Small Cap Value Report (9 June 2017) - Election, DX., MLIN

Good morning!

Actually it's not such a good morning for me, because I'm effectively long GBP, and I don't like the exchange rate movement!

EURGBP was 0.866 last night, and is now 0.881 as I write this.

Of less relevance to me personally, but of great relevance to many companies, GBPUSD has fallen out of bed. From 1.296 prior to the result, it's now at 1.27.

So it's a win for exporters and a loss for importers. Two of the big-caps in my portfolio have consequently moved in the appropriate directions: Burberry (LON:BRBY) is up 2.5%, while Next (LON:NXT) is down 4%.

As if the pound wasn't suffering from enough uncertainty already, we now have to deal with the potential for another election to sort out the hung parliament problem.

From an investment point of view, there's not much we can do except try not to get too exposed to the same directional moves - a mix of importers and exporters can help to manage the risk. Or the ideal situation is to find companies which are naturally hedged, or are otherwise immune to exchange rate volatility.

Anyway, that's enough rambling. Time for some company news:

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DX (Group) (LON:DX.)

• Share price: 9.5p (suspended shares)
• No. of shares: 200.5 million
• Market Cap: £19 million

Investigation by the City of London Police

Logistics company DX is currently suspended as a result of ongoing discussions with respect to a potential reverse takeover by John Menzies.

If the shares weren't suspended, the share price would probably be taking a beating as a result of this mysterious and ominous announcement:

The Board of DX announces that it has been notified by the City of London Police Economic Crime Directorate ("City of London Police") of an allegation that has been made against the Company which has resulted in the commencement of a preliminary investigation centred on the DX Exchange operations. 

The investigation is at a very early stage. The Board of DX received the details of the allegation on 7 June 2017 and is co-operating fully with the City of London Police.

So the Board found out two days ago. Perhaps they still weren't sure yesterday whether or not to announce it publicly? I suppose it doesn't make much of a difference while the shares are suspended.

I have no information about how serious the allegation might be and I'd bet that few ordinary shareholders do either. So that just leaves a large cloud of uncertainty hanging over the company for the time being.

John Menzies has responded in a separate announcement that it is "considering its position" in view of this news.

More tough news for long-suffering DX shareholders. Anyone holding from the 2014 IPO placing was down about 80% prior to suspension (including the effect of dividends).

The stats I've seen suggest that IPOs as a group tend not to do well compared to seasoned shares, at least not over the medium-term. There are just a few too many dud companies and otherwise mispriced flotations.

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Molins (LON:MLIN)

• Share price: 101.5p (+28% yesterday)
• No. of shares: 20.2 million
• Market cap: £20.5 million

Proposed sale of division and notice of GM

Apologies for not covering this yesterday - packaging group Molins is selling off its "Instrumentation and Tobacco Machinery Division" (I&TM) for £30 million:

The Sale provides the opportunity to accelerate the Group's strategy to be a global leader of packaging solutions and will provide the platform to invest in the Group's existing Langen and Molins Technologies businesses and acquire complementary businesses

The tobacco division was previously core to Molins, so this is a major change. Given the long association between Molins and tobacco, it is perhaps not surprising that the name "Molins" is also going to be transferred to the buyer of the division.

Since this is a fundamental change, shareholders will have to vote on it.

Proceeds will be used to drive organic but also particularly acquisition-led growth.

We also get a positive outlook statement:

"[O]rder intake in the Continuing Group at the end of May 2017 was considerably ahead of order intake for the same period last year. Trading is as expected and ahead of last year in all parts of the Continuing Group, such that the Board is confident that the Continuing Group's sales in 2017 are likely to be significantly ahead of last year."

My opinion

This deal strikes me as good news in terms of removing a declining business unit from the group and removing it at a reasonable valuation, though I'll continue to leave Molins (or whatever it's going to be called in the future) in the "too difficult" pile. It's still effectively a pension fund with a small operating business attached to it, and that operating business is smaller now, until they make some acquisitions.

A new agreement with the pension fund's trustees reaffirms rising deficit recovery payments of £1.8 million per annum and other conditions, including that dividend payments in any year cannot exceed payments to the fund.

It could be a fantastic buy at current levels. I simply haven't got the insight/conviction to make a long-term bet on a pension fund outcome.

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That's all from me for now. Have a great weekend and see you next time.

Cheers

Graham