ranging review which is considering all strategic options available to the Group including partnerships, acquisitions, corporate divestitures, a sale of the Group or a new or extended bank facility to continue to invest in the Group. The Board can confirm that good progress has been made in this wide ranging exercise and that expects to make further announcements as to the conclusions reached in the coming weeks.

It's difficult to know what to make of that.

My opinion - I quite like this company, but have reservations about its weak balance sheet, and that the cashflow isn't great, once you look at all the costs being capitalised into intangible assets.

It's probably best to wait and see what the outcome of the strategic review is. Companies which put themselves up for sale, and fail to attract any interest, can be seen by the stock market as damaged goods for quite some time afterwards. A similar situation occurred with API Group a while back, but in the end they did get a buyer & shareholders had a reasonably satisfactory exit.

Plus500 (LON:PLUS)

Share price: 363.5p (down 1.8% today)
No. shares: 114.9m
Market cap: £417.7m

The share price here is acting as if the 400p bid from Playtech may not go ahead. I've always had my doubts about that deal, and am wishing I'd left my short position running - I shorted it at about 380p, after the 400p bid was announced, on the basis that there seemed a high possiblilty of the bid falling through (due to the regulatory crisis that this CFD provider ran into).

The company last said this, on 25 Sep 2015;

As disclosed by the Company in its announcement dated 18 September 2015, the recommended cash acquisition of Plus500 by Playtech PLC ("Playtech") (the "Acquisition") is taking longer than had originally been anticipated. The statutorily required regulatory assessment of the Acquisition should be completed by the end of November 2015 but Playtech and Plus500 remain hopeful for an October 2015 completion.

Further to this announcement, the Company confirms that cancellation of admission of Plus500 Shares to trading on AIM is expected to incur a corresponding delay. The Company will update the market in due course.

I don't have a strong view either way, but when you see a significant discount open up to an agreed cash bid, then it means some market participants believe the deal won't happen.

So two interesting situations there, but don't think I'll get involved in either of them, as it's not clear enough what the correct positioning is.

Intercede (LON:IGP)

Share price: 120p (up 6.7% today)
No. shares: 48.4m
Market cap: £58.1m

Trading update - the market likes today's update. It mainly talks about revenue increasing, rather than profits, but the last sentence says;

The new contracts will all yield further revenues during the current year and beyond. The strong start to the year provides a solid base to meet market expectations for the year.

Additional detail which caught my eye, in particular mentions of impressive clients (which is probably why the valuation is so high);

First half revenues increased by more than 35% compared to the previous year from £4.0 million to approximately £5.5 million. An enlarged sales and marketing team continues to drive business expansion and during the period we have secured an enterprise-wide contract with one of the largest US healthcare corporations, sold our mobile derived credential solution to a major US Federal Agency, signed a new agreement with a US West Coast bank and made our first sale following the announcement of the Partner Agreement with Citrix on 13 May 2015.

Valuation - broker consensus is for a small loss this year, on turnover of £11.6m, and a further small loss next year, on higher turnover of £15.3m.

So this is really outside my remit, as it's not a value or GARP share, but more a growth company. It looks worth researching though, to see if it's the type of company/product which could really take off, and become a potential multibagger. High risk though, paying so much up-front for future potential, as most companies like this fail to deliver anything like what investors hope for.

If any readers have looked into this company, I'd be interested in your views.

Grafenia (LON:GRA)

Share price: 15.8p (down 22% today)
No. shares: 47.6m
Market cap: £7.5m

At the time of writing, this small printing company is today's biggest % faller. There was an announcement last night detailing a number of events, as follows;

Sale of Dutch subsidiary, for E2.35m cash. This is due to exchange rates making it less attractive to supply it from the UK. It is profitable, and was originally bought for E2.0m, so a reasonable outcome. In the last year it made profit of £0.4m, on £6m turnover, so that's a material chunk of the group now gone - nearly half of total group profit.

Grafenia was already too small to be listed, in my view, so this disposal must surely make it much more likely that the now even smaller group, might de-list eventually?

CEO resignation - "by mutual consent", although companies generally hardly ever tell the complete truth about why Directors are really leaving. An internal candidate, Peter Gunning takes over as interim CEO.

Profit warning - just for good measure! The key part says;

 Taking into account the relative weakness of the Euro, first half underlying earnings will be modest. Trading in the second half of the year for the Group's continuing operations is anticipated to be in line with the Board's expectations. However, the weakness in the first half is likely to result in underlying earnings for the full year being materially lower than previously expected on a like-for-like basis.

So a bit mixed there, although the H2 outlook for continuing business is probably the most important element, and that is expected to be in line. Not a disaster then.

My opinion - something interesting might emerge from this, as it has cash, and a new NED with an entrepreneurial background has joined, and might drive a new strategy, possibly? If that catches investor imaginations, then there could be a trading opportunity at some point in the future.

For the moment though, this is now a tiny, and barely profitable little company, with a bit of a cash pile, which might do something interesting in the future, who knows? So it's maybe a special situation, to keep on the watch list.

Now that the business has changed in size, the valuation metrics are no longer relevant until revised forecasts come out.