Small Cap Value Report (Mon 11 Nov 2019) - Mello, GRG, DTY, EAH, WEY, CARR, KNOS

11th Nov '19 by Paul Scott

47 comments 8643 reads

Hi, it's Paul here.

EDIT at 12:28 - sorry, I forgot to include today's estimated time of completion. It's mostly done now, but I'll add a couple more short sections after lunch, so the full report should be finished by about 3pm.

Edit at 15:11 - today's report is now finished.

Edit at 18:38 - here's moped-cam video from my holiday last week in Gozo, if you want to to be pillion passenger!

Edit at 21:30 - here's a fascinating video I took, of my visit to the underground command & control WWII centre, in Malta's Valletta's underground rocks. I'll tell you later this week a bit more about a lovely lunch I had with a Stockopedia member, who is a retired engineer, who played a major part in restoring the Lascaris War Rooms, and other world heritage sites in Malta. In the meantime, high-five Derek, what a pleasure to meet you! :-)

I'll be writing most of this week's reports, apart from Tuesday, which Graham is planning on writing, as well as presenting the SCVR live at Mello London. It's a total nightmare having to read the day's news, write a report, and then get up on stage and present it to an audience. Hence why I refused to do it this year, lol!

Mello London

David Stredder, the private investor who set up Mello, has just messaged me to say that ticket sales have gone well, and there are many excellent companies to talk to - David prioritises quality over quantity.

Above all, Mello events are so friendly, and most people come away having made some new investing contacts and friends, that they stay in touch with, and share investing ideas & research. As I always say, investing really is a team sport.

Having a common interest, you can stop and talk to anyone, with ease. I just say, "Hello, I'm Paul Scott. What's your favourite share?", finding that a very good way to start a conversation! Or, "What type of shares do you invest in?", Is another good conversation starter.

I really enjoy meeting Stockopedia subscribers, so if you spot me at Mello, please feel very welcome to say hello & have a chat!

Here's the full programme for the event, and the timetable of talks. Tickets can be bought here. Some people…

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Robert Smith

11th Nov '19

I always carry my own pack-ups, but then I'm tight.

Mark Carter

Thanks for your thoughts on Dignity (LON:DTY), Paul. I had looked at this before, and saw that it had way too much debt. I'm glad that regulators are looking into the sector. Funeral costs are scandalous.

Look, I just don't see the point of spending out a lot of money on a fancy coffin only for it to rot in the ground. If you love someone, then you should show it during their life, not at death.

Just bury in a cardboard box. Or whatever is cheapest. Although I'm pretty sure I'll die alone with not even a dog to eat my decomposing body. Still, chin up, huh.

AnonymousUser192020

Re Dignity (LON:DTY) don't forget there was a very compelling industry-insider a couple of years ago whose arguments certainly prompted some of us to exit before the rot set in https://www.stockopedia.com/content/short-sell-report-published-on-dignity-plc-you-hold-uk-funeral-services-provider-220078/ Thanks again, anonymousfuneralbroker - sometimes it pays to listen to those who really know their onions!

Paul Scott

Hi mammyoko,

Thanks for your pleasant remarks, but I'm struggling to reconcile this bit with reality;

We all (i am sure) love your gut feelings about companies which are so often right but it's great that you are back to providing us with the detail that backs up your feelings.

My reports are always about financial detail, that's what I do & have always done. Plus a bit of commentary & discussion. It's not about feelings at all.

Confused,

Paul.

FREng

Robert, you sound like an ideal investor. How's your portfilio (and what's in it?).

I wish Stocko would calculate the day's movement bid-to-bid. On larger holdings, the Stocko cash change today can be significant when the actual realisable value is unchanged.

Effortless Cool

The Kainos (LON:KNOS) Tom Burnet is indeed the accesso Technology (LON:ACSO) Tom Burnet. That's enough alone to put me off Kainos (LON:KNOS).

Jeremy Rea

Hi Paul,

Just to answer your question RE Kainos (LON:KNOS) ....

"Chairman - the long-standing Dr John Lillywhite is retiring. Tom Burnet, a NED, has been appointed as the new Chairman. Is this the same Tom Burnet from accesso Technology (LON:ACSO) I wonder?"

Yes, it is the same Tom Burnet.
I'm not sure how I would feel about that if I was Kainos shareholder.

EDIT, I see Effortlessly Cool beat me to it by a few seconds.

Ben1

Sorry I could have been clearer. I did mean interest in the company from US investors, not in its product offering

Wimbledonsprinter

Peter

I bought into Wey earlier this year, after the untimely death of Mr Massie. I have recently sold out, wondering also if it made sense to keep the company listed.

I would classify Chair, Barrie Whipp, as cautious - particularly for an AIM director. He is not exec chair, but following David Massie’s death, he was working effectively full-time for several months - and I think he was instrumental in closing down the more ambitious parts of David Massie’s strategy. In addition, if you look at Crimson Tide (LON:TIDE) - where he is exec chair - I would also argue this is run very conservatively ( eg compared with Checkit).

I have never met CEO Jacqueline Daniell, but she has a lot of hands on experience and is an expert on on-line education.. I note though that she was not present at the most recent AGM and although she has a CEO’s section in the today’s report, I note she is not listed for questions. I would like to see the CEO take a more pro-active role in shareholder engagement.

Having said the above, I think there is a good reason why the management should be cautious about the speed of growth at Interhigh. The pupils are full-time, need guidance and emotional care. From looking at reports, eg on mumsnet, the parents’ image of the school was quite good. Many of the kids are at Interhigh because they did not enjoy / cope at “normal” school. Therefore Interhigh needs to monitor the emotional well-being of the children. Rapid growth could damage this as well as the educational impact of the lessons.

