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

15th Nov by Paul Scott

43 comments 6258 reads

Good morning, it's Paul here.

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

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.

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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Nick Ray

15th Nov

Can anyone explain please why the Earnings Manipulation Risk is not 'high' on the stockpage of Veltyco (LON:VLTY) ? There seems to be an issue with receivables for some years.

If you go to the Stock Report for Veltyco (LON:VLTY) and click on "Earnings Manipulation Risk" it will open out a panel which shows you the exact calculations that it used and which ones passed. You can then click on a particular calculation to see the values involved. (This works on the new and the old sites.)

alexdonnelly

Hi Paul

could you take a look at future, please

thanks

threeputt

That'll teach me for not making a request, I was hoping for commentary on Bilby (LON:BILB) after their share placing this morning at 11p, I'm not in and it looks hairy and full of debt and I know you've avoided interest before, but it's got potential for a turnaround at some stage imo, they say they might need a further placing and I see it falling away some more yet. Be nice to see a review please

Laney

Becasue it's Friday post Mello I'm going to suggest DNEG change its ticker to RENEG

Richard Goodwin

The keyphrase I net worth. With London House prices you need huge liquid assets to have property as a small fraction if net worth.

Beginner

There are some really enlightening replies here, so 'thank you' to all who have contributed. What follows is my story, and I hope it may help somebody along the way.

I took my works pension last year at 55. I had only twelve years of contributions, but also have another pension (with nine years) that I can pick up at 60. I now work two days a week on average, driving HGVs. I have no family and no dependents. I live in the grim north, so my house is worth about three groats and a pickled egg. My lifestyle is, and always has been, modest: very occasional foreign holidays, and a baby diesel for transport. I reckoned last year I would need c£12k pa to live on, which is about a quarter of what I earned at my peak salary. The £19k quoted here would allow me to live better than when I worked! So far I am doing OK, and have never felt any kind of pinch financially.

I started investing (very unsuccessfully) in 2011, primarily using money I received for being stabbed, but also some savings. I went for growth, and failed! What remains of my capital I am now shifting into reliable dividend payers, and I have developed a penchant for preference shares. I hope to cease all earning activity at 59 or so.

For what it is worth, I think you should concentrate much more on expenditure than income. Neither can be assured, but you personally have a much greater level of control over what you spend, than what you will eventually bring in, if you invest in equities.

I wish you the best of luck ridding yourself of the toad squatting on your life. Be happy!

Zipmanpeter

Non-standard Finance (LON:NSF) have issued a wholly unsatisfactory trading update today which is effectively a profit warning and which caused the share price to tank. At 27.4p, share price is 16% down on the day & now down 58% vs before the abortive Feb 19 takeover of £PFG.

"However, the expected impact on normalised operating profit of the step-change in provisioning (6%-8% impact) and the trading performance to-date (4%-5% impact ), is that in aggregate, normalised operating profit for 2019 is now expected to be between 10-13% lower than current consensus of analyst forecasts, although still well ahead of 2018."

Is this overdone? Hidden amongst the verbiage and lack of hard numbers (“broadly in line with management's expectations...albeit not quite at the same rate achieved in the first half of 2019” means what exactly!) there were a few insights.

* They have increased their estimate for a "probability weighting of a stressed, or downside scenario" to 50% - similar to Amigo Holdings (LON:AMGO) This provisioning for something that has not actually happened

* Pro-active peparations being made in advance to weather the storm:" widening risk-adjusted margins , tightening score-cards & moderating loan book growth ....+ having long-term credit facilities in place" . Mgt esp ChM have also been through several credit cycles in non standard finance companies like Provident Financial (LON:PFG).

By division:

EDL Branch lending : "Strong growth, in line deliquency"
Guarantor Lending: Slower growth, in line deliquency - better than Amigo Holdings (LON:AMGO)
Home Credit: Lending volume down - less from old customers but more new customers; suggests consumers reach end of debt / being forced to borrow.

So we are looking at slower grow but (so far) no signs of major rises in impairment.

* Medium term Growth targets dropped sharply to EDL 10-15% vs 20%; GLD 15-20% vs 30%; Home credit to -5% -+5%

* an LOI for a much needed new loan facility has been signed for completion by end Dec

* However, 2 founding directors have left in last few weeks: the CEO of biggest unit & Exec Dir Miles Cresswell-Turner "immediate effect"; CFO Nic Tuenon - to pursue other interests outside non-standard finance" .

2019 Divi restated as expected to be 3p (ie 0.7 paid & 2.3p in May); 2.3/27.3= 8.4%

* Investor Day postponed until Jan - ostensibly until after GE but in my view to give time for the business to settle and for the Xmas results to come in

On a simple sum of the parts business using capitalisation of MCL (x2 as big) and AMGO (x10 as big) as direct counterparts to Loans@Home and Guarantor Lending Division plus unique, built out branch lending chain, EveryDay Loans, should be worth a LOT more than current £101Mn Mkt cap. I think standalone, the EDL branch network (normalised Op profit of >£30Mn after the profit warning) is worth more than the Mkt Cap.

