Small Cap Value Report (Mon 14 May 2018) - ITQ, SVCA, Cancellations, PKG, CER, ANG, PEG, TERN

14th May '18 by Graham Neary

38 comments 14132 reads

Good morning!

There's plenty of news to digest today.

I'm going to update this list with planned coverage as the day unfolds:

InterQuest (LON:ITQ) - proposed cancellation
Servoca (LON:SVCA) - proposed cancellation
Park (LON:PKG) - new FD
Cerillion (LON:CER) - interim results
Angling Direct (LON:ANG) - full year results
Petards (LON:PEG) - acquisition
Tern (LON:TERN) - raises £700k

InterQuest (LON:ITQ)

Share price: 19.8p (unch.)
No. of shares: 52 million
Market cap: £10 million

Proposed cancellation of trading on AIM

The writing is on the wall for this small recruitment company. Insiders had previously tried to take it private at 42p.

The Independent Director advised shareholders to reject that offer, on the basis that it materially undervalued the company.

That was last summer. Since then, the Chairman has increased his stake by getting paid shares in deals Interquest made with another company he is involved in.

We now have another proposed cancellation, and the Chairman's holding company proposes to put a bid in in the market for 4.2 million shares at 24p, before the voting takes place. A huge discount even to the 42p price which the Independent Director believed was an undervaluation.

The announcement was released at 5.22pm on Friday evening. It said:

The Directors consider that the Cancellation is in the best interests of the Company and its Shareholders as a whole and therefore unanimously recommend that you vote in favour of the Resolutions

It would be very interesting to hear the Independent Director's rationale for this recommendation! Since the Chairman's bid at 24p is not mandatory, I suppose we can't object on the grounds that the proposal undervalues the company.

Almost 69% of votes have been pledged in favour of the resolutions. The Chairman plans to start buying shares in the market later this week, and this will bring the concert party's aggregate shareholding closer to if not above the 75% of votes needed to push it through.

Assuming that it goes ahead, if minority shareholders don't want to stay invested in a private company which will be completely dominated…

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tomps3

14th May '18

We've just posted the 5th presentation on EVs - by Chargemaster who provide UK electric vehicle charging infrastructure. Tom is a great presenter and gives great insight to some misconceptions. If you're interested in the electric vehicle space, this is a must watch. Chargemaster itself sounds very interesting should it ever list ...

http://www.piworld.co.uk/2018/05/14/redleaf-ev-conference-5-chargemaster-driving-the-future-electrifying-the-industry/

(If you're not aware of the background of these, Tim & I attended a Redleaf PR EV conference. We thought the presentations looked a very interesting overview of the EV space and thought other investors might be interested to hear the 6 presentations, so we filmed them. There's one more from Williams, which will be published tomorrow.)

jonesj

There are studies around showing micro caps outperform.

Also, I've heard a US reference to a study showing the best performance is by illiquid micro caps, but have not seen the data.
If almost no-one is interested in illiquid micro caps, perhaps it makes sense to establish some rules for dealing with these & participate in the sector.

laurie

Hawk Investment Holdings is the major shareholder in Servoca (LON:SVCA) at 26%. Hawk is controlled by Bob Morton, who was non-executive chairman of SVCA until recently; Morton was replaced by a close associate. Seraffina (sic.) Holdings own 13% of SVCA, Groundlinks owns 14% and Retro owns 10%. Bob Morton has links to ALL of these groups.

Google Bob Morton FCA for some interesting stories. I vaguely recall that Tom Winnifrith had some pithy things to say about Mr Morton and his reliability.

I believe that someone on Stocko flagged Morton's involvement with Servoca. It was this person's warning about Morton, plus some time on Google, which kept me from investing here. I am grateful to whoever it was who shared the information.

Does anyone know other listed companies where Mr Morton has an interest?

gus 1065

I think this is the chap - Arthur Robert Leonard Morton. (Quite a few “Bob Mortons” out here). 37 Directorships - most of them look private/dormant/ or otherwise no longer active but a few names I recognise.

https://beta.companieshouse.gov.uk/officers/jr9bWQD8N3B1FMfxYLPtgqj44fk/appointments

For a bit of light reading, here is the Takeover Panel Hearing Committe ruling.

http://www.thetakeoverpanel.org.uk/wp-content/uploads/2017/01/2017-1.pdf

Gus.

