Small Cap Value Report (Mon 11 March 2019) - SCVR Grim Tales, Mello, TSLA, NTBR, XAR, QRT, ORCH, DRV

Monday, Mar 11 2019 by


How are we all doing? From a financial point of view, the FTSE All-Share is up well over 7% year-to-date (including today's gains). But I get the sense that those of us in the small-cap space aren't doing quite so well.

The AIM All-Share Index was up 5.4% as of last night (excluding dividends, which don't make much of an impact anyway). 

Within AIM, however, there have been many individual casualties and sadly many of them were favourites of the private investor.

I enjoyed this article by timarr: When Stocks Go Bad: Grim Tales from the SCVR. He goes into a great level of detail into popular stocks whose valuations have suffered to one degree or another:

It's a fine list, worthy of dissection.

It turns out that I've never had a position in any of these shares, but perhaps I should have: long-term holders in Fevertree Drinks (LON:FEVR), for example, have done terrifically. A period of share price weakness is inevitable for any company. Fevertree Drinks (LON:FEVR) remains on my watchlist for a potential purchase.

On the other hand, there are some members of the above list which I've written cautiously about: the first four of them in particular and also the three Israeli shares. While acknowledging that I could be unduly cautious, my stance on these seven companies is unchanged.

As a general principle, there is a lot to be said for avoiding "popular" shares, as they do tend to be higher risk and priced…

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

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Tesla, Inc., formerly Tesla Motors, Inc., designs, develops, manufactures and sells fully electric vehicles, and energy storage systems, as well as installs, operates and maintains solar and energy storage products. The Company operates through two segments: Automotive, and Energy generation and storage. The Automotive segment includes the design, development, manufacturing, and sales of electric vehicles. The Energy generation and storage segment includes the design, manufacture, installation, and sale or lease of stationary energy storage products and solar energy systems to residential and commercial customers, or sale of electricity generated by its solar energy systems to customers. The Company produces and distributes two fully electric vehicles, the Model S sedan and the Model X sport utility vehicle (SUV). It also offers Model 3, a sedan designed for the mass market. It develops energy storage products for use in homes, commercial facilities and utility sites. more »

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Northern Bear Plc is engaged in providing specialist building services. The Company operates in the support services sector. The Company's segments include Roofing activities, which provides a range of roofing services, including slating, tiling, leadwork, felting, refurbishment and maintenance for domestic, commercial and public sector properties; Materials handling activities, which includes supply, service and maintenance of fork lift trucks and warehouse equipment both on hire and for sale; Building services activities, which provides services, including fire protection and asbestos removal, and Corporate and other activities, which provides head office activity and consolidation items. The Company also provides services ranging from general building work, asbestos surveying, fork lift truck sales/hire, and health and safety consultancy. The Company's subsidiaries include Isoler Limited, Springs Roofing Limited, Wensley Roofing Limited and Jennings Properties Limited. more »

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Xaar plc is engaged in the development of digital inkjet technology and manufacture of piezoelectric drop-on-demand industrial inkjet printheads. The Company's segments are product sales, commissions and fees, and royalties. It offers a range of industrial inkjet printheads and printhead systems, which are designed and produced to meet the customer-driven requirements of a range of manufacturing applications. Its primary markets include wide-format graphics, ceramic tiles, labels, packaging, coding and marking, three-dimensional (3D) printing, advanced manufacturing and decorative laminates. The Company sells its technology in component form (the printhead) to original equipment manufacturers (OEMs) producing and selling the complete digital printing solution to the end market. It partners and co-develops with fluid suppliers, hardware and software integrators, and substrate suppliers to deliver a total solution to the end user. more »

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  Is NSQ:TSLA fundamentally strong or weak? Find out More »

29 Comments on this Article show/hide all

carmensfella 11th Mar 10 of 29

Just to mention that any of you attending the Mello2019 event on Thursday 16th and Friday 17th May can add a ticket to the Mello Trusts and Funds day on Wednesday 15th May for just a tenner Links for both are here...

