Small Cap Value Report (9 Nov 2015) - GOAL, REDT, LMI, DQE, BOO

Good afternoon!

Apologies for my running late today, but there are plenty of interesting things to report on, so here goes.

Goals Soccer Centres (LON:GOAL)

Share price: 133p (down 13% today)
No. shares: 58.5m
Market cap: £77.8m

Profit warning - checking the archive here, I reported on 9 Sep 2015 here when GOAL shares dropped 20% on a profit warning. The company publishes a range of estimated current year profit, which is extremely helpful, and something that all companies should do. It takes the guesswork out of their profit warnings.

So, last time the company indicated that calendar 2015 was heading for the £9.3m to £9.8m range, for profit before tax. Today this has been lowered again;

As previously reported at the Interim results on 9 September 2015, trading in the UK business over the summer holiday period had been challenging.

Whilst we have made progress since 9 September, delivering week-on-week sales improvements, the speed of this recovery has not been at the level anticipated. In view of this, the Board now anticipates that profit before tax for the current financial year will be in the range of £8.2m to £8.6m, predicated on the absence of adverse weather conditions.

The mid-point of the profit ranges given, has fallen 12.0% from £9.55m to £8.4m. Whilst that may not sound a huge amount, bear in mind that most of the year has already gone. So it's rather concerning to see another material drop in forecast profits this late in the year.

My opinion - last time I reported on this share, at 155p per share, I was beginning to get interested, but it was actually the discussion with readers in the comments section below that article which put me off, so it's worth recapping on those comments here.

It's all very well blaming the weather all the time, but this is Britain - we have erratic weather.

GOAL remains nicely profitable cash generative, so it's worth a look I think. There's also the takeover potential. The main downside seems to me that expansion is so capital-intensive, and slow. Also possibly the popularity of this service may be waning somewhat? Two profit warnings in rapid succession suggests that all is not well, but the shares have come down a lot in price, so maybe disappointment is now in the price, and it could be a good time to buy? I'm on the fence on this one.

Red24 (LON:REDT)

Share price: 21.5p (down 22.5%)
No. shares: 49.0m
Market cap: £10.5m

Interim results to 30 Sep 2015 - shareholders in this micro cap must be feeling rather cheesed-off today, as lacklustre interims are published, with H1 profit before tax down 29% to £346k.

The first paragraph of the Chairman's statement today is particularly irritating, as it seems inconsistent with previous positive updates given earlier this year by the company, which emphasised how the lost HSBC income had been mitigated. It's not generally a good idea to talk up your company's prospects, then when something goes wrong, tell people that actually it was always going to be a tough year.

"In many ways this year was always going to be challenging for red24 and, whilst we have made great strides in replacing our lost HSBC revenues with new contracts with Allianz and others, we have also faced a tough comparable period in which we gained from particularly strong Response activity in Libya...

Outlook - totday's outlook statement sounds a bit hesitant too;

The prospects for future revenue growth look brighter than they have for some years and we anticipate significant medium term growth in revenue from our acquisition of RISQ, from our new product safety team in the USA and from our partnership with Allianz. However, in the short term, the recent investment we have made in our business is likely to continue to impact on the current year profitability. Notwithstanding this, our confidence in the future prospects of red24 are borne out by today's dividend announcement. The business continues to perform steadily, the balance sheet is strong and the Board considers that the appraisal of key risks and uncertainties contained in the full year report remains valid.

Balance sheet - a redeeming feature, the company has net cash of about £2.7m, and a very healthy balance sheet overall, with few liabilities. So it's very solid financially, for a small business.

My opinion - I try to avoid very small, illiquid stocks, as you can get stuck high & dry in them, if something goes wrong. I've had several situations in recent years, where the Market Maker has just refused to buy my shares at the quoted price, and instead offered me a price maybe 10-20% below the market price, to get rid of them. Of course, I said no, but then saw other people dump their shares, and the price went even lower.

I'm also concerned that the gushingly positive Directorspeak here may need a discount applied to it, given that disappointing interim results followed several positive updates. That's not good enough, and the share price reaction today shows that clearly the company's actual performance was not as good as the market had been led to believe in previous updates.

Overall then, for me, there's a credibility issue here, so for that reason, combined with the lack of liquidity in the shares, it's not for me.

Lonmin (LON:LMI)

Share price: 14.75p (down 9.2% today)
No. shares: 586.9m
Market cap: £86.6m

1p Rights Issue - I don't normally cover the resources sector. However, this is topical, and a good example of what goes wrong when a company with a lot of debt is forced to raise money from shareholders.

The terms of this Rights Issue are staggering - 46 new shares priced at 1p each, for every 1 existing share held. So 27bn new shares are being issued at 1p. So the existing equity is effectively being valued at virtually nothing, since it will be diluted down to only 2.1% of the enlarged equity. Therefore shareholders who want to maintain their investment are being forced to buy new shares. Or they will be able to sell their Rights in a temporary market for them.

