Small Cap Value Report (Fri 12 Jan 2018) - SOM, XPP, PEG, QTX, LGT, IPX

Friday, Jan 12 2018 by

Good morning!

Plenty of interesting little updates today.

I shall work through this list:

There have also been requests for me to cover some of the asset management companies which had trading updates this week. Duly noted!



Somero Enterprises Inc (LON:SOM)

  • Share price: 370p (+8%)
  • No. of shares: 56 million
  • Market cap: £208 million

Trading Update

This is a US-based provider of concrete "screeding" machines - they allow for new concrete floors to be made perfectly flat.

We've covered this stock plenty of times here before. It's one of the few quality overseas stocks on AIM!

Today's update let us know that the company continues to perform well, and was ahead of expectations in H2.

As a result of the strong H2 performance, the Board now expects 2017 revenues will be slightly ahead of market expectations of $84.7m, EBITDA will be comfortably ahead of market expectations of $26.0m driven by the volume increase and effective operating cost management, while net cash at 31 December 2017 is expected to be not less than $18.5m, well ahead of market expectations of $16.5m.

It's helpful that the market expectations are given, so we don't have to guess what they are!

Most of the new revenue comes from geographic expansion, rather than from new products.

The company has many excellent characteristics, not the least of which is the apparent lack of competition in manufacturing these niche products.

The only criticism I've seen fit to make is that it hasn't made new product development a slightly bigger priority. It typically spends 2% of sales on product development, and introduces at least one new product per year. Could it be a little bit more ambitious than this, perhaps? Only $1 million of 2017's revenue growth has come from new products.

One of the benefits of being careful with its development spending is that the cash pile keeps growing. And the company has been quite generous in paying out surplus cash to shareholders in the past. However, it sounds like…

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All my own views. I am not regulated by the FSA. No advice.

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Somero Enterprises, Inc. is a manufacturer of laser-guided equipment. The Company's equipment automates the process of spreading and leveling volumes of concrete for commercial flooring and other horizontal surfaces, such as paved parking lots in North America. The Company's products include S-22E, S-15R, S-15M, STS-11M, S-840, S-485, CopperHead XD 3.0, Mini Screed C, PowerRake 3.0, 3-D Profiler and SiteShape. Its Somero Floor Levelness System monitors Laser Screed performance, operator performance and reports alert percentages of issues. The Somero SiteShape System allows for grade shaping automatically using users' motor grader, dozer or other grading machine. The Somero 3-D Profiler System allows automatic paving of contoured sites using a Somero Laser Screed equipment. The CopperHead XD machine encounters applications, such as chaired rebar, low slump and poor subgrades. The Somero eXtreme Platform (SXP) allows users use their Laser Screed equipment. more »

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XP Power Limited is a United Kingdom-based developer and manufacturer of critical power control components for the electronics industry. The Company provides power solutions, including alternating current (AC)-direct current (DC) power supplies and DC-DC converters. The Company's segment include Europe, North America and Asia geographical. It designs-in power control solutions into the end products of blue chip original equipment manufacturers, with a focus on the industrial, healthcare and technology sectors. Its product categories include high efficiency/convection-cooled, chassis mount/open frame, configurable, external, encapsulated and printed circuit board (PCB) mount, DIN rail, baseplate-cooled, through hole mount, surface mount, light-emitting diode (LED) drivers and distributed power/hotswap. more »

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Petards Group plc (Petards) supplies advanced security and surveillance systems. The Company operates in the development, supply and maintenance of technologies used in advanced security, surveillance and ruggedized electronic applications segment. It offers software driven on-board digital video and sensor systems for fitment to new build or retrofitted to existing rolling stock, and its applications include driver only operation, condition monitoring, saloon car closed circuit television (CCTV), drivers view cameras and automatic passenger counting systems. It offers electronic defensive countermeasure systems for fitment to rotary and fixed wing aircraft, threat simulation systems and mobile radios predominantly for the United Kingdom Ministry of Defense. It offers mobile speed enforcement and automatic number plate recognition (ANPR) systems to law enforcement agencies, and is sold under the Provida brand. It serves markets, including transport, defense and emergency services. more »

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

41 Comments on this Article show/hide all

Graham Neary 12th Jan '18 22 of 41

In reply to post #297213

Hi Ian, I take that to mean the same thing as market expectations, since the BoD are supposed to inform the market about what they expect! If earnings were going to be materially different from expectations, we should have been notified today. My $0.02. Cheers.

