Small Cap Value Report (Fri 2 Aug 2019) - STAF, AIEA, GOAL

Friday, Aug 02 2019 by

Good morning, it's Paul here.

Just so you know what today's timings are, I'm on the afternoon shift - so am writing between 11am- expected finish time c. 3:30pm. I've got nothing else on today, so no distractions thankfully. Well, just the market being open, which is a constant distraction of course.

Takeover activity

This is turning into something of a frenzy, with practically every day bringing news of another UK listed company receiving bid interest. I suspect there might be many more to come - because the weak pound makes UK assets attractive to overseas buyers. Takeovers provide us with lots of potential opportunities to make money, so I'm rather excited about this theme. 

Also, some markets e.g. USA, look expensive right now, therefore in comparison UK shares look cheap. Therefore, buying in growth through relatively cheap takeovers of UK companies, looks a very sensible strategy for American companies. There's also the potential for a USA-UK trade deal post-Brexit, which could enhance the attractiveness of some UK companies to an American buyer. Language helps too.

Positioning ourselves in companies' shares which look well set up as a potential bid target can be lucrative if there's a decent bid premium. However, sometimes bids can be at a poor premium (e.g. recently Sanderson (LON:SND) only about 10%), or in financially distressed cases, at a discount - who can forget the Flybe bid at just 1p, when shares had been c.16p days beforehand?)

Although it's mostly luck, as nobody really knows which companies might receive bids. It's often very surprising which ones do! (Earthport & PTSG spring to mind). Sometimes bidders can see something good in a company which UK investors might think is not good. And/or, American buyers, particularly VC/PE seem happy to put gigantic, unfathomable, valuations on tech companies. That's fine by me, if they want to buy any of my holdings at greatly inflated prices.

Talking of potential takeover bids, Staffline (in which I hold a long position) has caught my eye this week, not for results, but as a possible takeover target. I wouldn't normally cover this kind of thing, but it looks a good opportunity in my view, and it will be interesting to hear what subscribers think, in the comments section below.

Staffline (LON:STAF)

Share price: 140p…

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Staffline Group plc is a holding company, which is engaged in the provision of recruitment and outsourced human resource services to industry and services in the welfare to work arena and skills training. The Company has two segments: Staffing Services, which includes the provision of temporary staff to customers, and PeoplePlus, which includes the provision of welfare to work and other training services. Its Staffing Services focuses on providing complete labor solutions in agriculture, food processing, manufacturing, e-retail, driving and the logistics sectors. Its recruitment business operates from well over 300 locations in the United Kingdom, Eire and Poland. The Staffing brands include Staffline OnSite, based on clients' premises providing both blue and white collar, out-sourced, temporary workforces. Its Employability includes work program, prime contractor in over nine regions and sub-contracts in approximately five regions in England. more »

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Gattaca plc, formerly Matchtech Group plc, is a human capital resources business dealing with contract and permanent recruitment in the private and public sectors. The Company operates through two segments: Engineering and Technology. The Engineering segment comprises Barclay Meade and Alderwood recruitment consultancy brands. The Technology segment includes the Connectus recruitment consultancy brand. The Company is a provider of specialist recruitment services to the engineering and technology industries, both in the United Kingdom and internationally. The Company offers three core solutions: Contingent Workforce Solutions, Permanent Recruitment Process Outsourcing (RPO) and Total Workforce Solutions. more »

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Airea plc is a specialist flooring company. The Company's principal activities are focused on manufacturing, marketing and distribution of floor coverings. It offers brands, which include burmatex and Ryalux. Its burmatex brand is a manufacturer of contract carpets and carpet tiles. Its Ryalux brand manufactures tufted carpet, which offers a range of color and texture through two consumer brands, including Ryalux and Pownall. Its Ryalux brand offers a service of custom made floor coverings, as well as standard carpet ranges that are available through carpet retail outlets. It offers a product range spanning fiber bonded and tufted carpet in sheet and tile, as well as specialist barrier and entrance matting products. It also focuses on the design and manufacture of products to meet needs of architects, specifiers and contractors for the education, leisure, commercial, healthcare and public sectors. It operates in the United Kingdom, Republic of Ireland and North America, among others. more »

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

36 Comments on this Article show/hide all

Paul Scott 2nd Aug 17 of 36

In reply to post #499931

Thanks Jack.

