Small Cap Value Report (Fri 9 Aug 2019) - SND, BUR, OTB, PEN

Friday, Aug 09 2019 by

Good morning!

There are not any backlog things for me to write about, so this article will appear blank for the morning - so subscribers can add comments as usual.

Managing expectations - the main body of this article will appear during Friday afternoon, section by section, and will be done by 6pm. If that changes, I'll update this introduction accordingly.  I'm sorry if it annoys people that I haven't finished each article by 1pm, but that's just how it is.  I'd rather take my time, and write something worth reading, with some thought having gone into it, than rushing for deadlines.

Thanks for bearing with me. You now have my undivided attention for the rest of the day.

Update at 16:40 - today's report is now complete.

Sanderson (LON:SND)

Share price: 140p
No. shares: 60.5m
Market cap: £84.7m

Takeover bid update

In my view, this bid undervalues the company, and was at an insufficient premium. Although the share price did have a nice run upwards in the months before the bid.

Today the bidder, Aptean, says it has got irrevocable undertakings and letters of intent over 49% of the company's shares. That seems a bit lacklustre, clearly some shareholders are not impressed with the 140p offer. So it's not necessarily a done deal yet.

Why did management recommend a bid at such a modest premium? The deal might be driven by institutions wanting an exit? (as it's too illiquid to allow Instis to sell  in the market). A city contact told me this week that small cap fund managers are worrying about liquidity, after the Woodford fiasco, nobody else wants to get caught out holding lots of illiquid stocks, whilst facing client redemptions. That's an interesting point, and sounds plausible to me.

The risk is that, if the bid falls through, then the share price could tank back down to 100p maybe.

My own experience of takeover bids is usually very good, I've had lots of them over the years, including once amazingly, when I had three on the same day! Wish I could remember the details of what they were, but I definitely didn't imagine it.

Then there was the debacle with Revolution Bars (LON:RBG) (in which I hold a long position) where a (with hindsight, generous)…

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Sanderson Group plc is engaged in software and information technology (IT) services business specializing in digital retail technology and enterprise software for businesses operating in the manufacturing, wholesale distribution and logistics sectors. The Company's segments include Digital Retail and Enterprise Software. Its digital retail solutions include in-store technology; back-office systems for processing sales and fulfilling orders, and mobile and e-commerce solutions to underpin online operations. Its systems allow retailers to keep pace with new devices, technologies and channels, driving consumer engagement and retention. It offers Enterprise Resource Planning (ERP) software for manufacturing in general manufacturing, engineering, and food and drink processing businesses. The Company offers industry-specific software and warehouse management systems, delivering sales growth across wholesale distribution, cash and carry, fulfilment and logistics businesses. more »

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On the Beach Group plc is a United Kingdom-based online travel agent. The Company operates in two segments: Core and International. The Company's core segment conducts its activity through the United Kingdom Website (UK). The Company's international segment conducts its activity through Swedish Website ( The Company is an online retailer of beach short-haul beach holidays, primarily targeting customers in the United Kingdom under the On the Beach brand. The Company's technology platform enables customers to package the constituent components of their holiday (including flights, hotels and transfers) to build custom-made holidays from a range of flight and hotel combinations. The Company offers customers a range of flight and hotel products bookable through online channels (including by desktop, mobiles, tablets and applications) and over the phone. The Company's subsidiaries include On the Beach Beds Limited and On the Beach Travel Limited. more »

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Pennant International Group plc is a United Kingdom-based company engaged in the provision of management services. The Company operates through three segments: Training Systems, which provides and supports specialist training systems based on software emulation, hardware simulation, virtual reality and computer-based training in the defense sector; Data Services, which provides media, graphics, virtual reality software and technical documentation to the defense, rail, power and government sectors, and Software, which owns the rights to the Omega suite of software used by defense contractors and by defense authorities in Canada and Australia. It offers services that cover training equipment and related support, technical documentation, media development, software development and related consultancy. It markets in rail transportation, defense, aerospace, government, oil and gas, petro-chemical, power, retail, consumer goods, information technology and telecommunications industries. more »