If buying a ticket for Mello2019 use the discount code Stocko40 to get 40% off and simply add your Investment Trusts one day for £10 (normal price £49) so a huge money saving tip.If just attending on the Wednesday then apply the discount Graham provided in his intro.

See you all there.


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Graham Neary 11th Mar 11 of 29

In reply to post #456648

Thanks for all the comments on Northern Bear (LON:NTBR). Agree with your POV on adjusted profits, rmillaree.



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drvodkaquickstep 11th Mar 12 of 29

As any readers of this investment forum and others such as ADVFN will be aware, I have been a firm supporter of Driver (LON:DRV) since early / mid 2017 when they refinanced and brought new management in. From the 40p placing in Feb 2017 the valuation of the business more than doubled within 18 months; topping out at circa 85p last October.

This morning's Trading Statement noting some deferred and delayed commissions in their Middle East and Asian operations has therefore, not been well received by the market with the valuation down 26% as I write.

Frustratingly, the Trading Update was in mid-February last year and investors can only assume that some of the delayed contracts were hoped by management to be secured prior to the Trading Update but sadly not.

The valuation of the business has in fact been under pressure since the Year End (Sep 2018) and some questions marks have been raised this morning on social media concerning share sales by Directors (or their wives) in November 2018 and earlier this month along with a circa 1% share sale that was printed last Friday.

The weakness in the share price, a reduced cash position and the above noted transactions pre-TS do raise some questions and I have written to management this morning to express my concerns.

All of this said, Driver (LON:DRV) remain a leading expert in their field, are profitable, now pay a divi and have a solid order book.

The market reaction this morning seems unwarranted but current macro issues and perceived nervous investor sentiment means such news will be punished accordingly. Driver are a Top 3 holding for me so not a good start to the week.

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rmillaree 11th Mar 13 of 29

Driver (LON:DRV)

The stokopedia forecast numbers arent complete for current year (no profit figure available) - but they did show an expected increase in EPS from 3.84p per share 2018  to 6.3p per share 2019 and 7.2p 2020.

are they now advising EPS will be below last years 3.84p? - if this is the case is this not a huge miss ? in which case the shareprice reduction seems more than justified?

per RNS
the Board now anticipates full year underlying profits before taxation to be slightly below the 2017/18 result at approximately £3.5

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sharw 11th Mar 14 of 29

drvodkaquickstep - you are not alone - Keith Ashworth-Lord, for whom I have some respect, holds over 19% of Driver (LON:DRV) in his Buffetology fund.

rmillaree - IMHO this is one of Stocko's big failings. They make their own adjustments to eps which often means that they are not comparable with the forecasts in the next column. This in turn gives false eps  growth and peg figures in the top right box, in turn affecting screen results. WebFG/Sharecast show eps 6.10 to 9/18 with forecasts of 6.33 then 7.22. The warning that eps will be 'slightly below' last year suggests a 5% drop from forecast making the sp drop of 26% this morning looking like an over-reaction.

(The 6.1p figure is from the company where 'underlying' is defined as stated before the share-based payment costs, exceptional items and amortisation of intangible assets).

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Graham Neary 11th Mar 15 of 29

In reply to post #456618

Hi Bruce. Quarto Inc (LON:QRT) looks nice at current levels - if they carry on doing what they are doing, without any more mess-ups! I don't know if they can do that but the risk:reward looks nice on my initial inspection ..... good luck!

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MBFP 11th Mar 16 of 29

Hi Graham,

I enjoyed your introduction today.
I think nearly all the stocks you list have suffered bad trading news with the exception of Air Partner.
Air Partner had an accounting issue which has now been thoroughly investigated and appears contained.

Trading at Air Partner was going very well before this issue and it has been ok since. The shares now seem very good value to me with a large dividend in the promising sector of private aviation. They have cash in the bank, a PE of 9 and a forward div of 7%. Stockopedia likes it Q 92, V 80 and it qualifies for Greenblatt's magic formula!

I would buy more but already have a large stake.


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Graham Neary 11th Mar 17 of 29

In reply to post #456638

Hi jonesj, thanks for the message. A quick note on Ramsdens Holdings (LON:RFX). I'm not a big fan of acquisitions in this arena except when stores are bought out of administration.

