Small Cap Value Report (8 Jun 2015) - GAW, IDOX

Good morning!

(Apologies, but today's article corrupted, so I've had to remove all the graphics to get the text back)

Games Workshop (LON:GAW)

Share price: 504p
No. shares: 32.1m
Market Cap: £161.8m

Trading update - for the year to 31 May 2015. The key sentence says;

"We expect... profit... to be broadly in line with market expectations"

So a bit below then. There seems to be only one broker forecasting for this company, a retailer of bizarre fantasy gaming products, an example of which is below (from their website).

(had to remove picture as it was corrupting the article)

So if you always wondered where the Horned Rat procured its servants, now you know!

The additional commentary today sounds a little negative - mentioning "continued difficult trading" in Continental Europe, and a negative impact from exchange rates.

Valuation - the broker expects EPS of 39.1p for y/e 31 May 2015. The last time I looked at this share was on 8 Dec 2014, where I reckoned it was probably heading for 30-35p EPS. Today's broadly in line statement probably means they're within 10% of broker forecast, so probably 36-38p at a guesstimate.

The shares are currently at 504p, so that's a PER of between 13.3 and 14.0, which looks about right to me, given that the company has a strong, debt-free Balance Sheet.

Dividends - of particular note are the generous divis, although they are only just covered by earnings. The forecast yield for the year recently ended is almost 7%, clearly a very appealing number. Although when a divi yield is stretched on the upside, there is always the risk that it could be cut, and knock the share price down in the process.

My opinion - as you can see from the Stockopedia graphs below, turnover and profits go up and down, but the trend is essentially sideways. So this seems to be a mature business which is holding its own (for now). That's probably not going to attract a premium rating for the shares, so it looks priced about right to me, around the 500p level.

I can see the appeal for income seekers though, from that 7% divi, providing it is maintained.

Idox (LON:IDOX)

Share price: 37.6p
No. shares: 355.7m
Market Cap: £133.7m

(at the time of writing I hold a long position in this share)

Interim results to 30 Apr 2015 - as indicated in my report here on 19 May 2015, I've been gradually warming towards this software company. So today's interim results are a chance to have another rummage through its accounts.

The figures reported today look to be consistent with the trading update given on 19 May 2015, so no surprises, which is good. As expected, turnover is flat against H1 last year, and adjusted EBITDA and profit before tax are down 10% and 11% respectively, so not a particularly good performance.

Adjusted EPS drops out only a whisker down on H1 last year, at 1.49p (LY: 1.51p). Double that to annualise it (ignoring seasonality), and the adjusted EPS figure looks to be about 3p for a full year.

Are the adjustments to EPS reasonable? They look fairly normal, in that amortisation is excluded, which normally I would rant about. I dislike the exclusion of share option costs, and the restructuring charges seem to be an ongoing thing, so arguably should be treated as a normal cost.

On digging into the company's 2014 Annual Report, note 12, I see that very little of the £66.8m intangibles on the balance sheet relates to capitalised development spend (only £2.7m as I have highlighted below).

The vast majority of intangible assets relate to book entries made when the company has made acquisitions of other companies. Therefore I'm happy to ignore the amortisation charge relating to these book entries, because it doesn't relate at all to ongoing trading, or performance.

(insert picture)So what does this mean? Well, I think it shows that IDOX is a rather cash generative business. This is shown on the StockReport - which shows decently positive free cashflow every year, indeed growing at a reasonable rate.

(insert picture)

Furthermore, the growth in the business has not been achieved by throwing around new shares like confetti. I note from the StockReport that the average number of shares in issue has only risen from 346.6m to 368.5m between 2009 and 2014. This is encouraging, as it demonstrates the cash generative nature of the business, which is mostly self-funding its expansion.

Net debt - Some debt has also been used to finance acquisitions, but note how the trend is for net debt to come down. It is reported today at £9.7m, down from £15.8m six months ago - not bad going. So whilst I had concerns about debt in the past, I think it now looks alright, and not excessive in relation to the cash generative nature of the business.

The current number of shares is lower than noted above, and this appears to be due to the company doing share buybacks. The current number of shares in issue is 355.7m.

Balance sheet - overall it's not great, and it fails two of my tests. Net tangible asset value is negative, at £-16.4m. The current ratio is a bit on the weak side, at 0.91, but given that I like the cashflow being generated by the business, I can (just about) live with the balance sheet weakness.

Although it would be an immediate sell for me if the company ran into significant problems with trading in future.

Outlook - this AllGov project sounds interesting;

(insert picture)

Valuation - the company is confirming estimate for this year of 3.18p adjusted EPS. At 37.6p per share that puts it on a current year PER of 11.8. That seems reasonable to me.

Dividends - not generous, at 2.2%, but it's very well covered by earnings and free cashflow, so there's scope to pay more, if the company stops acquisitions.

My opinion - overall it looks reasonably interesting, in my opinion. The main focus of Idox is providing software for the public sector, especially local Government. That should be very sticky revenue, and I am intrigued by the commentary today about a new project, AllGov, soon to be launched. If that goes well, who knows, it might provide upside for future earnings?

Perhaps these shares remain modestly rated because of investor worries about being squeezed by public spending cuts? Although it's difficult to cut spending on software, especially if it's business-critical, and on a long-term agreement.

I've touched on a few more companies (mainly micro caps) in today's video on YouTube, namely;

(I've added clickable timings to the video, in the description, so you can jump to sections which interest you, and skip things that don't)

Regards, Paul.

(of the companies mentioned today, Paul has a long position in IDOX, and no short positions. A fund management company with which Paul is associated may also hold positions in companies mentioned)