Small Cap Value Report (Fri 14 September 2018) - CNCT, CCT, PVCS, ARW, RM2, JDW, STHR

14th Sep '18 by Graham Neary

28 comments 11496 reads

Good morning!

The final list turned out to be:

Connect (LON:CNCT)
Character (LON:CCT)
PV Crystalox Solar (LON:PVCS)
Arrow Global (LON:ARW)
RM2 International (LON:RM2)
J D Wetherspoon (LON:JDW)
SThree (LON:STHR)

Connect (LON:CNCT)

Share price: 34p (-8%)
No. of shares: 248 million
Market cap: £85 million

Trading Update

This distribution/logistics business has been plagued with poor performance, See our comments in June for a refresher.

Today we learn:

Smiths News (newspaper and magazine wholesaler) - shows "resilience", newspapers holding up but magazines "weakening a little" in Q4.
Tuffnells (delivery of awkwardly shaped objects) - H2 performance expected to be worse than H1.

Connect purchased Tuffnells in 2014 for £139 million, in a fine example of a misguided attempt by a company to diversify its operations.

There is a logic which says that a company which has diversified its activities has reduced its overall risk. I totally disagree! The way to reduce risk, in my opinion, is to improve your advantage relative to your competition. This is more easily done when you focus on one particular activity!

Glen Arnold, in his Deep Value Investments newsletter, assigned a value of zero to Tuffnells in June. Senior staff from Tuffnells have apparently found their way over to DX (Group) (LON:DX.)

Pass My Parcel - this "Click and Collect" operation winding down faster than expected with additional operating losses in the FY 2018, but lower costs in FY 2019. Good news.

Elsewhere:

the company is making a provision (up to £1.5 million) in relation to underpayment of the minimum wage
new CEO from 1 September. New provisions for further restructuring costs.
fined £1.5 million in relation to a fatality at a depot in January 2016.
trading performance expected below expectations

My view

Despite all of the gloom, I'm not yet convinced that this company is destined to go under.

The most important part of it, Smiths News, sounds like it is doing ok. Connect also owns a distributor of newspapers and magazines to airlines, which I understand to be profitable.

The problems are being caused by all of its…

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rmillaree

14th Sep '18

J D Wetherspoon (LON:JDW)

Reference the 5% LFL increase, the company advised today they need 4% LFL sales growth this year just to match the 2018 profits, so they will be doing well to repeat the progress they made in 2018. I will continue to hold, i made the mistake of selling out at £4 years back and had to eat humble pie and pay over £7 to buy back in, i would say the price does seem a little bit above the level i would want to pay if i was buying in today on a pure value basis.

zaracrest

Please inform me how to read the small cap report. I have clicked on every possible link several times and am going round in circles!!

Gromley

With a market cap of (now) only c. £5m Image Scan Holdings (LON:IGE) is really outside of the scope of SCVR, but it has been discussed before.

It was nuances in the wording of the outlook in the December 17 results statement that alerted me (belatedly) to the likely profits warning, which duly arrived in February. With this in mind there are a few things I find troubling in today's statement.

There is no evidence that this decline in orders [for portable X-ray] reflects anything other than changing Government budget schedules and the typically "lumpy" order intake that has been a characteristic of the business from time to time.

But is there any evidence that it actually is just normal lumpiness? I think they felt confident on that point they would have been clearer.

Further down they tell us :

Additionally, we are looking to strengthen our sales team. I expect the Company to be focused on organic growth for a period before revisiting its acquisition ambitions.

Can we join those two statements together? I suspect so.

With 16 days of the FY to go they are still trying to finalise several orders (presumably for c. £400k as the quote a revenue range of £3.4 -3.8m - Stocko show the forecast at £4.5m)

With lower expected revenues for the year coupled with the exceptional costs associated with the aborted fundraise and acquisition of Todd Research, which are estimated to have a total impact on profit of £270k, the Company expect to make a loss in FY 2018.

I think I read that as saying that £270k is the combined impact of costs of the botched takeover attempt plus the loss of sales (due to lack of management focus?)

My doubts about the credibility of the management have not been lessened by this statement at all.

At just a shade over 3p, the share price is down c. 20% today and nearly 75% vs the 52 week high.

For those that think share prices are just numbers, not at all they can do irony.

The proposed takeover of Todd Research was blocked because the largest shareholder felt that issuing 15% additional shares at 4p each would be much to dilutive (the share price at the time was 6p!)

One to avoid for the foreseeable in my opinion.

TamzinPiworld

Here's the link to Trakm8 Holdings (LON:TRAK) strategy presentation given at their AGM on Wednesday. Exec Chair, Gp FD and COO give a very clear overview of their vision.

https://www.piworld.co.uk/2018/09/14/trakm8-trak-strategy-presentation-september-2018/

Interesting to see the video demo at around 31 mins, especially if you're following Seeing Machines (LON:SEE), and to hear John's comments around 58mins, when questioned about Seeing Machines (LON:SEE).

Trakm8 Holdings (LON:TRAK) always do a comprehensive presentation at their AGM, which is filmed. This is such a great initiative for investors. It's a good presentation. You get real insight where their at, and where they're focussed.

Jim Wall

any chance you could take a look at Character (LON:CCT) ? trading update out today..

