Small Cap Value Report (9 May 2014) - AMA, NET, SNTY, C21

Good morning! Sorry I'm late today - had one too many ice cold pints of Peroni at the Lord Aberconway last night, after an excellent evening hosted by FinnCap and ShareSoc, where four companies presented. Brief impressions;

 

Amara Mining (LON:AMA) - I'm not interested in resource sector shares generally, but found this a surprisingly interesting presentation from the company's FD, Peter Gardner. They have recently raised enough money (from a Placing at 17p) to progress their main African project to feasibility study, and it has considerable cost advantages, being located near a hydroelectric dam, hence has cheap power and water available - both being key cost considerations for gold mining. Although as David Stredder, the host, commented, it might be an idea if the CEO changed his surname from Spivey to something less appropriate for the resources sector! The company also has some gold producing sites, but these are small, and near the end of their lives.

The internet is full of pictures of cats, for some unknown reason. Actually, it's probably because they are the epitome of disdain and indifference. Here is one that made me laugh considerably this morning, and I hope it brightens up your day in a small way :

 

Netcall (LON:NET) - This really is an excellent company, and I enjoyed the presentation from its charismatic CEO Henrik Bang (great name too!). I felt there was a bit too much management speak in the slides, so I was finding it difficult to understand what the company actually does. However, three brief case studies were given about how their software helps eradicate 700 years waiting time on corporate phone lines, by calling customers back, instead of putting them on hold and making them listen to musak. Also the company has done well selling software to the NHS, which reminds people of appointments, since scandalously about 10% of appointments are missed by people who don't turn up for them. If it was down to me, I'd put them in the stocks and hurl rotten vegetables at them, but apparently that's not politically correct these days. It's a pity the shares are so expensive, otherwise I would buy some.

 

Synety (LON:SNTY) - Executive Chairman Simon Cleaver gave an interesting presentation which explained how their integration of CRM software with cloud based telephony is giving SMEs a full call centre style telephony system, embedded within their existing CRM systems, at nil capital cost, and about £25 per month per user. I make no secret of the fact that I really like this company, and it's my second largest holding, although the shares are expensive for a low turnover, loss-making company.

For anyone who missed this presentation, I've invited Simon Cleaver to present at my next ShareSoc Brighton event, which is being held on Thu 26 Jun 2014 from 6pm. We're also going to have a group debate on "shorting shares - good or bad?", so attendees are invited to prepare short (2 mins max) talks giving their perspectives on shorting. Then we'll have a before & after vote, to see what people think overall. Should be interesting.

 

Unfortunately I missed the presentation for Harvey Nash (LON:HVN), as the room had become so hot & stuffy that I felt close to passing out, so had to leave the building to get some fresh air briefly. Unfortunately the Reception staff had gone home, so I couldn't get back in once I'd returned my oxygen levels to normal, so I had to pop over the road for a quick half at the Lord Aberconway. Suitably revived, I waited outside FinnCap's offices until the Polish cleaners turned up, and talked them into letting me back in, just in time for the excellent buffet.

 

 

 

 

 

 

21st Century Technology (LON:C21)

I bought some more of these recently, but without much conviction. It's a CCTV equipment maker that specialises in public transport, but has experienced a few bumps in the road recently with profit warnings - an occupational hazard in the small caps space I'm afraid.

New management (formerly from a larger competitor, Synetics, if my memory serves me correctly) took over about six months ago, so I've been half expecting them to kitchen-sink things - i.e. have a good clear-out, and write off anything dubious, etc.

As you can see, headline results for the year ended 31 Dec 2013 are not only very late, but are also poor (although not disastrous);

 

 

The commentary says;

 

The outcome for the year is broadly in line with our statement at the half year.  However, it is a disappointing result after the hard work and investments made, particularly in our product based expansion into continental Europe, this was compounded by Go-Ahead's decision not to renew our contract in mid-August 2013.

 

Oh dear, doesn't sound very good, does it? That said, at 4.6p per share, the market cap is buttons, only a bit over £4m! So if they turn things around then the upside could be pretty good. Are they likely to go bust? Let's have a look at the Balance Sheet. With £3.2m in net current assets, the Balance Sheet is pretty strong, so I think they are OK for the time being, especially as costs have already been cut with a 17% reduction in headcount.

 

On current trading & the outlook, the following extracts sum it up;

 

The expectation for the current year is for revenues to be similar to 2013 although, as already stated, revenues are sensitive to the retention of the customer accounts mentioned above. 

We are currently trading in line with Board expectations and every effort is being made to develop new lines of business and secure positive outcomes from the important contract negotiations and renewals due later on this year.

 

Reading between the lines, it sounds to me as if they are preparing the ground for more customer losses, so I suspect this won't be the last profit warning. This is potentially disastrous, as the notes to the accounts show how reliant they are on one key customer in particular;

 

Major customers

In the year the Group had two customers that each accounted for over 10% of the revenue at 54% and 24%.  In the prior year there were three customers that each accounted for over 10% of the revenue at 60%, 19% and 12%.

 

Because of that, I think these shares really have to be seen as very high risk. Accordingly, I've decided to take the hit, and have sold some of my shares at a loss, to reduce my position size down to a level where it wouldn't hurt me if they go bust. Maybe that is a mistake, but risk management is paramount with investing, so one has to size positions at a level which is appropriate to the risk involved, and this one is starting to worry me. I'm happy to run with the remaining (smaller) long position, and hopefully management will be successful in their turnaround strategy.

The maiden dividend paid in Jun 2013 is not being repeated.

 

 

 

There's not much else happening today that interests me.

I see that a lot of overvalued tech stocks are really taking a battering at the moment - WANdisco (LON:WAND) is collapsing, not before time - I tried to short this one a while back, but couldn't get a borrow unfortunately. I must open some new short positions - this feels every bit as bad as the sell-off in 2000 when the TMT boom finally burst. I'm amazed at the speed that overpriced large cap stocks like ASOS and Ocado have dropped - the latter has more than halved from its peak. I'm not currently short of either, so can comment on them here. I'm sure there will be other casualties, as investors are far less inclined to support mad valuations now. It's the people who have fallen in love with the overpriced stocks who end up losing their shirts when the market corrects back to sensible valuations, as it's doing now, so I hope no readers here have fallen into that trap.

Speaking to my brokers yesterday, they said it's gone quiet, and there's very little new buying going on now, so I think this could well be a year where "Sell in May & go away" could be a very wise move. Thankfully as I only hold value & GARP stocks, this doesn't matter to me, in fact several of my positions are going up nicely at the moment, and if they drop I just buy more, when the price is right.

I think the market has been rewarding bad investors making bad decisions for too long, so it's about time that normality returned. So opening some new short positions is definitely top of my agenda. This not only protects your capital, by hedging your longs, but also means you have more firepower to buy the bargains at the bottom of the market.

Sorry for being a bit late this morning, back to normal on Monday. I wish you a pleasant weekend.

Regards, Paul.

(of the companies mentioned today, Paul has long positions in SNTY, C21, and no short positions)