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smilingmickey 2nd Aug 18 of 36

Hi Paul,
I just draw folks attention to an RNS issued yesterday by Spectra Systems re their possible entry as a supplier of coated polymer for production of bank notes, using disruptive technology which I assume has been developed in house.

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Lgarvey 2nd Aug 19 of 36

Hi Paul

Any thoughts on this regarding  £SOS  

Online fashion retailer Sosandar PLC said that Octopus Investments Nominees Ltd bought 11.12% stake in the company on Wednesday.

Octopus Investments Nominees owns 18.1 million shares in the company.

Sosandar shares closed 7.0% higher at 15.25 pence each.

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Zoiberg 2nd Aug 20 of 36

In reply to post #499801

From the corresponding RNS :
"Our Chief Executive Officer, Neil Rylance, built up his personal shareholding in the Company a number of years ago and, as part of this sale to the EBT, intends to continue to lead the company in this next important phase of its development".
EBT = Airea Employee Benefit Trust and the name of the Non Executive Chairman is Martin Toogood.

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Mark Carter 2nd Aug 21 of 36

I remember the early 2000's, when there was a huge disparity between value shares and the rest of the market. Although I didn't own many shares, I do recall that a lot of them were being bought out. One of them was Amstrad, which I had had bought only a few months earlier. It had a big cash pile which was a substantial part of its market value.

Although acquisitions tend to be pro-cyclical, sometimes companies can be actually be rational. At the time, there was deep value, and value shares performances subsequently produced gangbuster returns.

I don't think we're in the same circumstances as then, but Paul's comments seem on-the-money to me. It's a combination of relatively cheap stock market values and attractive exchange rates.

If I had to hazard a guess as to what would make a good takeover target: a company that wasn't too large, in a mundane industry, and have a low EV/EBITDA rating. Low ratings means that there's likely to be low debt, they're relatively cheap, and can be justified on the grounds of "value-enhancing". Banksters lap up all that kind of stuff, making them good candidates to pitch to their corporate clients.

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Trident 2nd Aug 22 of 36

Re: GOAL it looks like the curse of Mike Ashley has struck again. His somewhat random commercial adventurism is beginning to make him look like a business Jonah.

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Cisk 2nd Aug 23 of 36

In reply to post #499906

Hi Rhomboid,

You’re correct it was a typo on my part, meant to say EBT but for some reason was thinking pensioners!

I admire your glass half full stance on Airea (LON:AIEA) - unfortunately for me there are too many red flags here and plenty of other opportunities around. I certainly don’t blame Airea for Brexit, it’s out of their control. But many companies blame brexit for their current woes...

And back in 2016 when the vote was made to narrowly leave the EU, unfortunately what has happened since was pretty much predictable and forecastable. And those that felt that what was an economy in pretty good shape would continue to be that way, with years of uncertainty, political ridiculousness and wasted billions not having much impact, unfortunately were mistaken. Anyway, enough brexit talk.

What really did it for me was the timing and cost of that share sale to the EBT. That, with other factors, has pretty much wrecked the finances of the company. And throw in a rejected bid from James Halstead - it makes the management at best look questionable and at worst downright rubbish.

If they so desperately needed shares for the EBT, surely a share purchase program, buying shares in the market over time, would have supported the share price and evened out the buying price, rather than buying them from the CEO? So now we’re in the situation where he got almost double the current price for his stock, the company actually borrowed money to do this, cashflow - and trading - has deteriorated and the share price is on the floor.

So I wish you luck with your continued holding - maybe Halstead will come back with a revised offer, but for me, I should have followed my gut and sold when the CEO sold!

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laurie 2nd Aug 24 of 36

So what is going on at SVS Securities? Have they gone under or are they simply closing? (No condolences, please, I use many brokers and I am covered by FSCS in the event of a firm's bankruptcy, but I moved shares from Beaufort to SVS....)
Are there any other firms that are on the edge that people can tell me about? I have accounts with everyone, so I would really like to know.

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Trident 2nd Aug 25 of 36

In reply to post #500026

A question to ask perhaps is what are the terms of option awards.

The EBT is arguably a hedge against option award requiring shares to be bought in the market at the time of exercise. The alternative would be to issue new shares, which is dilutive.

If there is an exercise price that option holders have to pay, that money goes into the EBT, and is there to repay all or part of the the loan made by the Company to buy the original shares.

The company may have to write off any element of the loan which represents a shortfall of the exercised shares compared to their original value. The auditors will probably detail this to this to the board annually.

