Small Cap Value Report (Fri 15 Nov 2019) - VLTY, HYNS, CPR, DNEG, KIE

Good morning, it's Paul here.

Apologies for yesterday's outage, I'm back on the case today.

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Veltyco (LON:VLTY) - is only a £3m market cap. An announcement this morning makes it clear that the company is on the brink of going bust.

Without fresh funding, it's finished, by the looks of it;

... In the event that trading in the short term is not in line with the Board's revised expectations and/or the Group is not able to manage its creditors and/or the Group continues to trade at a loss and/or the Group is not able to secure further funding as outlined above, the Group's ability to continue as a going concern and to meet its liabilities will be materially impacted.

It sounds as if the company might already be trading whilst insolvent, which can make Directors personally liable for a company's debts.  I hope that none of our subscribers here hold this share.

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Haynes Publishing (LON:HYNS) - has put itself up for sale, starting a formal sale process.

The reason given is this;

"Our founder, John Haynes died this year; one year before the Company's 60^th anniversary in 2020.  The Board now believes our future will be best secured by the whole Group becoming part of an organisation with the financial resources to invest for future expansion and take the Company through to the next 60 years of success."

The company's website shows that Directors have a controling stake in the company;

The directors of Haynes Publishing Group P.L.C. have beneficial/non-beneficial and a connected interest in 64.4% of the total shares of the Company.

There doesn't seem to be a bidder as yet;

... The Company is not in discussions with any potential offeror...

Which makes me wonder if the Directors have just got fed up with the hassle of having a listing, or perhaps want to cash out themselves.

The share price has more than doubled this year, in a market which has been very poor for lots of small caps. It will be interesting to see how much bid premium the market adds to the share today? Although with something this illiquid the share price isn't necessarily logical at all, as it can be affected by a few tiny trades.

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Carpetright (LON:CPR) - the previously mooted 5p takeover bid from its largest shareholder, Meditor, has appeared this morning. Carpetright would have gone bust, if it had not been for major financial support (loans, and a placing) from Meditor.

Shareholders should accept this 5p cash bid, as the alternative is a pre-pack administration, leaving shareholders with nothing.

Note that, as is usually the case, the CVA restructuring a while ago didn't really work. CVAs seem to just delay business failure, so I wonder if landlords are likely to continue supporting CVAs?

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Postponement of IPO

A company called DNEG has today announced that its IPO will not be going ahead just yet;

Further to the announcement on 7 November 2019, DNEG has today decided to postpone its initial public offering ("IPO") due to ongoing market uncertainty.

The Company can confirm that it has received a strong level of interest from investors and therefore will be assessing when to recommence its IPO plans once market conditions improve.

A "strong level of interest" - really? Why is it postponing its IPO then? Clearly the level of interest wasn't high enough, so does it make sense to call that "strong"?

My broker tells me that the IPO market is really tough right now, so there could be more potential deals pulled. That's not going to help shares in listed brokers, although I think bad news re lucrative IPOs is already known, and priced-in.

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Kier (LON:KIE)

Share price:  88p (pre-market open)
No. shares:  162.1m
Market cap:  £142.6m

AGM Trading Update & Board Changes

I looked into this infrastructure building group in some detail, here on 17 June 2019. My view then was that the group's finances were nothing like as bad as Carillion, and that the situation might be salvageable. Although poor cashflow put me off wanting to invest myself.

Today's update sounds reassuring on key points;

Trading in line with expectations

The Group is trading in line with the Board's expectations. Since 30 June 2019, the Group has been awarded c.£1bn of new contracts and been appointed to a number of frameworks, including the£30bn Construction Works and Associated Services framework for the Crown Commercial Service.

Working capital and net debt both in line with expectations

The Group continues to focus on operational cash generation, with working capital and net debt both in line with the Board's expectations.

More details are given about cost-cutting, potential disposals, and management changes.

My view is that this one is binary. It's either going bust, or it could recover - but probably only after another equity fundraising, which would be likely to be at a steep discount.

The figures are not actually that bad. So it doesn't look a complete basket case, which Carillion did.  Personally I wouldn't want to take on the risk of a potential 100% loss, so it doesn't interest me. Investing in financially distressed companies is complicated & subject to considerable uncertainties, so why get involved? Although if its efforts to reduce debt are successful, then I suppose there's a chance the share price could recover strongly.