Trident

When delisting a company is still bound by the takeover rules for a period of years so shareholders can still refer to the Takeover Panel. However, there is no doubt that generally in the short to medium term it can kill value.

Integrity of Directors means a lot in any context. On Aim or off

andyfwwrench

ratioinvestor - I would tend to agree with you. At any point in time there are so many interesting opportunities in the stock market, especially if one is prepared to look overseas, that some simple filters are required just to reduce the list to a reasonable number. As an example a company called Norman Broadbent (LON:NBB) issued results today. I had a look at the RNS as I had never heard of the firm. It is a microcap headhunter. As soon as I saw their line of business I lost interest; it isn't scalable and will never provide returns that couldn't be got just as easily and more safely from a much larger company. To echo Graham, why is this company even listed? Or to look at it from the other way around to invest in such a company one has to do much more work on investigating directors and managers and in general being very close to the business. To my mind a microcap has to offer the opportunity of multiplying an investment to counter the risks of failure, fraud, bad luck, recession and so on. If it can't then it is worth the minutest consideration. N.B. I am not making any commentary on the quality or otherwise of Norman Broadbent (LON:NBB) as the whole 2 minutes of research I have already done has disqualified it from me expending any further time.

davidjhill

Didn't Morton also have a chunk of Resources In Insurance, which also went bust a couple of years back?

As an aside - and one for Graham - I had previously noticed a pattern that the types of businesses that do what I consider morally bankrupt delistings where small shareholders get screwed appear to be smaller niche recruitment or "people" businesses. I've been caught out in the past with a couple of them and so no longer invest.

I consider the cycle goes something like this.....small recruitment business flatters to deceive to be larger than it really is as revenues in its niche are effectively just commission/brokerage and thus gross margins are very high. In reality the ongoing business can be very fragile and precarious. Owner/directors know this and look to crystallise some value by selling a part of the business. They don't want to relinquish control and don't want to accept the very small multiples a trade buyer would pay so the answer is to IPO it to people who don't know the industry but lick their lips at the margins and the high dividend yield.
The directors tend to be the original owners who were previously used to paying themselves most of that fat gross margin in bonus/commission each year rather than giving it away to external shareholders and so they come to resent the loss of earnings. As shareholders work out that the business isn't really that great after all and the directors are still overpaying themselves for a small scale PLC the share price keeps slipping. There is little liquidity anyway as the owners didn't divest enough in the first place since they wanted to stay in control; this exacerbates the slippage.
Same unscrupulous owners now see an opportunity to delist and buy back or take private the same business but at much lower values (ie trade sale) and have little compunction in doing so.
Everyone complains, cycle repeats........

Depressing, but I've seen it multiple times now and whilst the business each time may have a slightly different flavour the characteristics are all too similar.

Andrew L

A few thumbs down for me here! My point is this. If you invest in companies with weak franchises then things like this will happen. It is very easy to blame management, AIM, corporate governance etc etc. It is harder to blame ourselves. There are thousands of companies to choose from and Stockopedia makes it easier to find reasonable ones. If you buy into weak companies then you can't really blame anyone else for the outcome. A small cap recruiter is always low quality. Any one of their staff can leave tomorrow and start a rival business.

Thank you, Gus,
Re: Bob Morton

That is quite a list of directorships in dodgy companies. I remember Vislink, now Pebble Beach Systems (LON:PEB) , RSM Tenon, Porta Communications (LON:PTCM) ....all companies where there were/are worrying red flags with LTIPs and/or ownership structures. He has stepped back from directorships due to ill health +/or the FCA. He still owns at least 22% of Porta Communications (LON:PTCM). OneView (LON:ONEV) has just gone on my bargepole list; the others were already there.

There is an insurance company on the list that went bankrupt while they were insuring my car. I had to pay for another policy! (It wasn't a financial tragedy...I lost c. £100.)

Graham Neary

David - that is a brilliant summary. Thumbs up from me. Interesting observation re: "people" businesses. It's not so hard for the principals of such businesses to rid themselves of external shareholders, when you think about it. In their worst case scenario, they create a brand new company and work for that, instead.

