Small Cap Value Report (Mon 16 Apr 2018) - Mello 2018, OMI, PCF, XLM, CER, KNOS

16th Apr '18 by Graham Neary

21 comments 14461 reads

Good morning!

RNS announcements have hit the tape at 7.25am, giving us 35 mins to read and decide what to do in advance of the market open.

Would anybody like to start a petition for after-hours updates instead of 7am (when we're lucky) updates?!

Anyway, here are some stocks which have caught my attention so far.

Orosur Mining Inc (LON:OMI) - Q3 results
PCF (LON:PCF) - £100 million in retail deposits (I hold)
Carr's (LON:CARR) - interim results
XLMedia (LON:XLM) - "acquisition of leading UK Bingo comparison site"

We also had trading updates from Cerillion (LON:CER) and Kainos (LON:KNOS). I originally thought that Cerillion was in-line, but it looks like an EBITDA miss with the shares down by 7% in early trading.

Mello 2018

A quick word on the Mello 2018 conference which is coming up in less than two weeks. Paul, I and many of the Stockopedia team will be there so hopefully we will meet as many of you as possible.

Paul will be presenting a session on small-cap opportunities and threats while I will be taking part in a ShareSoc Masterclass event with Peter Higgins, Lord Lee, Leon Boros and Phil Oakley. We'll be covering two crucial topics - risk management and red flags.

Tickets for the Masterclass are sold separately and are nearly all sold out, but if you'd like to attend then please use the form on ShareSoc's website: link here.

Orosur Mining Inc (LON:OMI)

Share price: 5.625p (-12%)
No. of shares: 117.6 million
Market cap: £7 million

Q3 2018 Results

Apologies for going off-topic with this South American gold miner (we don't usually cover resources here).

Production is down and cash operating costs are up ($1065/oz). The company performed to expectations for several years but is now enduring a period of bad luck.

It is taking some drastic measures to preserve cash:

During the Quarter, and in large part due to the performance of the SG UG [San Gregorio Underground Mine], the Company commenced the implementation of a strategic initiative…

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Housemartin2

16th Apr '18

XLMedia (LON:XLM) Does anyone else feel deprived of financial info with this RNS ? Maybe I am being unreasonable.

The Phoenix

XLMedia (LON:XLM) & Kainos (LON:KNOS) please Graham

Albertos

XLMedia (LON:XLM)

This transaction was in the public domain a week ago.

https://onlinebingo.co.uk/news/whichbingo-sold-to-xl-media

Lack of financial information implies it's not very large but my veiw is that if they put out an RNS the values should be given otherwise it's impossible to assess the impact.

Phil

mammyoko

Cerillion (LON:CER) please Graham. They have been winning significant contracts but these don't seem to be translating into expectation-beating results. I thought the market might mark them down more severely as a consequence this morning.

ppdrs

I agree. An RNS from XLMedia (LON:XLM) that gives no financial details about the acquisition target, what they paid (or even a ballpark indication of size), how they've funded it, or what impact it will have on earnings. Basically this RNS was completely pointless!

Graham, if you have time, I'd appreciate any brief comments about the trading update from Kainos (LON:KNOS). Also to add my thanks for the very informative commentary from you and Paul!

Chrisfarrell21

On XLMedia (LON:XLM) it's one of those grey RNSs which I understand to be marketing gumpf. I don't know what, if any, rules there are for what's contained in a grey RNS, but it presumably means it's not financially material.

Thanks

Chris

bestace

It's been issued as a non-regulatory RNS, so it's immaterial. The most recently filed accounts for Whichbingo are for the year ending 31 December 2016, which showed net assets of less than £1.5m, of which cash was £1.2m.

The company was small enough not to have to report an income statement, but looking at the movement on retained earnings it seems to have made a net profit in 2016 of £600k. By adding back the depreciation charge and the year end creditor for corporation tax gives an implied EBITDA of around £800k. Then apply a 'finger in the air' multiple to either of those figures to get an indication of what they might have paid.

