Small Cap Value Report (9 Jul 2014) - CHRT, SRT, BEG, STVG, THT

Wednesday, Jul 09 2014 by

Good morning!

Cohort (LON:CHRT)

The market has given a thumbs up to an £8m acquisition announced this morning, by defence contractor Cohort, of a company called Marlborough Communications. I've been saying for a while that Cohort should do something with its surplus cash, so this is an encouraging move. As they are paying cash, then naturally it is earnings enhancing, as cash is currently yielding virtually nothing just sitting in the bank.

The RNS today quotes turnover and EBIT figures for the acquired company, with 2012 figures of £12.4m turnover and £1.9m EBIT said to be typical. I can't determine whether it's a good acquisition or not, without knowing the proper profit figure! EBIT is not a proper profit figure, as the company could be capitalising a whole load of development spending and other capex. So I would have liked the announcement to refer to a proper profit figure.

EDIT: I've spoken to the company's advisers, and am happy to correct this point. They say that the EBIT number is quoted because they want to report profit on a cash/debt neutral basis. I was thinking of EBITA or EBITDA as being inflated figures, but of course thinking about it more clearly after my second cup of Aldi colombian coffee, the EBIT figure is perfectly fine, as that includes depreciation charges. So my mistake on this point, which I'm happy to correct. Apologies for the earlier misunderstanding. 

Note that the deal is for 50% plus one share, so Marlborough Comms will become a subsidiary, with its full numbers brought into the consolidated group accounts from the date of acquisition, but there will be a significant "minority interest" line on both the P&L and Balance Sheet, to reflect the part of profit and net assets that is not owned by Cohort. The EPS figure adjusts for this though, so is usually the easiest number to focus on in  (relatively unusual these days) situations where subsidiaries are not 100% owned.

As regards the other 50% (minus one share) part of Marlborough Comms, there is an unusual but quite interesting way of dealing with that;

Cohort has agreed to acquire the remaining MCL shares following the end of the year to 30 September 2016 at a price determined by MCL's order book and EBIT performance for the years ended 30 September 2015 and 2016. Cohort's obligation will lapse in the event…

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Cohort plc is a holding company. The Company's segments include MASS, MCL, SCS and SEA. Its subsidiaries include Systems Consultants Services Limited (SCS) and SEA (Group) Ltd. (SEA). Its sub-subsidiaries include MASS Consultants Limited (MASS) and Marlborough Communications Limited (MCL). SCS is a defense consultancy. SEA is an electronic systems and software company operating in the defense, transport and offshore energy markets. MASS is a specialist defense and technology business, focused on electronic warfare, information systems and cyber security. MCL is engaged in sourcing, design, integration and support of communications and surveillance technology for the defense and security markets. It provides a range of services and products for the United Kingdom, Portugal and international customers in defense and related markets. The Company operates in the United Kingdom, other European Community (EC) countries, Asia Pacific, and North and South America. more »

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SRT Marine Systems plc, formerly Software Radio Technology plc, is engaged in the marine technology business. The Company's principal activity includes development and supply of automatic identification system (AIS)-based maritime domain awareness technologies, and derivative product and system solutions for use in a range of maritime applications from safety and security to fishery management and environment protection. AIS is a mesh network radio communications system technology specifically designed for the marine domain, and it uses a combination of global positioning system (GPS) and high frequency radio to enable real time, simultaneous data communication between multiple, independent entities providing information, such as identity, GPS position, speed and other customized data. It offers a range of AIS products and maritime domain monitoring system solutions, which also fuse other maritime sensor technologies, such as radar, closed-circuit television and communications. more »

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Begbies Traynor Group plc is a business recovery and property services consultancy. The Company's segments include insolvency and restructuring, and property. It provides services from a network of the United Kingdom locations through two operating divisions: Begbies Traynor and Eddisons. Begbies Traynor is an independent business recovery practice that handles corporate appointments, serving the mid-market and smaller companies. It provides insolvency, restructuring and consultancy services to businesses, their professional advisors and financial institutions. Eddisons is a national firm of chartered surveyors, delivering transactional and advisory services to owners and occupiers of commercial property, investors and financial institutions. It provides professional services, such as business rescue options, advisory options, forensic accounting and investigations, corporate and commercial finance, personal insolvency solutions and services to banking, legal and accounting sectors. more »

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  Is LON:CHRT fundamentally strong or weak? Find out More »

7 Comments on this Article show/hide all

shanklin100 9th Jul '14 1 of 7

Hi Paul,

Is there any possibility you could comment on STVG's pension-related announcement today please? I see Edison havesubsequently issued what is IMHO a very bullish e-mail including a statement that the announcement was very much as expected despite there, at least that I have yet to find, never having previously been any indication that the pension deficit was anything like on this scale.