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Beginner 12th Jan '18 23 of 41

Rumours posted in another place suggest Lighthouse (LON:LGT) is under investigation for poorly advising steel industry pensioners. Nothing has been published about this however.

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Graham Neary 12th Jan '18 24 of 41

In reply to post #297108

Hi abtan, I agree with your calculation of those quarterly numbers. Are you factoring in that exchange rates were a 7% headwind in Q4? Without that headwind, the result would have been 23% better than last year, rather than just 16%. So maybe on a constant-currency view, the Q4 result was better than it appears at first.

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handybrownone 12th Jan '18 25 of 41

There has been the start of a potentially major scandal in British Steel with questioned raised in parliament. Certain British Steel workers can transfer their final salary out as a cash pot. Many pots are 7 figures what you would expect for someone who has worked 30+ years, obviously eye-popping for the holder. Lighthouse has a deal with the Unions as outlined here

A number of pensioners have had their pots pillaged by people who do not have the pension holder interest as their main priority. I can't see Lighthouse listed but certain firms have been closed down. Masses of pension advisors have descended into Port Talbot, S####horpe and Doncaster.

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LeoInvestorUK 12th Jan '18 26 of 41
OK, well here's my thoughts looking at Impax Asset Management (LON:IPX) 's figures: 

  • In general there is a pattern of higher inflows in at least the following two quarters after good growth performance and vice-versa.
  • Until recently they have not been a particularly good performer in share price terms (nor has the dividend yield ever been particularly high). However AUM have been steadily growing with only relatively minor set-backs.
  • In retrospect the turnaround started Q4 2015 after a run of poor growth and inflows ended.
  • The pattern was well established in the AUM report of July 2016 following a 3rd quarter of excellent growth and 2nd quarter of good inflows but the share price had hardly moved.
  • 2016 as a whole was outstanding in terms of absolute growth, funds outperformance, funds inflow and (I suspect) reaching critical mass. This performance is unlikely to be repeated.
  • 2017 was not nearly as good in terms of absolute or relative growth, but inflow momentum continued strongly.
  • Q4 2017 performance was better than the previous 2 quarters which should ensure positive Q1 2018 inflows, but the momentum carried over from 2016 is surely spent with 12m historical returns no longer beating benchmarks.
  • However profit performance should continue to improve in the short term as future fee income will be based on significantly higher average AUM even without more growth and the costs of the Pax purchase fall away.

Clearly this biggest risk to holding an asset manager is the multiplicative effects of a large fall in general share prices. I have a large amount of S&P put options to protect myself against this, but I feel the best news (luck?) about IPX is behind it and it is at risk of a 20% correction independently of the wider market. As I had a large holding I sold 1/4 this morning.

Blog: LeoInvestorUK
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sharw 12th Jan '18 27 of 41

....and this week the prize for the most disgraceful Friday afternoon behaviour goes to Coral Products (LON:CRU) for a profit warning at 14.48. The last trading announcement was at 07 00 on October 11th (AGM day) which waxed lyrical about:

" for the Group has continued its improvement from the final quarter of last year. Sales are significantly ahead whilst margins have been broadly maintained.......We expect further sales and margin improvement over the remainder of the current financial period".

There must be some lessons here.

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Graham Neary 12th Jan '18 28 of 41

In reply to post #297353

Thanks very much for the comment leo, I also have covered it now.



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Redrichmond 12th Jan '18 29 of 41

Nice review in Somero Graham,alas I sold about a month ago afrer holding it flat for 6 months hovering on 272 and got fed up.. hey ho..I did a phone call with the directors last year ,never done that before with any company so all a learning curve.

I liked they were investor friendly and I questioned them on your previous article about copies in china at a fraction of the price..Their comment was customer loyalty with somero and the support you get. In china you can buy a copy but dont get the support..In the US its very 'made in the US' attitude for these small 5 million turnover flooring contractors. A £500,000 machine is quite a outlay for a 3-5 million turnover firm

The directors anwsers about China Im not sure are valid. To make people in china buy Somero machines over chinese copies because of the support you get and friendly service. Quoting lost days with a machine down costings thousands, better to buy somero and get support than risk it with a copy and a handbook.