Of course buying such a large tranche off a Director who remains CEO is fraught with conflicting interests, and should not be done, unless they are sold at absolute bargain basement prices or can be justified in terms other than the interests of the selling party.

I would take this generally as a barge pole indication

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Trident 2nd Aug 26 of 36

I wonder if taking Paul's view of 'cheap' Companies if we could for fun build up a list of Ones to Watch from the perspective of their attractiveness for takeover purposes.

I know generally its a mug's game, but I wonder if there are generally some good investments which are languishing, and which may be vulnerable.

We can shoot them down, as improbable or probables, from Stocko readers viewpoint, and then have an ongoing screen of the collective filtered runners and riders.

Probably a silly idea?

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Zipmanpeter 2nd Aug 27 of 36

In reply to post #500071

Recognising it is only a mug's game and thus only worth thinking about re companies you already at least half believed in, I have 2 candidates (both of which I am in already):

LOOP - recent (60% in P3M)  fall in excess of 20% EBITDA reduction announced with good hopes of recovery in 2020 as i) additional delayed sales pods come on stream and ii) adding video may return net churn to positive.  US beachhead already established and hiring to accelerate there.  Attractive SAAS model for $ rich tech buyers

CALL - similar to LOOP but already recovered recent fall.  N et new user wins/mnth ahead of year end target by end of H1.  US business growing and now cash positive and being accelerated.  Either a trade buy or a PE deal opportunity

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Jamesweston 3rd Aug 28 of 36

In reply to post #500071

Hi Trident,

Definitely not a silly idea when there are collectively so many hours between us all put into researching different companies. 

one recently flagged to me is Proactis PHD. 

Lots of stakes being taken by large funds after a massive share price crash after a profit warning. 

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Acky 3rd Aug 29 of 36

In reply to post #500056

Good question laurie. I just tried to log in to my SVS account this morning only to find the website simply no longer exists! On googling SVS Securities the first article that comes up is one from Value The Markets which reckons that according to 'multiple sources' as of yesterday morning it 'has been shut down', and that 'an Administrator has been appointed and a statement is expected on Monday'. Looks like will be an FSCS job, so sounds like a load of hassle and a big time delay in getting access to cash and shares? What happens if any corporate actions in the meantime? Not been in this situation before and it doesn't sound good...

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Edward John Canham 3rd Aug 30 of 36

In reply to post #500056


SVS Securities

Where did you get this news from?

All I know is I can't log into my SVS account.

Edit: OK - got it.

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Hicks 3rd Aug 31 of 36

Like others I too have an account with SVS, and first realised that something was wrong yesterday when I tried to log-in to my account at lunchtime.

As has already been mentioned, what happens if a corporate action occurs, also are dividends still paid into our accounts, even though we cannot access them? If the mess is finally sorted out will we get our equities back or will they have been sold at some future date, and we only receive the cash?

We will have to wait I guess until Monday, when hopefully something will be announced. Hopefully retail investors will at least get back their cash/shares.

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Edward John Canham 3rd Aug 32 of 36

In reply to post #500141

SVS is authorised by the FCA so compensation scheme will cover up to £85k.

Had experience with Beaufort Securities - dividends due were received, holdings were not touched so you got your shares and cash at administration date plus later dividends. There were no corporate actions covering my holdings so I don't know on that.

My BS account was an ISA and was transferred into another ISA so no consequenses there.


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Acky 3rd Aug 33 of 36

In reply to post #500156

Thanks for the info re dividends & holdings, that sounds positive. And was also wondering about the ISA situation, so thanks for that info too!

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Hicks 3rd Aug 34 of 36

Thanks for the reply Phil, most helpful.

I see that the SVS website is still accessible, but obviously not the log-in part of it. Maybe somebody just forgot to take it down!

Not being able to panic sell with all the chaos that is going on at the moment my turn out to be a good thing, who knows, still rather have the choice though.

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LE4R 5th Aug 35 of 36

In reply to post #500156

Thanks from me too, Phil - v useful. 

One question on the compensation scheme that I have is -as I hope! - its eligibility for execution-only investment actitivies. I've never heard anyone make a distinction when it's been discussed on forums etc, but digging further now the relevant page talk extensively about a firm having given 'advice' etc - see eg.

On a separate note, I have direct messaged you, Acky, Hicks and Laurie on this generally. Please see your inbox.

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dakespaul7 Mon 9:50am 36 of 36

what are your thoughts on the STAF news today? 

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


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