Graham Neary

It is currently being written, it is right here on this page :)

Rusty2

Just scroll up and there it is.

Maddox

Tim Martin is an interesting character - I picked up a beer mat in my local Wetherspoons promoting a hard Brexit - 'headlined 'Free Trade (ie 'no deal') means lower prices'. Yet this morning BBC Radio 4 Today Prog. he was contemplating that his prices would have to rise on account of Brexit.

I wonder whether he is going to re-print the beer mats this time with the truth?

gus 1065

Hi Graham.

Thanks for the write up on Character (LON:CCT) .

I hold, possibly against my better judgement, on the basis of a very strong IP portfolio and decent underlying performance. My main concern is over the quality of the corporate governance, not least the fact that they seem to have a bloated BOD with five different exec’s each being paid the going rate for an AIM CEO. Likewise, as reported on a previous post (by regular contributor Janebolocha) they have a penchant for buying back shares via cosy deals with directors rather than on the open market.

I think they’ve taken Peppa Pig-gery too much to heart...

Gus.

Hi Gus, re: Character (LON:CCT) I suspect you're right on the remuneration front but can't we defend the buybacks by at least pointing out that they have occurred at cheap share prices? Which is good for the rest of CCT's shareholders. G

laurie

Image Scan Holdings (LON:IGE) New management came in a couple of years ago and turned an unprofitable company into a profitable one. Their catalytic converter inspection X-ray is a sound product. Further industrial inspection applications are offered. The improvements in their portable security x-ray machine are promising, but this product exists in a competitive market place and are largely bought by government agencies.
As a shareholder (firmly in the red), I hope that committing the schoolboy error of not consulting major shareholders concerning a fund raising for an acquisition will not happen again. Assuming that existing shareholders would be happy about dis-application of pre-emption rights is another worry concerning the inexperience of the management in running a public company. I made my feelings known and was told that including existing shareholders in a rights issue would have been too expensive. I expect that IGE will be more thoughtful about this in the future, and more critical of advisers (Cantor Fitzgerald) who don't appear to have given sound advice.
There was a statement issued from the major shareholder that indicated support for an acquisition strategy, and no implication that there was an objection to the specific acquisition, although there may have been.
I had already expected a loss from the company this year, considering trading statements made to date, and the acquisition problems. The valuation looks fine against 2017 and 2019 earnings. I'm holding for the growth potential of a small company, but I am neither a widow nor an orphan.

FREng

Off topic, but today's RNS from Malvern International (LON:MLVN) listing the 67 other directorships currently held by their new NED, Nirvana Chaudhary, must be a record (I hope!).

ACounsell

Exposure to POG via companies is all well and good if you invest in the right vehicles. I have held Pan African Resources (LON:PAF) since April 2006 and participated in 2013 rights issue (mistake!) and despite selling 30% of holding at close to £0.20 (today's price £0.0785 after poor trading update - again!) am only just above water 12 years later. Then there is the continually recommended (and continually disappointing) and highly rated, by Morningstar, amongst others, Black Rock & Gold & General Fund purchased in March 2008 which is sitting at a loss of c. 45%! Not much insurance there and what is worse this fund actually often appears to be negatively correlated to the POG - a fact I did take up with the fund managers a few years ago. Perhaps I should have sold both these and added to my investment in a Physical Gold ETC (£PHGP) but then that is also down 15% since March 2013! These POG related holdings may eventually come good but this 'insurance premium' is a high price to pay.

Hi, fair points. I don't hold gold bullion myself. I also don't invest in the resources industry. I get my gold exposure via pawnbroking shares instead! It would be very interesting to find other productive ways to be long gold. G

sharw

Graham - if there isn't enough room in your cellar to stash all those gold bars you could always go for an ETF such as ETFS PHYSICAL GOLD ETC (LON:PHAU) or ETFS GOLD ETC (LON:BULL) !

doug2500

Is RM2 actually worth more for it's tax losses than it is as a business?

If it was taken over for it's market cap of £27 M the buyer could make profits of £290 M tax free, saving £58 M!

I confess I'm not sure if things work like this but it could certainly become a shell company and turn into something else.

dmjram

The tax authorities stopped this type of behaviour long ago - tax losses are now tied to the trade that made them.
You'd have to make money out of its seemingly unwanted pallets to gain any tax benefit. Otherwise they are worthless.

Beginner

Goldplat (LON:GDP) may be of interest to those looking for gold exposure. The company does run a small mine, but the majority of revenues are generated by their work extracting gold from mine waste and redundant mine equipment. Although it has not paid a dividend recently, the company runs at a profit and has cash in the bank. Per is 6.6, and quick ratio is 0.83.

Paul Scott

Today was a Doh day - I mis-read a calendar meeting, and turned up at 17:30 at WH Ireland, for a meeting with Malvern International (LON:MLVN) (in which I have a long position) - seemed a strange time for a meeting to start, I thought. Anyway, I'd mis-read the calendar invite, and that was the buggery end time of the meeting, not the start. So sadly I have no insights at all about the company.

LOL Paul, I think you need to employ a PA!!

Small Cap Value Report (Fri 14 September 2018) - CNCT, CCT, PVCS, ARW, RM2, JDW, STHR

Connect (LON:CNCT)

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Graham Neary

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