Small Cap Value Report (8 Aug) - PURI, C21, CAP, HNT, SGI

Good morning! Firstly today I shall look at interim results from PuriCore (LON:PURI 38.5p). This is a company which makes products to "protect people from the spread of infectious pathogens", in particular products for supermarkets to sterilise fresh produce, and decontamination machines for hospitals, also woundcare. The company has had a chequered history, but refinanced in Jan 2013, so seems more stable now.

Checking back our archive here, I've mentioned it twice before, on 30 Apr 2013, when it announced a move into positive EBITDA for 2012, and on 20 Jun 2013 when it announced a contract win.

The market cap is £19.3m at 38.5p per share. There were convertible bonds in issue, but 95% of these were converted into ordinary shares at 40p, as part of a refinancing in Jan 2013. There are now only £375k in loan notes outstanding, with a conversion price about double the current share price, so they are likely to be repaid on expiry in Dec 2013.

H1 revenue fell 4.9% to $24.1m, although they say new contract wins will kick in for the H2 figures. A sharp fall in supermarket revenues, has masked strong growth in (admittedly small) wound care products (up 148% to $1.7m). Note their accounts are in US dollars, so will need converting into sterling for valuation purposes (today's rate is £1 = $1.55).

The Chairman's comments contain this encouraging-sounding couple of sentences:

 

Encouragingly the second quarter was strong with significantly increased revenue from a major US contract, recurring revenue growth, and two new marketing partnerships in Wound Care. With these partnerships in place, new product launches, and a strong US order book for the remainder of the year, the Directors remain confident in the future prospects for the Company.

 

So thye've neatly side-stepped commenting on performance against market expectations, but it sounds fairly upbeat.

Puricore's Balance Sheet really has been fixed by the refinancing in Jan 2013. So it now has net cash of $3.3m, which is transformed from its previous significant net debt position. They generated a $847k loss before interest and tax for the half year, which is only slightly improved from the comparable prior year period. So not a very impressive performance, in that the growth I was hoping for here has not shown itself in the H1 figures. There is a $5.8m book loss on the conversion of the bonds, which is non cash, so is of no consequence as it's a one-off.

Overall the Balance Sheet passes my review, with current assets representing 118% of current liabilities, it seems to have adequate working capital. Moreover, there are no non-current liabilities at all, which is good, and not something you see very often.

Net tangible asset value is $7.4m, so that's OK.

Looking next at cashflow, it generated positive cashflow before working capital movements, of $594k, but this is down on the prior period of $814k, a bit disappointing. I note that they capitalised $703k of costs, so it's another of these companies where they try to focus investor attention on EBITDA, which conveniently ignores a chunk of operating costs! So the true underlying trading picture, the way I look at things, which adds back capitalised intangibles to operating costs, this company is trading as near as makes no difference to breakeven.

Overall then, I don't think there is anything particularly exciting in these results. Although the H2 outlook might spark some investor interest, who knows? I think there might also be some interest in these shares from people looking at the restructured Balance Sheet for the first time since the refinancing, and realising that actually it's fine now.

I hold a small number of shares in Puricore, and on reading these results I don't see anything madly exciting, but am encouraged by the positive outlook for H2. So on balance I'm happy to hold for another six months, but won't be adding any more to my holding.

The valuation does not look stretched for a company with growth potential, and which is building recurring revenues, in my opinion.

 

 

 

 

Profits warning of the day goes to 21st Century Technology (LON:C21  6.5p). Checking the archive here, I last commented on this company on 28 May 2013, saying:

"I've always been a bit wary of C21, because it's a very small company, and dependent on a small number of large contracts. Therefore profits warnings are more or less inevitable at some point, where gaps appear in the order book. Although it looks a good company, so maybe is one to buy on the disappointments, and sell when it gets fully valued, which it probably was around the 15p level a few months ago."

My hunch back then was right, and they have today served up a profits warning for H2 together with their H1 results for the six months to 30 Jun 2013. The problem is due to gaps in the order book, and H2 sales are now expected to be between £4-5m. They say that will result in a full year result of between a loss of £0.25m and a profit of £0.25m.

Given that H1 saw a profit of £0.5m, they are really glossing over the fact that H2 will be a loss of between £0.25-0.75m. Not good. The trouble is, this also now throws the dividend into question, and means that the £2.2m net cash is not looking secure at all - that cash could easily be burned up in trading losses, and restructuring costs, so to my mind should probably be disregarded on a downside case valuation scenario.

I also don't see how you can now value the business on an earnings multiple at all, as earnings are too unpredictable, being heavily reliant on a few big contracts, one of which is coming up for expiry they mention.

