Small Cap Value Report (Fri 26 Jan 2018) - SDI, ARE, WTG, MLIN/MCAP, PAY, HW.

Friday, Jan 26 2018 by

Good morning!

After a hectic month of news, we finally get a relatively slow news day today.

Stocks crossing my radar are as follows:

Thank you for suggesting PayPoint (LON:PAY) in the comments, which updated yesterday. It's not strictly speaking within our market cap limits, but it's a stock I have followed before.

Time permitting, I will cover other requested stocks.



Scientific Digital Imaging (LON:SDI)

  • Share price: 29.5p (+13%)
  • No. of shares: 89.6 million
  • Market cap: £26 million

Interim Results

This is an acquisitive company focused on scientific and healthcare-related technology.

We haven't covered it too frequently here. Last time, I said that I was put off by the rapidly increasing share count, which has nearly trebled since 2015. In general, I prefer organically growing companies, rather than companies which are growing through acquisition.

The SDI share price would suggest that the company's strategy is performing extremely well, so maybe I should try to have more of an open mind?

These interim results are good:

  • Revenue up 34% to £6.6 million. Organic growth from two subsidiaries, plus growth from two recently acquired companies.
  • PBT up over 100% to £850k, adjusted PBT up 140%.

There are now six subsidiaries, following the most recent one in August 2017.

It turns out that the two most recently-acquired subsidiaries act as supplier to a third one.

This can be a source of confusion. What happens when your PLC's subsidiaries are buying and selling things between each other?

The answer is that any transactions like this need to be completely ignored when it comes to financial reporting for the parent company PLC. It should be as if the transactions didn't take place. That is how "consolidation" works.

But it doesn't mean that no additional value is being created by the interaction of your PLC's subsidiaries. The overall margin achieved by the company improves as there is more work being done between getting in the raw materials and turning them into finished products for customers.

In terms of margin,…

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All my own views. I am not regulated by the FSA. No advice.

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Scientific Digital Imaging Plc designs and manufactures scientific and technology products for use in applications, including life sciences, healthcare, astronomy, consumer manufacturing and art conservation. The Company's segment encompassing Synoptics three marketing brands, Syngene, Synbiosis and Synoptics Health. The Company, through its subsidiary, Synoptics Limited, develops and manufactures scientific instruments and systems that develop digital imaging technology for a range of disciplines. Synoptics Limited offers its products through four divisions: Syngene, Synbiosis, Syncroscopy and Synoptics Health.The Company through its Opus Instruments Limited, manufactures the infrared imaging system designed for art conservators to provide images in a portable camera. The Company, through Artemis CCD Limited, manufactures light imaging cameras. The Company through Fistreem International Ltd manufactures water purification products and vacuum ovens. more »

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Arena Events Group Plc is a United Kingdom-based international turnkey event design and delivery company. The Company provides managed solutions from concept and design through to the construction and delivery of temporary structures, seating and interiors for a host of sporting, outdoor and leisure events around the world. Its contracts range in size and complexity from a simple equipment rental for a local outdoor event, to an integrated solution of multiple structures and interiors for an international sporting event. It provides a wide range of services from temporary demountable seating and project management, to the installation of ice rinks as well as the provision of high end catering equipment and event furniture. The Company has operations in the United Kingdom and Europe, Middle East and Asia and the Americas. more »

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Watchstone Group plc offers technology solutions to the insurance, automotive and healthcare industries. Its segments include Hubio, Healthcare (pt Health and InnoCare), and ingenie. Hubio provides integrated solutions to help organizations in the insurance and automotive sectors to build customer engagement and enable usage-based personalization. Healthcare includes ptHealth, a national healthcare company that owns and operates physical rehabilitation clinics across Canada, and InnoCare, a clinic management software platform and call center and customer service operation based in Canada. Its ingenie is an insurance broker. Using telematics technology, ingenie gives its community feedback, advice and discounts to help young drivers improve their driving skills. more »

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

40 Comments on this Article show/hide all

anfitrion 26th Jan '18 21 of 40

In reply to post #304833

Van Elle even stronger today, seems not everyone has seen this as a profit warning.
Valuation is pretty undemanding, I must admit.