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

30 Comments on this Article show/hide all

SundayTrader 9th Aug 11 of 30

In reply to post #502531

As regards Vitec, this charge seems to apply to British companies where a large part of their business is outside of this country - Halma has booked a £14 million hit on this one. As I understand it, HMRC is trying to make Corporation Tax on overseas earnings slightly more sensible, and the EU claims that this is illegal state aid. The government is supposedly challenging it, but presumably EU jurisdiction still holds up to 31st October. I tried to research this in relation to Halma, but I couldn't make enough sense of it to see any basis at all for the EU claim - does anyone else know any better? - but there have been other cases of the EU using state aid rules to extend the boundaries of their jurisdiction, and this looks like another example.

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stuartb58 9th Aug 12 of 30

Thanks Sunday Trader. Feeling bruised as  I have held Halma for about 30 years and missed it in their numbers!

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SundayTrader 9th Aug 13 of 30

Hi Stuart

You beat me - I have been holding Halma for only about twelve years.

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FREng 9th Aug 14 of 30

In reply to post #502481

"Could a lower pound for longer be the final spur for inflationary pressures to come home to roost?"

I have kept cash in RPI linked bonds (Treasury and £INXG ), to protect against this, and they have risen lately as others are worried about increasing inflation. RPI is always rather higher than CPI so it's better than inflation proofing.

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xcity 9th Aug 15 of 30

In reply to post #502481

Forgetting about Brexit, we could easily be looking at Japan syndrome spreading across the world. EU policies have always pushed in that direction but now we may be entering US & China trade wars. No-one wanting a high currency.

In recession, it is quite possible to have low interest rates, low investment AND no growth. Classically, lowering a currency has been seen a way as combating this if it can be managed without retaliation (not really possible for China or US & probably not possible for EU except internally).

Low but consistent levels of inflation have always been seen as a lubricant aiding adjustment within an economy (reason for the 2% target). Deflation is nearly always damaging (I'm struggling to think of any examples where it has been positive).

It's important to realise that this is a problem with balance in the world economic order. China has been able to grow by flooding the world with cheap goods; that is sustainable for smaller economies but is impossible to sustain for a large one. (Only mention this because it is too easy to put it down to Trump.)

The big risks come from the growth of political friction. Impossible to predict whether that will blow up into military conflict but it certainly makes establishing a new balance much harder.

wrt Brexit, it could be argued that it gives us the flexibility needed to navigate these troubled waters or that it is a mistake to leave the protection of big brother. Takes your choice, pays your money either way.

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tightfist 9th Aug 16 of 30

Hi Paul,

Next Wednesday (14th) Serabi Gold (MC £35m, StockRank 87) will issue it's H1 results. Whilst maybe not your sort of company, the outlook could make very interesting reading.

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Paul Scott 9th Aug 17 of 30

In reply to post #502681

Hi tightfist,

I don't cover any resources sector companies.

Good luck with it!

Regards, Paul.

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Glen Keedy 9th Aug 18 of 30

As a Sanderson (LON:SND) shareholder. My initial reaction was YESSSS. Takeover! Quickly followed by HOW MUCH?? 10% premium, TEN F PERCENT! Possibly the measly premium is explained by this bit of the RNS.

“...Sanderson Directors have irrevocably undertaken to do in respect of their own beneficial holdings (and have undertaken to use reasonable endeavours to procure in respect of the beneficial holdings of their close relatives) being 8,843,750 Sanderson Shares and 2,691,750 Sanderson Shares under option, in total representing approximately 17.9 per cent. of the issued and to be issued share capital of Sanderson...”

You may think accepting a tiny bid premium is a great way to realise their holdings in an illiquid small cap without collapsing the shareprice and having to answer awkward questions at AGMs. I couldn’t possibly comment.


PS - if Burford Capital (LON:BUR) do sue Muddy Waters who will provide the finance??

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LongValue 9th Aug 19 of 30

In reply to post #502736

Liquidity is clearly an issue with small-cap stocks but as a shareholder in Sanderson (LON:SND), I was very disappointed with the premium offered. I might go a little further and say that many fund managers are simply not doing their jobs when accepting derisory takeover offers. They seem to relinquish the role of ownership and appear to act as if they have bought a piece of paper rather than a piece of a business.