The deal by RFX was small so that reduces the overall risk. But if I was an RFX holder, I would have preferred an increase in the dividend.

I agree that RFX looks like good value here. I have a slight preference for HAT which has been extraordinarily disciplined when it comes to acquisitions.

Disc: long HAT

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drvodkaquickstep 11th Mar 18 of 29

Further to my initial comment above re: Driver (LON:DRV) I have since spoken to Gordon Wilkinson (CEO) and he confirmed his agreement to me relaying the content of our discussion here:

1) Trading Statement date. Gordon noted that whilst the trading statement was in February last year the Board did not want to release an update without the full facts on some of their delayed/deferred contracts and the necessary information to update the market was only recently made fully available to the Board. See 2) below...

2) Cash Collection. I quizzed Gordon re: the narrative in the statement concerning cash collection and he noted that a couple of staff members had had their "knuckles wrapped" re: timeliness of reporting both with respect to timely cash collection and the status of contract awards/delays. From my own professional experience in this sector I am fully aware of the challenges of contract award dates when a client will update you each week saying "yes the paperwork is on its way to you" only to get the same story for the next few weeks and sometime months making it very difficult when trying to forecast. Always better to err on the side of caution.

3) Recent Director / PMDR share sales. Personally I have a fairly relaxed attitude to Director share sales as everyone has their own reasons for selling although clearly it's not a sign of confidence. I questioned the sale (200k shares) in November 2018 by the Regional Director of the MEA business and Gordon noted it was off the back of the positive October trading statement (pre FY) and hence there was no reason for the Board to object to the sale. Equally Gordon was made aware of the intention by the wife of the UK MD to sell 25k shares in early February at which time again the Board had no reason to object to the sale. By the time the transaction was reported it was 1st March 2019 and he noted the timing could have been better.

It should be highlighted that Gordon personally owns and/or has options over circa 2m shares and hence he has some alignment with other shareholders. He has not sold any shares since joining the business.

4) Cash position. The £5m cash position noted in the TS is net cash (actually £5.1m) and compares to £6.9m net cash at the year end. The reason for the difference (reduction) pertains to the Group's contracts in Oman where the finance ministry are very slow to pay between Nov-Feb each year. The Group hence has to fund its Omani projects until payments are released from March onwards and Gordon noted that a six figure payment had recently been received with further payments due imminently.

5) Share price weakness in 2019.  Gordon noted that the Board was made aware in November 2018 of one of their major shareholders wanting to reduce their holdings hence there has been some downward pressure on the share price.  This may also possibly account for the large trade on Friday last week although the timing of this specific trade is still questionable.

6) Middle East staff. Some staff have been released in the Middle East due to a slowing workload. Having worked in the Middle East myself for 6 years I know how boom and bust it can be although its hard a strong run since 2010.  Things will pick up again as sure as the sun sets and rises. The cost of these redundancies will not be treated as exceptional.


Gordon summarised our phone call by noting his own frustration given the turnaround of the business since 2017, the order book being at a record level and the core UK business (30% of sales) etc which is doing "very well". It would appear there is scope for the noted contract delays to fall into H2 although clearly nothing is certain.

With 10p a share in cash and assuming diluted EPS of circa 5p puts the Group, which is still on a growth trajectory, on a cash adjusted PE of less than 9.  

Whilst this news is disappointing I plan to retain my holding and perceive the Group as increasingly likely to be the subject of future M&A should current prices persist.  

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crystal tipps 11th Mar 19 of 29

Hi Graham

Thanks for your write up on Orchard Funding (LON:ORCH) as it's a company which is also on my watchlist.

Although I agree with your sentiment of potential value following the weakening of the share price, my only concern is the company's constant reference to obtaining a banking licence over the last 12 months which consistently fails to materialize.

I'm not surprised investors have moved away to more fertile investment territory and the share price is where it is when one of the main prospects for growth of the business resembles can-kicking down the road....

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brucepackard 11th Mar 20 of 29

In reply to post #456708

Thanks Graham, particularly for highlighting the cashflow statement movements, net debt is reducing, but driven by less upfront spend on new books. Possibly that will impact revenue in future years.