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Graham Neary 26th Jan '18 22 of 40

In reply to post #305033

re: Scientific Digital Imaging (LON:SDI)

Cheers for that John, if that's true then it's very comforting indeed. Thanks. G

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shanklin100 26th Jan '18 23 of 40

In reply to post #304943

It is possible that the foam being mentioned in the Nike video et al is not Zotefoams (LON:ZTF) foam, but I have not found details of Nike having any other agreements of this type.

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Graham Neary 26th Jan '18 24 of 40

In reply to post #304888

Hi Clive, thanks for the suggestion re: PayPoint (LON:PAY). I have covered it now. Cheers.

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jdnthomas 26th Jan '18 25 of 40

Hi Graham
Just want to take you up on one point on Watchstone (LON:WTG). According to today's update the £50 m held in escrow is in addition to the £62m cash held. So that is potentially close to £3 per share of cash. They also say they have eliminated the the 2017 losses through the sale/closure of the loss makers and cutting costs. It's a slightly odd way of putting things but implies they are now at monthly break-even and with a fair wind may turn a profit (before exceptionals) in 2018, so you might value those businesses around 1 times sales or about £1 per share. So quite a lot of upside potential.
Of course there is the huge claim for damages from Slater & Gordon hanging over them which if it succeeded would leave the shares worthless. S&G are bound to pursue it but I would think their claim for misrepresentation and breach of warranty must be fairly weak given the circumstances of their due diligence and the limited warranties WTG gave. The amount in escrow is probably more vulnerable as I think it is at least in part dependent on how certain of the underlying cases S&G bought turned out, rather than whether there was any breach of the SPA.
There is also the outstanding SFO investigation into the accounting etc. It would be pretty perverse of the SFO to decide that the shareholders had been defrauded by previous management and decide the appropriate remedy is to fine the company (i.e those shareholders). But then the SFO is not interested in justice but merely in raking in as much money as it can so I would not put it past them.
So very much a special situation this one but I think worth a small bet (recognising it is just that).

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Graham Neary 26th Jan '18 26 of 40

re: Watchstone (LON:WTG).

Good point on the money in escrow - whoops. Fixing that now. Thanks for the correction.

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dewigo 26th Jan '18 27 of 40

GN. TW at Share Prophets is the authority on WTG(he exposed the fraud which was Quindell). Only £5.99 pm sub. PS knows him well(tweets him middle of the night when he's pissed, so TW says).

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Graham Neary 26th Jan '18 28 of 40

In reply to post #305288

Hi dewigo, yes I am familiar :)

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Graham Neary 26th Jan '18 29 of 40

In reply to post #304863

Hi timarr, it took me a while but I eventually got around to completing a section on Harwood Wealth Management (LON:HW.), I hope you find it interesting. Thanks for the suggestion! Cheers. G

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shipoffrogs 26th Jan '18 30 of 40

In reply to post #305308

Great point about companies raising funds off shareholders then handing some of it back and inviting the taxman to take his share of the handback.

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daveinthelakes 26th Jan '18 31 of 40

Thanks Graham for a superb effort today.

Enjoy the weekend, Dave

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Gromley 26th Jan '18 32 of 40

In reply to post #305143

It is possible that the foam being mentioned in the Nike video et al is not Zotefoams (LON:ZTF) foam, but I have not found details of Nike having any other agreements of this type.

Good point Martin - in fact though I've previously looked for evidence to challenge or at least question Zotefoams (LON:ZTF) 's view that they have a significant technical lead and not really found anything, although to be fair when it comes to Zotefoams and industrial foaming (sorry "cellular materials technology")  in general it seems that the internet ain't interested! (It would be overly rampy to talk about a 'hidden gem' but I do quite like the lack of interest in advance of what could be some significant developments).

Anyway just for the record you linked to the wrong December RNS earlier - your link (14th Dec) was about a substantial investment in new capacity for their High Performance (& higher margin) strand. This (by pure co-incidence I'm sure - not) came one day after the Nike announcement, here.