It might be useful to make note of the major shareholders who are prepared to accept such low offers. These are not the type of co-owners that I want to be in partnership with. They may even constitute a red flag.

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hawkipa 9th Aug 20 of 30

In reply to post #502761

Re Sanderson (LON:SND) I had a long chat with the chairman and I do accept his logic for the sale. He was most engaging and generous with his time, He gave a number of reasons for his acceptance that this was a good offer, most notably the inclusion of the pension liability and there was a clear implication that he was very worried about a downturn in business conditions generally for Sanderson (LON:SND).

Despite, speaking to him I did get the sense that the PE buyers were clearly shrewd operators and played their hand extremely well. I pointed out the average premium for takeovers now was far in excess of this one and also given their home currency was USD, the movement in GBP made it altogether cheaper now than when they first spoke.

I concluded he was a decent man with valid reasons for wanting to exit, but the buyer convinced him that they would walk away at a higher price, which I simply don't think is the case. The long and short of it for me is that it is a disappointing premium and I was in it for the long term, but the return based on my in price represented a handsome profit, so time to accept reality and move on.

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clarea 9th Aug 21 of 30

In reply to post #502721

Three takeovers in a day Paul bet the reason you can't remember the deatils was because you got stuck into the lager and vino enjoying the spoils when that happens good times, will we ever see the book you mused about a year or so back ?

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Thornabian 9th Aug 22 of 30

Onthemarket, up 10% today (albeit on low volumes), just about broke-even in their FY results as of Jan 31st - excluding marketing costs - which management said would dial back to levels in line with cashflow.

Most temporary free contracts are due this year but the CEO said they will not provide any guidance until interim results in October because other portals are trying to undercut them in negotiation as they increase.

Rightmove reported reduction in agent numbers and leads for agents - actually only reported 1H leads rather than 12m - maybe because it seems to be going down so much while their subscription cost to agents is going up.

Stock rank doesn't like them but excluding (somewhat) discretionary marketing costs they look poised for upside.

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douglas1964 9th Aug 23 of 30

Re £BUR TW states on his website  that Gotham City is about to launch a shorting attack.

No position. Just saying.

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Trevor47 10th Aug 24 of 30

I had 3 Takeovers in close proximity. I made money on all three. 

What upset me was all three companies had reported excellent results and promising futures. 

A few months later all three announced takeover offers.

All three were British Managers selling out to overseas companies.

They were O2, Pilkington Glass and one other I cannot recall.

It seems to me the urge to make a personal profit is also a factor in these situations.

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Howard Marx 10th Aug 25 of 30

In reply to post #502881

"Re Burford Capital (LON:BUR) TW states on his website that Gotham City is about to launch a shorting attack."

Reads more like a general weekly newsletter than an 'attack':

From ShareProphets: "Gotham City Research will be issuing a statement regarding Burford Capital (BUR) over the weekend. Topics covered will include: Burford Capital, litigation finance, short selling, and freedom of speech."

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timarr 10th Aug 26 of 30

In reply to post #502956

Reads more like a general weekly newsletter than an 'attack':

I'm not a subscriber, so I can only see the headline:

BREAKING: Gotham City set to issue Burford short dossier this weekend

But that sounds more like an 'attack' than a general newsletter, I'd have thought?


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Gromley 10th Aug 27 of 30

In reply to post #502961

Shareprophets tell us that Gotham reserached [sic] Burford "very carefully" last year over several months but despite concluding that the shares were wildly misprice chose not to share their view "For a variety of reasons".

Gotham apparently have no position in Burford Capital (LON:BUR) and have not discussed the company with Carson Block.

Will be interesting to see if they have anything useful to say.

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xcity 10th Aug 29 of 30

In reply to post #503011

Interesting read. Generally agree.

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dmjram 10th Aug 30 of 30

In reply to post #503011

Thank you, a very good read.
Ties in to comments made on here previously - Burford's returns are more akin to jackpot payouts/lottery winnings with a very uncertain distribution between cases. 

Which accountants (at Burford which has chosen the fair value as opposed to cash accounting route) are attempting to accrue for and auditors take a view on.

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

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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