Small Cap Value Report (9 Oct 2014) - GHT, SKP, VNET, SCPA

Thursday, Oct 09 2014 by
26

Good morning! A bit of respite for us today, as the US markets bounced strongly yesterday evening.


Gresham Computing (LON:GHT)

Share price: 66p
No. shares: 63.2m
Market Cap: £41.7m

Profit warning - this software company today says;

However, we now expect that a number of new CTC contracts previously anticipated for 2014 will instead fall into 2015 and as a consequence the Board expects total revenue for 2014 to be 10%-15% lower than current market expectations.  As a result, earnings for the full year 2014 are expected to be materially below current market expectations.

Timing of contract wins is usually a big problem for software companies, as they have fixed costs, but lumpy revenues, thus making profits unpredictable & volatile. That is the reason many software companies have instead tried to move to a SaaS model, where instead of paying a large up-front licence fee, customers instead pay smaller, but more regular payments, more like a hire charge than a one-off purchase.

My opinion - I've only mentioned this company once in these reports, on 5 Feb 2013, when I commented that the shares looked too expensive. There has always been a lot of hype around this company's shares, but the financial track record looks lacklustre, and undeserving of a premium rating in my view.

Note that its track record on free cashflow generation is very poor, which probably explains why it doesn't pay any divis. Sure enough if you check its cashflow statements, more than all the cashflow generated is spent on intangible assets (i.e. capitalised internal costs). Therefore it doesn't really make any profit at all.

There are lots of software companies which do this - capitalising a load of internal costs, thus reporting profits which aren't real. The lack of a decent dividend is the big tell. Also, the cashflow statement & Balance Sheet show you what is going on. Caveat emptor! I reckon that sooner or later the penny will drop, and a lot of small software companies that don't generate any cash at all will be heavily marked down in price.

I like software companies, but it's real cashflow, evidenced by a decent dividend, that is the litmus test for me.


SkyePharma (LON:SKP)

Share price: 323.5p
No. shares: 104.8m
Market Cap: £339.0m

Normally I don't go near the pharmaceutical sector, as I don't have the expertise…

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Gresham Technologies Plc, formerly Gresham Computing plc, is a software and services company. The Company is engaged in specializing in real-time transaction control and enterprise data integrity solutions. Its segments include Clareti Solutions, which supplies cash management and payment solutions to the finance and banking markets across Asia Pacific, Europe, Middle East and Africa (EMEA) and North America, and Other Solutions, which supplies a range of solutions to enterprise level customers in a range of end markets. The Company's portfolio of applications based on the Clareti platform, including Clareti Transaction Control (CTC), Clareti Accounts Receivable Management (Clareti ARM) and Clareti Loan Control (CLC), provides solutions for real-time data management based on business-driven controls. The Company's Clareti software platform is designed to address, regulatory compliance, financial control, internal risk management, data management and regulatory compliance problems. more »

LSE Price
115.5p
Change
 
Mkt Cap (£m)
78.7
P/E (fwd)
60.6
Yield (fwd)
0.5


Vianet Group plc is a provider of real time monitoring systems, data management services, and actionable insights for the leisure and vending sectors. The Company's segments include Leisure Services, which includes design, product development, sale and rental of fluid monitoring equipment, data management and related services; Vending, which includes design product development, sale and rental of machine monitoring equipment, data management and related services; Technology, which includes the provision of data management and technology related services, and Fuel Solutions, which includes wet stock analysis and related services. Its Leisure division consists of the core beer monitoring business (including the United States), and gaming machine monitoring. Its subsidiaries include Brulines Trustee Company Limited, Vianet Americas Inc and Vianet Limited. more »

LSE Price
122p
Change
 
Mkt Cap (£m)
34.8
P/E (fwd)
13.0
Yield (fwd)
4.7



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


3 Comments on this Article show/hide all

Aislabie 9th Oct '14 1 of 3

Back in June you noted that Hayward Tyler HAYT had "nothing very much to get excited about".
A trading update today suggests that it might be just about to get a little more interesting,
although without a dividend and a reduction in debt it still may not float your boat.
Full year results are,with "full visibility of the years results" and will "at least achieve market expectations" . The full visibility follows contract announcements that will form a substantial part of a years trading.
Interims for 30 Sept will be published 11 November (respectable timing) with an analyst meeting at Finncap on the same day. I like the feel of this.

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Aislabie 9th Oct '14 2 of 3

I very much appreciate your daily work on this site, which I regard as a "must see" part of my daily routine. I want therefore to be sure that I am not abusing the house rules by mentioning another company that was not reviewed today.
Scapa SCPA has given an update today that seems positive and with their pension issues largely dealt with (as far as I can work this out) they would appear to be the sort of company to keep an eye on as a general price fall off in the market reveals a good price point

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underscored 9th Oct '14 3 of 3
3

Just had a look at SkyePharma SkyePharma (LON:SKP) and have a few suggestions regarding their valuation. They are a "value added" generic manufacturer not a red hot biotech lottery ticket, there is no chance of a multi-billion dollar blockbuster in the foreseeable future. Even if they were involved with such a blockbuster, their business model seems have been to get a partner in to take the risk (and the main chunk of the upside).

That said I like this kind of business model, it takes know-how to achieve and they have attracted in some good partners with excellent in-house expertise of their own, GSK, J&J etc. Some of their developmental products are intriguing and thoughtful. -COPD medicine with theophylline, slow release capsules for insulin dependents. Nice to see people trying to solve real problems with existing technology rather than chasing the latest pathway published in Nature last year.

With regards to Flutiform:
Downsides:
-Possible headwinds moving forward in Europe. The EMA have approved a generic ICS/LABA from Teva at the beginning of this year. Although not the same drug as Flutiform and therefore not substitutable at the pharmacy, it is another cheaper alternative in the same market space.
-They have failed to get US FDA approval for Flutiform, Abbot bailed in 2010. The FDA have requested additional clinical studies to satisfy them, this is an expensive proposition and 4 years later they are still looking for a new partner. This is a shame as 1. the US is the biggest single asthma market, 2. margins in the US are normally higher vs the rest of the world 3. There is no regulatory pathway for generic inhaled ICS' in the US, so a much higher and persistent moat.

Upsides:
-Mundipharma are running a study to gain an indication to treat COPD. If this is can be approved then that is a whole new market.
-Asthma and COPD are growing disease, the total market is likely to continue increasing over time.

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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 Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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