Thoughts welcome. Best wishes, Martin

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Gostevie 9th Jul '14 2 of 7

Hi Paul,

This bit of the Outlook Statement from the Begbies Traynor (LON:BEG) results gives weight to your suggestion that "...Government policy of ultra-low interest rates, and political pressure on banks to allow insolvent zombie companies to continue trading, has massively distorted the usual creative destruction of a recession":

A sustained rise in rates would result in a less benign financing environment, with the possibility of an increasing number of insolvencies and restructuring assignments.

With the benefit of our reduced cost base, a strong financial position and committed medium and long-term bank facilities, the group remains well-placed to take advantage of opportunities to develop and enhance the business, both organically and through selective acquisitions. We also retain the capacity and expertise to handle an increase in activity levels should they arise, which would result in improved profitability due to the inherent operational gearing in the business.

Happy to hold shares in this company, which with the total year's dividend maintained at 2.2p gives a yield of around 4.8% at the current price of 45.5p.


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hedley05 9th Jul '14 3 of 7

Hi Paul
regarding BEG, i did some research on this a few months ago. It's the only company i have ever looked at seriously with book value per share above the actual share price. Is this significant?

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Paul Scott 9th Jul '14 4 of 7

In reply to post #84664

Hi Hederz,

Most of Begbies Traynor (LON:BEG) book value is goodwill on acquisitions, which in my opinion should always be written down to zero. The net tangible assets then become only £7.5m, so it's not an asset play. It's a cashflows/divis play. With the potential for growth thrown in for free.

Regards, Paul.

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marben100 9th Jul '14 5 of 7

I'd just like to make one further point about Begbies Traynor (LON:BEG) . I wasn't overly impressed with the results this morning, especially following a strong run since I purchased last November, with a top-up in January, so was in two minds whether to take my profits & run. However, it occurs to me that an investment in Begbies is a natural hedge against rising interest rates, as the announcement and Paul's commentary points out. As other parts of my portfolio (especially fixed interest investments) may suffer when interest rates eventually rise, I concluded that holding on adds some sensible balance in my portfolio, so I will remain a holder.



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makw61 9th Jul '14 6 of 7

Hi Paul,

It would appear that STV have only just agreed the 1 January 2012 actuarial valuation. Therefore the accounts figure will have been based on the 1 January 2009 actuarial valuation rolled forward for changes in asset values and with the liability recalculated for e.g. changes in discount rates. However, other actuarial assumptions will not have been reassessed, of which the most significant will likely be the mortality assumption which feeds into the liability side of things. As life expectancies will have increased since 2009, and revised actuarial tables issued, this would tend to increase the liability side of things but I can't really understand the quantum of the change as the report states a 1 year increase equates to a 3% increase in liabilities, or c.£9m by my calculation. I would think an increase of 2-3 years possible unless they were using some very old tables previously!

Triennial valuations do take some time to prepare and for the trustees to agree, but I would think 12-15 months would be closer to normal practice. Perhaps there have been some difficult discussions around the recovery plan?

For me, DB schemes are a bit of a "red flag" as the risks always seem to be on the downside. The asset side of the equation is factual, but the liability side of things can be quite subjective and human nature seems to tend to overly optimistic assumptions. The presence of a DB scheme wouldn't put me off if everything else looks good, but I tend to avoid where possible.



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shanklin100 10th Jul '14 7 of 7

Hi Paul

Thank you for your comments on the STVG pension-related RNS. I too am at a loss as to why the SP did not suffer more albeit Edison did issue a note suggesting the pension payments going forward are less than they expected. Just a bit of a surprise (to me) that this was not IMHO fully reflected in any previous RNSes.


Regards, Martin

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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