The issue is underwritten, and very costly. You can hardly blame the underwriter(s) for wanting to extract their pound of flesh though, as the company is clearly in a deep hole (Edit: sorry, pun unintended).

It looks as if the bank have probably insisted on an equity fundraising, as the price for renewed, but reduced bank facilities;

Upon the Underwriting Agreement with respect to the Rights Issue becoming wholly unconditional and certain customary conditions being met, the Amended Facilities Agreements which the Company has entered into with its existing lending syndicate will come into effect providing:

(i) an extension of maturity of the Existing US Dollar Facility from May 2016 to May 2020 (assuming Lonmin exercises its option to extend the term up until this date) and a reduction in the amount of the Amended US Dollar Facilities to US$225 million (as compared to US$360 million for the Existing  US Dollar Facility); and

(ii) an extension of maturity of the Existing Rand Facilities from June 2016 to May 2020 (assuming Lonmin exercises its option to extend the term up until this date).

My opinion - this is a good example of the risks inherent at loss-making, highly indebted companies. The resources sector, as we know, is in a right mess at the moment, with over-supply of almost everything, and such weak selling prices, that the only solution is for the weaker producers to cease production. It's the brutal weeding-out process, where capitalism mirrors nature, in ensuring that only the fittest survive. Or those which get the most support from their Government survive anyway.

Looking at Lonmin's balance sheet, it will actually look quite sensible once the Rights Issue funds have come in. Fixed assets have been slashed in half, and intangibles mostly written off, so they've done a kitchen-sink job in these figures, resulting in a $2bn reported loss. Mind you, only $134m of that was the operating loss.

Overall, this looks a potentially interesting special situation I think. If you think that the price of its metals will rise, then the company could return to profitability in future, and make the shares potentially a bargain perhaps? As I'm not a sector expert, I only tend to occasionally punt (i.e. smallish positions) in this sector, but only in companies with strong balance sheets. Lonmin could be a half-decent punt once it has the Rights Issue money in the bank, possibly?

DQ Entertainment (LON:DQE)

Interim results to 30 Sep 2015 - if you want to enter the parallel universe of Indian accounting, then this RNS is a very amusing place to start.

As I mentioned at the ShareSoc evening last week, if you want to find where the bodies are buried (in dodgy accounts), just look for inflated debit items on the Balance Sheet - since these have to necessarily be created in the process of over-stating profits (Credits to the P&L, and the corresponding Debits end up sticking out like sore thumbs on the Balance Sheet). As I keep saying, situations like Globo are so easy to spot - the balance sheet will always look ridiculous.

In the case of DQE, the balance sheet is beyond ridiculous, it's comedic.

Debtors - these are reported at c.£37m. Yet if you look at the P&L, turnover in H1 this year was £7.4m, and turnover for the previous 12 months was £18.3m. Therefore, DQE seems to have more than 2 years' worth of debtors sitting uncollected on its balance sheet. If your customers don't pay you, then you're not running a business, you're actually running a charity.

The company says it's making progress on this front, but the figures say that the opposite is actually the case;

Our continuous efforts in respect of collecting receivables from customers are bringing in positive results, with remittances being received from almost all clients concerned. We are confident that these actions will enable us to report a significantly reduced debtor position by the end of the financial year.

I'm fairly sure they've said things like this before, and it's come to nothing, so personally I won't be changing my mind on this unless & until the figures show genuine progress.

Intangible assets - I accept that a film company will capitalise production costs onto its balance sheet, as is the case here. However, that makes the shares difficult to value, as it depends on what future income the back catalogue of films can generate. Historic costs are irrelevant, as that's just sunk costs.

My opinion - it's just a complete bargepole job. UK investors clearly don't believe the numbers, as the £2.6m market cap says it all really. There's no point in the company maintaining a UK listing, so I would expect this share to de-list at some point, and be a 100% loss for anyone left holding the shares.

Note also that quite a lot of debt is building up on the balance sheet, so you wonder who is lending to the company, given that it doesn't appear to have a viable business model, and cannot collect in money from customers? It looks to me as if a lot of fictitious revenue might have been put through the books, which is the only credible explanation for why over 2 years's of sales are sitting uncollected in debtors.

That's me done for today. I'll try to get back to normal timing tomorrow.

By the way, I am off to visit Boohoo.Com (LON:BOO) (my favourite personally held share) this Weds - the CEO remembered me from my days as the FD for a ladieswear chain in the 1990s, as Pinstripe/Jogo (the precessor companies of BooHoo's management) were major suppliers of ours, so I spoke to them every week for years. Small world!

So, if any readers have any BRIEF (!!) questions that you would like me to ask when I visit, then please add in the comments section below. I will of course report back with my findings.

Regards, Paul.

(of the companies mentioned today, Paul has a long position in BOO, and no short positions.

A fund management company with which Paul is associated may also hold positions in companies mentioned.

NB. These reports are personal opinions only, never recommendations or advice).