In 3 years time it almost certainly won't be the same price... if things go right, but also if anything else goes wrong.
That said, I'm optimistic, the group is well within it's banking covenants, but I just can't average down into a situation like this.

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Edward John Canham 11th Mar 21 of 29

Record (LON:REC)

Is there any excuse for releasing a RNS at 16:29?

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JohnEustace 11th Mar 22 of 29


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Luthrin 11th Mar 23 of 29

According to various news sources, the Financial Reporting Council is to be abolished and replaced by a new regulator, the Audit, Reporting and Governance Authority. The BBC claims that for the first time, the new regulator will be able to:

  • Directly regulate the biggest audit firms
  • Impose greater sanctions in cases of corporate failure
  • Require rapid explanations from companies
  • Publish reports about a company's conduct and management

Colour me cynical, but I'm not holding my breath.

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MBFP 11th Mar 24 of 29

In reply to post #456778

No. Outrageous and I'm not even a holder.
Why not first thing tomorrow.

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mcfly46 11th Mar 25 of 29

Always interested to hear your thoughts on $tsla Graham as im long, though the constant negativity does keep me second guessing myself -probably a good thing. I still believe the product they offer for the price isn't going to be matched by their competitors anytime soon, even if it is claimed they will be. Though I feel better about it over 10 years than over the next 1-2, falling margins on the model 3 and the ramp up in production for the model y might mean a repeat in the up and down share price of the last few years.

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jonesj 11th Mar 26 of 29

In reply to post #456778

No, an RNS at 16:29 is inexcusable. I would argue 16:35 is fine, as it gives everyone time to digest the news.

I'm not sure about the precise timing of this RNS, but the first sell trades were at 16:29:13 and Shareview shows 8 trades over the next 4 seconds, although all very modest trade sizes. Compared with no trades at all from 12:59 to 16:29.

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Aislabie 11th Mar 27 of 29

In reply to post #456753

Considering how long it took PCF (LON:PCF) to get a banking licence (and it was already majority owned by a bank) I do not see any concern about a banking licence for Orchard Funding (LON:ORCH) which was only applied for in July 2018
Another point raised recently in SCVR was that City Financial was a significant holder and the recent price drop may have reflected a liquidation of their holdings

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mojomogoz 12th Mar 28 of 29

Obviously, I'm a day late...a few observations re Quarto Inc (LON:QRT)

1) Despite $6m fall in gross debt from $77m to $71m and $13m of it switching from bank to directors and associated cos the interest expense is up from $2.9m to $3.7m plus there is $0.4m of 'other interest' too. I'd have liked some further disclosure around this (Nov RNS doesn't say much either). Looks like banks have demanded immediate reduction to extend credit facility and new CEO CK Lau has had to stump up the cash.

2) CEO owns near 30% of company. He's out of pocket on his stock purchase and now he's had to find nearly the equivalent of market cap for loans

3) Increase in payables last couple of years to help cash flow - $4.6m 2018 and $6.8m 2017 (2018 offset by $2.3m increase in receivables).

4) There are a businesses and initiatives that are not core (eg Q Partners, some of their publishing teams). Its unclear whether these will flourish or become exceptionals...and whether this is good for profit.

5) What's the duration of backlist? At 2/3rd of revenue and requiring low investment there would seem potential to cut investment and overhead and generate high cash flow. However, in recent years part of the problem seems to be that some old publishing units were a bit dead on their knees and that acquisitions and heavy investment in recent years in new publishers and publishing (that partially responsible for sinking old management) was needed to replace dead wood.

So, where is the company at?

Why doesn't Lau just take private? One more significant negative surprise and is he effectively forced to take private?

Who has the answers? :)

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intuitive6191 12th Mar 29 of 29

In reply to post #456683


You commented...

" IMHO this is one of Stocko's big failings. They make their own adjustments to eps which often means that they are not comparable with the forecasts in the next column. This in turn gives false eps growth and peg figures in the top right box, in turn affecting screen results. "

It seems like its comparing apples amd pears.

Can I ask - do you have a workaround for this?


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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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