JamesrWilson1989

Huge movements near the end of the day for bookmakers - Supreme Court rules Professional & Amateur Sports Protection Act of 1992 is unconstitutional. This now means that individual states can set rules on sports gambling at their discretion.

XLMedia (LON:XLM) has barely moved on the news but will think it will open +10% tomorrow.

Howard Marx

jones j

Ian Cassel the US microcap investor has provided the data you refer to. In his words:

"The best place to be is in illiquid microcaps. The worst place to be is in liquid microcaps. It's not a surprise that illiquidity, a factor that most investors fear, is a big driver of returns."

Sportech (LON:SPO) also up 12% by close of play on the US betting liberalisation news. Currently in the process of reinventing themselves as a US focused sports betting infrastructure supplier after selling their UK football pools business, so potentially a major beneficiary.

Gus.

Precisely. Ideal businesses to pre-pack from administration too. Very low barriers to entry as next to no capital required for set up so there is no need to tap up investors you may have screwed in order to start again. With such a lack of culpability or consequence I guess it’s not surprising this type of behaviour persists.
Hard to regulate for specifically though unfortunately.

ed_miller

The Premier Technical Services (LON:PTSG) website says that Hawk Investment Holdings has an 11.6% holding in Premier Technical Services (LON:PTSG) and that Bob Morton was one of the founders. If memory serves, he was a director till recently, chairman, I think? Don't quote me though. In any case, anyone thinking of putting their money where Bob Morton is involved should definitely Google him and look him up on www.shareprophets.com .

I wouldn't touch Bob Morton with someone else's barge pole!

mammyoko

Nice report Graham. Thanks for the insightful comments on liquidity

Cisk

Another factor that can catch one out is not just the mkt cap - but also the free float of shares.

Once held shares in a company called GSH, in which the founder had a large holding. The indications were that he wouldn’t try and take control - but of course he did and shareholders had to sell. Was miffed at the time as I liked the company, but learnt a lesson to be wary of companies in which a single individual owns a large % (e.g. 60-70%) as it doesn’t take much for them to try to take control and take the company private. From what I recall GSH had a fairly decent mkt cap.

You're welcome!

15th May '18

Rider to the comment about potential benefit to Sportech (LON:SPO) from the recent changes in US sports betting. Text from after hours RNS setting out how they are positioned to take advantage of this. Shares up a further 11-12% today.

Gus.

————-

Sportech PLC

('Sportech' or the 'Group' or the 'Company')

US Supreme Court Ruling

Sportech, the international betting technology business, welcomes today's US Supreme Court decision which effectively permits each state to now adopt legislation to permit and regulate sports betting.

As highlighted in recent announcements and publications, Sportech is well positioned to act quickly and decisively in states that pass legislation permitting sports betting in the wake of this decision.

Sportech has over 600 employees across the US engaged in providing secure, regulated betting platforms to 90 licensed operator customers (racetrack, casino, off-track betting network, and online betting operator) in 37 states. The Company will be leveraging this broad presence to deliver sports betting services to those customers.

In Connecticut, where Sportech owns and operates a network of off-track betting facilities and a licensed online and mobile betting service, the Company has been a proactive supporter of legislation to regulate sports betting to combat the spread of illegal activity and to protect consumers. The Company believes that Connecticut will be an early adopter of a comprehensive and rigorous regulatory framework for sports betting, under the oversight of the Department of Consumer Protection, and Sportech is prepared to act quickly to provide eligible Connecticut residents with a platform for safe and legal sports betting through Sportech's venues and digital platforms.

Andrew Gaughan, CEO of Sportech, said: "It is a very positive decision and supports Sportech's initiatives, investment and focus on US growth opportunities. We have over 600 staff already deployed across the US providing gaming solutions to our business and retail clients and while there is plenty of work ahead of us, we believe we are well positioned."

kevanp

17th May '18

Just for any InterQuest (LON:ITQ) shareholders left, I tried to sell my holding to Chisbridge at the offered 24p a share at 0800 this morning, when the offer came into effect. My broker discovered that the entire offered amount, of over 4 million shares, had already been sold at 0700, before the market opened.

Isn't capitalism wonderful for the unscrupulous?

Small Cap Value Report (Mon 14 May 2018) - ITQ, SVCA, Cancellations, PKG, CER, ANG, PEG, TERN

InterQuest (LON:ITQ)

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Graham Neary

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