Training sales people and support staff in china they told me was also a problem and it takes good staff away from the US to train up the staff in China. Losing them money.

In hindsight should have changed my trading passwords and let my wife set them so I cant sell.

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abtan 13th Jan '18 30 of 41

In reply to post #297318

Morning Graham

Thanks for the reply.
My concern was centred more on the sequential like-for-like growth from Q3 to Q4.

Undoubtedly there is an FX impact between these periods, but a) it isn't explicitly quantified in the TU, and b) I can't imagine it being material anyway.

Looking back at all quarters from 2014 to now, there doesn't appear to be seasonality either. 

For completeness the last acquisition, before Comdel, was in 2015 so no funnies, until now, comparing LFL figures.

Total Q4 revenue was £43.2, or  £39.1m excluding £4.1m revenue from the September Comdel acquisition.

Total Q3 revenue was £43.7m

That works out at a like-for-like drop between Q3 and Q4 of £4.6m, or 10.5%

That's quite a material drop and not one that's alluded to in the update. 

The overall growth from 2016 to 2017 is still impressive, but this "covert" drop in the last quarter makes me question whether the high rating is still deserved.

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lemonjar 13th Jan '18 31 of 41

In reply to post #297238

they issued a correcting RNS, seems he actually sold and reduced holdings a bit,

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Tubbers 13th Jan '18 32 of 41

In reply to post #297228

I get Somero but why Tristel?

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matylda 13th Jan '18 33 of 41

In reply to post #297368

Pity the fools that ever considered investing in it ! Coral Products (LON:CRU)

Blog: Briefed Up
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Edward John Canham 13th Jan '18 34 of 41

In reply to post #297563

Coral Products (LON:CRU)

This is very fishy:-

1)"Significant capital expenditure incurred during H1 resulted in an increased depreciation charge of 244k. Associated financing costs were 58k." If you increase your capex your depreciation charge rises, if you have to finance it, because you don't have cash, then your financing costs rise - these are not abnormal items - I presume they planned to do the capex and weren't forced into it at gun-point.

2)"The review, which was carried out in conjunction with the introduction of a new ERP system, resulted in slow moving and obsolete stock totalling 225k being written off." You don't need an ERP system to identify slow moving and obsolete stock you just need management/finance team that are aware what is going on and aware of their physical stock - this just means IMO they hadn't done a rigorous review of their stock for quite some time.


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sharw 13th Jan '18 35 of 41

In reply to post #297563

Well, the "fools" include two of the most highly respected income funds - Miton (Gervais Williams) with 19.99% and Chelverton (David Taylor and David Horner) with 7.01%. If they had the wool pulled over their eyes what hope for mere private investors?

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matylda 13th Jan '18 36 of 41

In reply to post #297593

I pity them

Blog: Briefed Up
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sharw 13th Jan '18 37 of 41

In reply to post #297568

Agreed, but what also points to bad management is that your first point refers to H1 which ended on 31/10 - just 20 days after the gung-ho trading statement:

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Brian Hamilton 14th Jan '18 38 of 41

In reply to post #297538

You need to do your own research, as always. Perhaps check back on the incentive plan for executives, note the target share price to be reached to provide benefits, consider what sales and profits may result when US approval is given, note the cash position, check the patents held etc. Hope this helps.

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Tubbers 14th Jan '18 39 of 41

Thanks for the pointers Brian, I will have a look into that. Thanks

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Paul Scott 14th Jan '18 40 of 41

In reply to post #297273

Hi Francis,

I find the best way to confirm a confusing "Holding In Company" RNS, is to check the major shareholdings on the company's own website (investor relations). That's what I did on Friday with the BOO announcement, and BOO's website clearly showed that Jalal held 76,485,370 shares (6.66% of the company). So the RNS stating that he now holds 68,750,000 shares (5.98%) means that he reduced his holding by about 10.1%, disposing of 7.735m shares.

I don't see this as a problem. It's entirely natural for major family shareholders to want to top slice their holdings. It tends to be the case that the family shareholding will often be 90%+ of a person's wealth. So you can understand why they might want to reduce that weighting, to free up money to buy nice houses, cars, and give money to friends, family, charities, etc.

Regards, Paul.

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Samsgrandad 24th Jan '18 41 of 41

In reply to post #297343

Amused by Stocko's naughty word detector's reaction to Scun-thorpe.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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