However, it is now VERY vulnerable to being taken over and broken up. I think standalone, the EDL branch network is worth more than the Mkt Cap.

Until it renews its loans (or a discounted equity injection) it is also very vulnerable to any sudden lurch down in impairments.

I hold and still, despite everything, like it - not least because on a political level, ALL the political parties are competing to throw money and support at struggling working class voters - who have a high overlap with NSF's customer base I believe.

Not for widows & orphans as they say!

bryans1311

You could supplement your income by writing a book! ;)

All the best with your retirement “beginner”.

Bryan

jonesj

(In reply to Lion Tamer).
The idea of spending no more than the dividends could also work, providing of course the individual has not filled their portfolio with stocks yielding 6, 7, 8 or even 9%. Obviously some of the very high dividend yielders have problems, such as risk of dividend cuts, falls in capital values and in some cases, a business in terminal decline.
If the individual has a mix of more durable businesses on a modest & well covered dividend, then living off the dividends could work.
Incidentally, google tells me that the FTSE all share yield is 4.13%, so anyone living of dividends could well be spending a higher proportion of their pot than someone using a 3% withdrawal rate.

Incidentally, by complete coincidence, I took a self funded early retirement one year ago today, so when I say I am employing a 3% limit, this is what I have already been using.

Due to following a long established prudent lifestyle, I have come in well below the 3% for the first year. This included a 3 month winter holiday in the tropics, although probably spending less than most people do back home.

Paul Scott

Hi J,

I did have a good look through the stunningly good results today from Future (LON:FUTR)

My immediate reaction was, what's the catch? These figures look too good to be true.

I could only spot 2 potential problems;

1) Large difference between (high) adjusted profit, and (much lower) statutory profit. So the adjustments need careful scrutiny. Big share options payouts seem part of the difference, but given what the share price has done, I doubt many shareholders would begrudge management a share of the gains.

2) Weak balance sheet. However, on checking further, I see it did a large placing just after the period end, which fixed this problem.

I regret to say that I didn't see the potential at Future at all, it went completely over my head. That's perhaps the problem with just analysing the figures. The best potential could be from properly understanding the business model, and spotting future potential that way. Sadly, having to cover 500-600 companies, that would not be possible for me.

I seem to recall that Richard Crow spotted this one a while back, and thought it would do very well, so a hat tip to Richard there. He's very good at identifying potential winners. Whereas I think my strengths are more in spotting dodgy accounts, and warning people about that.

Regards, Paul.

Hi captnoglos,

Landlords and CVA's........ Highly likely that Landlords will support CVA's if (and only if) they will receive something from the CVA process, even if it subsequently fails. The alternative is often nothing.

Yes, I think you're probably right there.

Although I think landlords should collectively insist on being given say 50% of the equity, if they agree to write off problem leases.

16th Nov

Hi threeputt,

Our archive of comments on Bilby (LON:BILB) is here;

https://www.stockopedia.com/share-prices/bilby-LON:BILB/discussion/

Graham checked out the most recent accounts (which is what we mainly do here), and thought it looked awful;, at 24p, in Sept 2019:

https://www.stockopedia.com/content/small-cap-value-report-thur-19-sep-2019-igg-sfe-bilb-aampb-514696/

Further back, I glanced at it here, at 40p per share, but didn't ;

https://www.stockopedia.com/content/small-cap-value-report-tue-5-mar-2019-bilb-swl-sbiz-deb-454633/

Thanks for flagging up the placing today. It's deeply discounted, and rather small;

The total number of New Shares to be issued represents approximately 44.85 per cent. of the Company's existing share capital and approximately 30.96 per cent. of the Enlarged Share Capital. The Issue Price represents a discount of approximately 52 per cent. to the closing mid-price of 23 pence on 14 November 2019, being the last business day immediately prior to the announcement of the Fundraise.

My opinion - Small shareholders have a massive advantage in this type of financially distressed situation - you can sell, and salvage some of your money. Institutions can't. So they often put a bit more money in, to keep things afloat. That is often throwing good money after bad.

Take a look at this, which sounds close to critical to me;

David Bullen, Chief Executive Officer, said: "We would like to thank shareholders for their support. The funds raised will provide additional working capital to the Group and together with temporary amendments to the financial covenants in the existing debt facilities will provide us with additional time and flexibility to agree new debt facilities with rebased financial covenants, a process which may involve a further equity fundraising. The Board remains confident in the Group's prospects."

Interest rates are so incredibly low right now, that it makes sense for banks to help struggling companies to recover. Remember all that talk after 2008 about moral hazard, and zombie companies?

As it has turned out, and who could have possibly predicted this? interest rates have remained at historic lows. The economy has recovered, and many so-called "zombie" companies have actually managed to re-finance at amazingly low interest rates. So, we have to face up to the reality, that all the conventional views 10-11 years ago, that interest rates would normalise soon, were completely wrong.