Also looking at mumsnet, the parents were well aware of the potential conflict between the needs of their children and a profit-making business.

WDWombat

Thanks just back will have a look this evening

peterthegreat

Re: Kainos comment by Weasel.
I have been a Kainos shareholder for a couple of years so I can answer your rhetorical question about how the appointment of Tom Burnet from Accesso Technology makes me feel. The answer is that it makes me feel a bit uneasy as I can see no good reason why his background or track record would make him a good chairman of Kainos. As a result I will not be topping up my holding in Kainos as originally planned, although I am happy to retain what I already hold.

Hi simoan,

You would need to double-check this, but my inkling with ECO Animal Health (LON:EAH) is that it seems to be funding new product development through capex. That is discretionary. Hence it looks a genuinely cash generative business, which chooses to spend the cashflows on new products and divis.

I think that is much more positive than a business which, e.g. is replacing worn out machinery with vital capex.

But as always, please check the figures properly yourself. I can only ever give an overview here, as I have to cover 500+ companies, which is pretty insane thinking about it!

Regards, Paul.

rmillaree

ECO Animal Health (LON:EAH)
Simoan/Paul

As Paul has confirmed the capitalised expenses for this company are the spending on new product development which is amortised in a similar way to plant depreciation.

Simoan you are right that capitalised costs have been significantly higher than the amortisation charge - materially flattering the results if you don't take the viewpoint this extra investment would pay dividends in the future with enhanced profits/cashflow at a later date. In their defence bringing to market what they bring to market takes time and the future payback is always going to be uncertain. Unfortunately the gamble has backfired here as they seem to have had a constant stream of setbacks over the last couple of years. Prior to that the company had a very good history of growing earnings over a decent period of time.

Todays news is a bit of doozy with all the bad news they have unleashed - i think it makes any investment here a pure gamble - unknown this, unknown that unknown everything basically. I guess the only saving grace is that the company has a rock solid balance sheet and i am guessing their product IP should have decent value and may perhaps attract a bidder at the right price? - i guess the extreme reaction of the shareprice today with the price going below 160p early doors and ending up at 270p says everything that the market doesn't really have a handle on how much this company is worth at present.

Phil Mc

I bought Gregg's originally following an update in which they blamed the beast from the east and were marked down by the market. I've sold part of my holding to take some profit off the table but continue to hold. I do consider the shares on the expensive side but I still see a number of growth factors. The breakfast offering of bacon sarnie and coffee for at or around 2 pounds is fantastic value. Let's say you are staying at a budget hotel or you are a commuting worker and want a simple breakfast on the go without breaking the bank? I also think of the increased number of service station/travel based locations. Certainly when I'm headed up to Bolton to watch my terrible football team I would rather have a quick and easy (slightly less expensive) coffee and snack offering at the services as opposed to other options. I would say the same if I'm working in town/city around lunchtime looking for a brew and sausage roll. I note that there are often parents with children in the queues perhaps capturing those who want a lunch treat without heading to the 5 pound a sandwich coffee shops but rather a quick sit down with a ham baguette or toastie at half the price. One line that stood out for me in the July update was that sales of fair trade coffee placed Gregg's as third in the uk out of home coffee market ! Disclosure - I don't eat in Gregg's every single day :-)

Bi Ben1,

Sorry, I misunderstood! Thanks for clarifying :-)

Best wishes,

I would change the word good for superb. Many, many thanks

simoan

As Paul has confirmed the capitalised expenses for this company are the spending on new product development which is amortised in a similar way to plant depreciation.

Simoan you are right that capitalised costs have been significantly higher than the amortisation charge - materially flattering the results if you don't take the viewpoint this extra investment would pay dividends in the future with enhanced profits/cashflow at a later date. In their defence bringing to market what they bring to market takes time and the future payback is always going to be uncertain. Unfortunately the gamble has backfired here as they seem to have had a constant stream of setbacks over the last couple of years. Prior to that the company had a very good history of growing earnings over a decent period of time.

Thanks Paul & rmillaree,

Looking at the FY19 results there is a £9m entry in the cashflow statement for "purchase of intangibles", which is not the greatest description for the cost of internal product development! It's only when you go to Note 8 "Intangible fixed assets" that you find the matching cost described as "Drug registrations, patents and license costs". So still not totally obvious this relates to product development to someone unfamiliar with the company. If I was looking to invest I'd look into this further as it does seem to be a recurring feature and does not seem to be matched by amortisation charges, as you mention.

All the best, Si

12th Nov '19

Hi Peter,

I have had Kainos on my watchlist for a while now, although I have never held. I was a holder of Accesso. I would be of a similar opinion to you regarding Mr Burnet's appointment . It is not encouraging me to open a position in Kainos. I do wonder quite what the logic in his appointment is.

Nebraska1977

11th Mar '20

Dignity (LON:DTY) equity looks like it is worth zero. They are getting perilously close to their debt covenant and with the CMA sure to take some form of pricing action then the bond holders are going to be getting ready to wipe out the equity. Much like Thomas Cook last year, it’s better to sell now while there is some market value for the equity. Common sense tells us that when the CMA report is published, Dignity (LON:DTY) shares are only going to go in one direction.

Small Cap Value Report (Mon 11 Nov 2019) - Mello, GRG, DTY, EAH, WEY, CARR, KNOS

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Paul Scott

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