Looking back on that it is clear (and actually now I see should have been obvious) that the strategic deal was on the back of existing positive engagements. In particular the release includes :

 "The foams, which are designed for footwear, can be formulated to specific customer needs and are superior in performance, consistency, quality and purity to foams produced by other methods."

That would leave me comfortable that the new Nike shoes will sport the "Zotefoam inside" logo!

My only concern would be that I do get the feel that the Zotefoams (LON:ZTF) management have secured a reasonable share of the spoils for their great leap forwards (see what I did there?)

 Quite looking for the results statement on 13th March or more particularly the outlook therein.

 No surprise at all, if I tell you that I'm also long here - now one of my top 3 positions.

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shanklin100 27th Jan '18 33 of 40

In reply to post #305343


Do you feel that Zotefoams (LON:ZTF) have a history of negotiating poor deals? Why do you think that the Zotefoams (LON:ZTF) might not have a reasonable deal with Nike?

Thank you, Martin

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timarr 27th Jan '18 34 of 40

In reply to post #305308

Thanks Graham,

I agree, I think it's hard to see them generating above average growth other than by acquisitions. However, there are a huge number of small financial advisers out there, so if they really can come up with a cookie-cutter approach to buying and integrating I think they could outperform. Lot of if's there, though.

And I agree on the dividend, don't get why acquisitive companies do this.



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gus 1065 27th Jan '18 35 of 40

In reply to post #305308

Hi Graham - good set of commentaries yesterday, thank you.

With regards to the apparent inconsistency of Harwood Wealth Management (LON:HW.) raising new shareholder funds at the same time as paying dividends, I wonder if this has something to do with the nature of the business/shareholder base and an exercise in tax management?

From the Harwood Wealth Management (LON:HW.) accounts I see that 79% of the shares are not “held by the public” - not sure if this includes or excludes institutional investors but for sake of the hypothesis, let’s assume a large chunk of the equity is held by employees of the company. While there are some chunky Director holdings, it may be that as part of their acquisition strategy they encourage the key personnel in the newly acquired companies to take shares in HW both locking them in/giving a vested interest in the success of the business. Potentially held in an ISA or SIPP or within the limits of the tax free dividend allowance, the payment of tax free dividends could also then be a more tax efficient alternative to salary or other earnings type benefits subject to income tax. No knowledge of the case, just speculation.


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Gromley 27th Jan '18 36 of 40

In reply to post #305398

No specific reason to think that Zotefoams (LON:ZTF) negotiate bad deals Martin and I don't mean to denigrate the management. Just general caution of :

  1. Nike being a big powerful player, who I'm sure know all about getting the best bang per buck.
  2. The tendency for big "anchor clients" to be able to push hard such that suppliers can virtually be paying for the privilege of being associated with the "name".
  3. I've seen it suggested that they one of those companies run by scientists who love the tech. That's not always a recipe for great deal making.

Don't want to sound too negative, I'm really hopeful for this, just not counting my chickens!

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Graham Neary 29th Jan '18 37 of 40

In reply to post #305428

re: Harwood Wealth Management (LON:HW.)

Interesting hypothesis Gus. Thanks! G

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CliveBorg 29th Jan '18 38 of 40

In reply to post #305238

Many thanks Graham, very useful to hear your opinion. Regards, Clive

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catalogue 29th Jan '18 39 of 40

Hi Paul,
Are you covering  Conviviality (LON:CVR) today? Is today's dip a buying opportunity?
Regards, Peter

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Bezhe 30th Jan '18 40 of 40

Regarding the apparent inconsistency of companies paying dividends while also raising money from shareholders: I recall reading a book many years ago which made the case for doing exactly that. It may have been a US book but the point being made was that by forcing a company to pay out its entire after-tax profit, it also forced management (a) to generate enough cash to cover the dividends without having to borrow and (b) to be able to justify to investors the company's investment intentions, thus ensuring a focus of good capital allocation. By using retained earnings and borrowings to expand, there is a risk of poor capital allocation.

Of course, it seems likely that the cost of raising new money, allied to the mismatch of tax rates on income versus capital gains wipes out the logic of the case being made but it is worth giving it some thought.

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 Are LON:SDI's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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