The upside case is that there are interesting sales opportunities in the pipeline, which they mention in the narrative to the figures. So if you take an optimistic view, then the shares might be worth a flutter at the current offer price of 6.5p, which with 93.2m shares in issue equates to a market cap of £6m. In my view that's probably about the right price, given the big question mark that now hangs over the company's business model.

I imagine that existing shareholders are probably supporting the share price today by buying the dip, but personally I'll sit on the sidelines and wait to see where it settles. Taking a bearish view, I'd be prepared to have a flutter on them at around 4-5p maybe, but not above that. It will be interesting to hear Mark Slater's view on this turn of events, as he's spoken positively about this company in the past, as I reported in this article about his speech to an investor conference.

As a more general point, very small companies with lumpy sales are a nightmare to invest in, as they just seem to be accidents waiting to happen. Sooner or later some problem arises with the order book, and the price collapses. Increasingly I'm trying to find companies with recurring, or at least reasonably predictable revenues, and avoiding companies with a small number of big customers wherever possible.

 

 

 

 

 

There's another interesting-sounding announcement from dual-fuel technology developer, Clean Air Power (LON:CAP  9.125p). They are close to a US launch, and announce a trial with UPS running 10 lorries with the CAP system. Funding has been provided by the Californian Energy Commission. The shares are slightly better at 9.125p this morning, which gives a market cap of £16m. On the one hand that is a lot for a historically loss-making company. On the other hand, it could turn out to be a bargain if this technology really takes off in the US, where there is a cheap natural gas boom going on, so clearly an exciting market for CAP.

Who knows whether they will crack it or not? The shares are a gamble on that, but they are also a gamble on investor sentiment suddenly taking hold of the story, as sometimes happens in bull markets. I've no idea what the future holds, but in my opinion it's a reasonably priced speculative story which is already selling a real product, so it's not a zero turnover hype story. If they deliver strong growth, I could see these shares multi-bagging. If they don't, then they won't! DYOR as usual.

 

 

 

 

Huntsworth (LON:HNT 58p) is a strange one. It's been discussed here before, and whilst the shares look cheap on a PER and dividend yield basis, it has far too much debt. However, as reported here before, they have an unusual plan to refinance from a Chinese partner, which would then open the door to the Chinese market (it's a PR group). However, the Chinese partner needs to borrow the money to invest in Huntsworth.

The company says today that the investment of £36.5m in fresh equity is expected to be completed in Sep 2013. Personally I would want to see that money in the Bank, in the UK, before I would consider investing in Huntsworth, but if that happens, then it could look interesting.

The interim results today are nothing to write home about - adjusted basic EPS is down from 3.7p to 3.3p for the six months, and reported basic EPS is down from 3.2p to 2.6p, so rather poor performance actually. However, they do confirm expectations for the full year, which is for 5.83p (for a PER of about 10). Although bear in mind the dilution from their impending equity deal will reduce EPS, and stil leave them with a fair bit of debt, so it's not really cheap. The Chinese expansion angle does sound interesting though.

 

 

 

 

Next, I had a quick look through the interim results from Stanley Gibbons (LON:SGI  299p), and it doesn't float my boat at a market cap of £87m (299p per share). They seem to have a strong seasonal weighting to their year, with a heavy H2 bias, based on the prior year figures, so interims may not be representative.

Trading profit rose from £2.1m to £2,3m for the six months, but increased internet development costs, and exceptional items, brought down profit before tax to £1.1m (prior year comparative for H1 was £1.7m).

The Balance Sheet is strong, and they seem to have raised fresh equity in H2 of last year, as the share premium account jumped up - inidicating new shares being issued. This explains why EPS forecasts show a dip this year, as earnings are being spread over a greater number of shares.

A forecast PER of 17.5 falling to 16.1 next year doesn't strike me as good value. Also I find the whole concept of selling wildly expensive stamps to be completely ridiculous, and a strange historical anomaly. In 50-100 years will anyone even know what stamps are? (or care?). We're not investing for 50-100 years true, but at some point this is surely likely to become a declining sector?

Although it's anybody's guess what sort of junk the super-rich will pay crazy money for, if they can be convinced that it is rare & valuable. I do enjoy a TV show called "Four Rooms", where dealers compete to buy hideously expensive rare bits of tat from members of the public. Well worth a watch for anyone who's not seen it.

 

 

 

 

OK, I've run out of time, so will sign off for today. As always, comments are welcomed in the comments below.

Regards, Paul.

(of the companies mentioned today, Paul has long positions in PURI and CAP, and no short positions)