This bit is the most important of today's updates;

Shareholders should be aware that in the event that the Company is unable to obtain such alternative funding there is a risk of the Company not being able to continue trading as a going concern. Whilst the Board does not consider this to be a likely scenario, nevertheless were it to occur, Shareholders could lose all or a substantial amount of the value of their investment in the Company.

It doesn't matter whether I'm right or wrong about the final outcome here. The question is why would you risk a 100% loss, in a company that is basically telling you that it's almost insolvent?

One for punters only. Serious/rational investors would have already sold some time ago.

john652

Hi Paul,

Thankyou for having a look at Future (LON:FUTR)

My reservations are also in the share based payouts but agree management deserve this, but the situation at conviviality plc is one I keep in mind, they had no management share ownership, only through options and didn’t have an ownership approach, they bet the ranch and completely messed it up. Future are similar in a number of ways, lack of shareholding, making big acquisitions with the associated risks etc. However so far, so stunning.

Spotting the dodgy accounts & the opposing view is really why I am here so thanks for looking at this and thankfully not spotting any lurking issues.

On the topic of giving up the daily grind, two statements that you really have to bear in mind when deciding to spend your capital or not is:

* 60% of Americans fear running out of money in retirement rather than actually dying.
* Financial services make their money off capital, ‘don’t spend your capital’ is perhaps the greatest marketing phrase ever!

If you can live off dividends great but run the numbers on the drawdown calculators

https://www.hl.co.uk/retirement/drawdown/calculator

You might be surprised at the numbers. I was and led me to give up 2 years ago and become a full time investor.

2-3 years cash though is essential for me to phycologically be able to trade & stick with my rules.

Lion Tamer

17th Nov

Reply to jonesj, re: drawing no more than dividend income

Yes, I entirely agree. In addition to avoiding too high dividends I check for dividend cover, fcf cover, etc. I've 19 quantitative items (and a number of qualitative items) in total in my investment process although some are overlapping. I also perform regular portfolio reviews and use the portfolio analysis tab to check overall portfolio composition. Unfortunately much of the invaluable content of the portfolio analysis tab is still missing on the new site so you'll need the old site for this. Over three years I've actually withdrawn significantly less than the dividends, in fact nothing for nearly three years due to an overly large starting cash buffer, which I'm now building up again in preparation for moving house sometime next year.

BTW, Congratulations on your first year of self funded retirement!

Farmer George

john652, good that you drew attention to drawdown calculators. Drawdown calulations are an excellent tool for 'what if' analyses. One can assume optimistic and pessimistic age and fund growth scenarios, and, make a decision based on what one feels comfortable with in the spirit of risk aversion.

Mike888

Re the HL drawdown calculator,

I may be wrong, but it seems to completely ignore inflation (there is no mention of it in the assumptions), so it assumes your monthly withdrawal will remain constant for life with no need to increase it. Whilst it is probably lost in the roundings for early years, fast forward 20-30 years and it's a significant hit, and obviously proportional to that point.

For any readers using the calculator, just be aware of this apparently hidden gotcha,

EDIT :

In fact, just reduce the capital investment forecast % by 1%, to accommodate a measly inflation rate, and just look what it does to the forecasts, you'll be surprised.

Yes, a net of inflation return assumption needs to be made so that a real return figure is assumed.

The other key (critical?) assumption is that the underlying capital value is preserved i.e. no fall in the fund value so that capital draw-down can be undertaken over the reported periods. In order to arrive at real returns in excess of inflation, equity-type investments will be necessary, with the attendant risk of a fall in values. Are there workarounds?

18th Nov

Regarding inflation workarounds in an equity portfolio I don't believe so, although the relationship between interest rates and inflation do favour some stocks more than orhers, banks sprig to mind

in reality inflation will have an impact on your drawdown rather than your capital growth, so as long as one is less than the other the consequence is somewhat dampened, but it most definitely isn't ignorable.

You are quite right re the risk of bad years, again the HL drawdown calculator seems go be biased towards compound growth, which isn't much use if the day you decide to go all in, is the start of a bear market. It's all a bit rose tinted for me and TBH could catch the unwary off guard.

This calculator allows you to add in the inflation elements. Let's assume the maths behind it is correct. There are loads out there.

https://www.mycalculators.com/ca/retcalc2m.html

These calculators are very useful for reminding the power of compounding, they should not be used in isolation and the sole basis for jacking it all in, but they are very useful for challenging the idea of not spending capital, or at least understanding it better. The state pension, transfer values of old pensions & any inheritance tax have to be considered of course.

I have a friend, he won't retire, or at leat stop and take stock, because he is just to nervous of the unknown and doesn't have enough 'capital' which he absolutely does, however he has his very old mother, no siblings & her big old house in Barnes coming to him. But he won't include this in the calculations, madness in my view, sure there are some unknows in the inheritance, just like there are with that bus that takes you out as you hobble to work on your 65th birthday.

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

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Paul Scott

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