Small Cap Value Report (Fri 20 Sep 2019) - CLP, EVE, SOG, FCRM

Good morning!

I'm in an airport restaurant, hoping that nobody notices I haven't ordered anything. There's only a few minutes until I have to go to the departure gate - let's see how much I can cover.

• Clear Leisure (LON:CLP)
• eve Sleep (LON:EVE)
• StatPro (LON:SOG)

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Clear Leisure (LON:CLP)

Interim Results

This name has been knocking around for a long time. It's now an investment company with NAV of just E1.5 million (denominated in Euros because of its investments in Italy). It's highly leveraged,  borrowings on today's balance sheet of over E6 million.

Unless it raises a lot of new money, I don't see how it can stay listed for that much longer. The Board has the authority to issue shares with nominal value of up to £500k, but the share price as of last night is trading below nominal value (0.25p). Doesn't that make issuing new shares sort of tricky?

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eve Sleep (LON:EVE)

• Share price: 4.9p (pre-market)
• No. of shares: 261 million
• Market cap: £13 million

Cessation of merger talks, trading update and lifting of suspension

This company sells mattresses online. It has a strong track record of unprofitability.

Merger - abandoning merger talks, and its shares can trade again.

Trading update- it says brand awareness has improved by 50%, from 10%. So I guess that means we are at 15% now.

Then it gives us the bad news:

...overall trading has been more challenging than previously anticipated owing to the uncertain economic outlook and continuing low levels of consumer confidence. This economic backdrop combined with heavy discounting and promotional activity from our competitors has led the board to conclude that 2019 revenues are now likely to be in the range of £25m-£27m.

According to the StockReport, 2019 revenues were supposed to be £35.3 million (up from £34.8 million in 2018). If that is the most recent forecast, this is a savage sales miss.

Through cost-cutting, the company still hopes to make a reduced loss this year, compared to 2018.

CEO comment:

The opportunity to create a leading sleep wellness brand remains undiminished and I am confident that eve's rebuild strategy, centred around a differentiated brand positioning, expanded product range, lower friction customer experience, combined with increasing brand awareness sets out a clear path to building a profitable business, which delivers for shareholders

My view: despite being backed by a well-known fund manager, this company is not investment grade.

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StatPro (LON:SOG)

• Share price: 148.5p (pre-market)
• No. of shares: 66 million
• Market cap: £98 million

Recommended Cash Offer

The offer for shareholders is quite a huge premium: 230 pence per share. The premium is 55% versus yesterday's share price.

Over 49% of Statpro shares are already supporting the deal, so I expect that it will go through.

You can read about the buyer here. It's an investment data company based out of Pittsburgh in the US.

So many deals happening recently - the combination of weak GBP and low small-cap valuations, in my view.

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I was writing a section on FCRM, but it was deleted when the page accidentally refreshed, before I had finished it (writing this report is a lot more difficult on a laptop). So that section is gone now, sorry about that.

What I was writing was that I wouldn't worry too much about the delay to publication of FCRM's accounts, which happened because of the new accounting rules. Companies providing complex services (e.g. gas and electricity connections by FCRM) often have complex contracts, and this makes accounting very difficult.

While I do think it's very helpful for investors to understand accounting rules, one of the options that we always have is to simply avoid those companies whose numbers we don't understand or which are subject to a lot of uncertainty. That can save a lot of heartache and avoid a lot of stress - think of Burford Capital (LON:BUR), Carillion, etc. I'm not an expert on FCRM, but hopefully its accounts make sense now, after their accounting review.

Out of time for now, have a good weekend everyone. Paul is back on Monday.

Cheers,

Graham