It's always a bit suspect trying to analyse the accounts of private companies which have limited disclosures, are now over a year out of date, and where the reported figures may not necessarily reflect the performance of the actual business, so the above should be taken with a big pinch of salt.

willhampson

My suspicion with the XLMedia (LON:XLM) announcement this morning, given that the deal was public about a week ago (as Phil points out above), is that originally it was not deemed a material transaction but they then decided to put out the RNS to attempt to arrest the SP slide. It seems to have failed. A patient, but slightly frustrated holder.

Graham Neary

re: XLMedia (LON:XLM). Kainos (LON:KNOS). Will do! G

mercury61

GAME Digital (LON:GMD) seems to have some heavy hicoups

barnetpeter

Don't forget to vote for Paul and Graham in the 2018 investor awards! Only takes a moment.....

xxx

Graham, do you think that having post hrs updates is impractical due to the number of stocks quoted on US exchanges ?

Hi, do you mean dual-listed stocks? If they need to wait to announce when the US market closes, they could keep doing that. Apologies if I have misunderstood your question.

Zipmanpeter

Graham,

Appreciate the write up of £PCL and cannot really fault its prospects. The operating margin has been going up for 5 years even before the move to full bank status permitted retail deposits (11-12% in 2012 to 18% in 2017). The process of obtaining the bank licence has not really caused costs to explode or credit execution to go awry, suggesting good management. Now it is well set to grow fast

The 3 concerns that one could have are:
i) the 0.5% default level is so extremely low that it has (somehow) been dressed up/lucky since lending on cars and SME machinery would normally see higher defaults even under benign conditions - although I see no evidence of this in weak policies
ii) that this level of control will be lost if the business grows as fast as it is targetting, especially if this coincides with a sharp UK recession for SME and/or a big decline in used car prices - neither an unimaginable scenario
iii) as the banks have withdrawn, this has created a big opportunity for new financial models/new (bank) lenders like PCF. The flip of this is that if one of these new models really takes off, it could disrupt the PCF model in a big way eg crowd funding. The average retail lender is depositing £40K for a 2% return pa !! People like this have many options. However, people are typically very conservative with the way they bank cash.

What's more, the simplicity of the model and the sticky (penalty) notice periods for deposits mean at worst, I think would then simply grow less fast than forecast. But this is a risk since the price is nearly x2 book value when most banking companies would be closer to 1 or even less and with a much better dividend than PCF and will likely be several years before PCF pay a good one.

Finally, I agree your observation re the equity raise depressing ROE might 'confuse' valuation on a less followed stock. This can be one the ever fewer sources of extra advantage a human has over a machine since it must be hard to write a programme to distinguish a 'good problem' like an expansion supporting equity raise which depressing a metric from one to fix a balance sheet. (My current financial favourite Non-Standard Finance (LON:NSF) is (I hope and believe) suffering a similar blind spot as its reported statutory losses have exacerbated by acquisition costs accounting and future short term profits depressed by early recognition of impairment losses in new IAS standards. In between stands a good business).

re: XLMedia (LON:XLM) and Kainos (LON:KNOS). Getting there. Cheers! G

Brilliant stuff, Peter, thanks. I agree with you that PCF (LON:PCF) valuation could be a bit punchy for some. You've made plenty of good points there for me and other bulls to digest.

Best,

Graham

daveinthelakes

17th Apr '18

Graham,

It would be interesting to have your thoughts on the relative merits of PCF (LON:PCF) and Arbuthnot Banking (LON:ARBB) as you have looked at both recently.

Dave

I am a long term holder of Arbuthnot

Thanks for the suggestion Dave, I guess I could do some kind of round-up of financial stocks. G

Thanks Graham. That is a great idea if time permits. Dave

GageacBob

2nd May '18

PCF was reported on recently by Graham-an interesting on-line bank, that is described in the stock sheet, as being a momentum trap. But the chart, and all one reads on this one, doesn't seem to suit that rather negative view, and it does seem to be on a good run upwards at the moment, or is that the danger, or am I missing something? Thanks.

Small Cap Value Report (Mon 16 Apr 2018) - Mello 2018, OMI, PCF, XLM, CER, KNOS

Mello 2018

Orosur Mining Inc (LON:OMI)

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Graham Neary

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