Small Cap Value Report (Mon 20 May 2019) - Mello slides, WYG, LWB, CER, FOXT, ACT

Good morning, it's Paul here.

Pre-7am intro

Mello London was another rip-roaring success last week. I did my usual talk on small caps, and so that everyone can see (including those who were not able to attend Mello) what I rattled on about, here are my presentation slides.

NB. This is an expanded set of slides, with my full talk on ZANE towards the end, which is new material beyond what I was able to say at Mello. I wanted to talk in more detail about ZANE, and was given a late presenting slot, but the previous panel show thing over-ran by so long, there was no time for me to talk properly about ZANE.

Its founder, Tom Benyon, has become a good friend, and I'm seeing him for lunch today actually.

Tom's a remarkable man, not only did he found ZANE, but he still does c.10-day sponsored walks each summer, even with 2 replacement hips and more recently a replacement knee joint. His walks, plus his military & political contacts make him (by far) the largest fundraiser for his own charity. That seems in stark contrast to a lot of larger charities that seem to have become so corporate these days, with 6-figure salaries for CEOs, etc.

Unfortunately, at Mello, some of audience visibly zoned out, the moment I switched from talking about shares that might make them money, to talking about ZANE. Out came the smartphones, and glazed eyes! I was rather dispirited by this, and later apologised to Tom Benyon, feeling I'd let him down, by failing to produce an interesting enough presentation to hold the audience's attention.

Tom feels that it doesn't work, trying to combine charity stuff with investing. After all, as he pointed out, if he went to a charity conference & started talking about shares, the audience there would zone out too!

Clearly then, I've got a lot to learn about how to do charity fundraising, but like everything, one has to start somewhere! 

EDIT: to save anyone asking the question who might be curious, I am not asking for, or being paid anything by ZANE to promote it. I paid for my own return flights to Zimbabwe, and internally, plus I paid for the restaurant meal we had whilst in the country, for the trustees. So please be reassured, I'm putting money in, not taking it out.

ZANE has a policy that everyone flies economy. Seeing as I was paying for my own flights, I upgraded myself. When Tom saw me in the priority boarding queue, he shouted, "Scotty!" - I looked over, and he mouthed (from the economy queue some distance away), "You bas*@rd!!", with a broad grin, and we both collapsed in laughter! Great fun. (end of edit)

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On to today's trading updates & results.

7-8am early quick views

WYG (LON:WYG)

Recommended offer at 55p per share, a 244% premium - wow, what a result!

It's a done deal, with 72.5% already agreeing to support it. Unless of course another bidder comes along with a higher offer?

Congratulations to shareholders. The company was struggling financially, so a bumper-priced takeover bid is a terrific outcome.

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Low & Bonar (LON:LWB)

Profit warning - Q2 performance has improved on Q1, but not as much as expected.

As a result of the above, first half performance will be materially behind that of the prior half year. The Board continues to expect the improving sales trend to underpin a stronger second half, helped by the usual seasonality in the business, and also supported by further cost reductions already in process.

In light of current trading and ongoing weakness in certain markets, the Board has lowered its expectations of full year performance.

Placing previously - LWB strengthened its balance sheet with a £50m (net) equity fundraising in Feb 2019.

Debt - still too much, but not going to breach covenants;

The balance sheet remains a focus with net debt at mid-year expected to be below £110m.  Despite weaker performance, and considering the likely impact of the CE disposals, the Board expects to meet banking covenants at both the mid and full year.

CEO - a separate RNS is refreshingly honest, about the Board deciding to look for a new CEO, and the reasons why.

My view - too complicated. Profitability seems to be collapsing in stages. It's not something I can meaningfully assess, so will steer clear.

I'd say its very unlikely the divis would continue, but nothing is said about divis in today's announcement. Hence I'm inclined to disregard the high divi yield shown on Stockopedia. Probably another lurch down in share price today seems likely.

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Cerillion (LON:CER)

Interim results - down on last year, but makes positive noises about H2 (and provides supporting reasons for that optimism);

While the results for the first half are behind those for the same period last year, we believe that Cerillion remains well-positioned to achieve its performance targets for the full year and continue its track record of steady revenue and earnings growth.  This is based on the strong new business pipeline, with two high value opportunities in the last phases of negotiation and other opportunities where the Company is at the shortlisted stage.

My opinion - sounds like the business has very lumpy contracts.

The balance sheet looks quite good, so no issues there.

If you like the business, and think it should achieve full year targets (which looks a bit of a tall order to me), then today might provide a buying opportunity, perhaps?

It seems a fairly decent business, from having looked at it before.

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Foxtons (LON:FOXT)

Q1 trading update - says in line with expectations.

... conditions in the London property market remain very challenging

Sales volumes continue to be at record low levels and ongoing Brexit uncertainty is impacting consumer confidence.

And/or, people are coming to realise that prices are ludicrously high, and many parts of London are not actually very nice places to live?!

Cash position looks fine;

Foxtons remains in a strong financial position with a net cash balance as at 31 March 2019 of c.£15m (2018: c.£12m).

My opinion - talk about cyclical! Looking at the historic trend for FOXT results, it was making operating profit of over £40m in each of 2013, 2014, and 2015. Now it's bumping along around breakeven.

The lettings business cushions things, and the balance sheet seems fine - so I don't see any solvency risk.

With a market cap of £165m, that's a lot to pay for hopes of a recovery. On the other hand, it should recover at some point, but that could take years.

I can see the logic for buying at some point, in anticipation of a recovery in London property sales. But when?

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Looking at the above, I don't think there's any point in me delving any deeper with additional comments.

After 8am comments

Actual Experience (LON:ACT)

This little company floated in Feb 2014. I remember it, as a fund manager friend was terribly excited about it, and told me I should buy some. It went to a massive premium on day 1.

Here we are over 4 years later, and the market cap still looks elevated at £83m (at 185p per share). Yet the company hasn't achieved anything approaching commercial success.

Interims today show revenue of only £953k for the 6 months to 31 Mar 2019.

A thumping loss (after negative tax) of £3.3m

There's £8.2m cash left in the kitty, but depleting quite fast. Will investors stump up more cash when it runs out, probably in 2020? the clock's ticking in my view.

My view - the entire valuation rests of jam tomorrow hopes. That's obviously very high risk.

In over 4 years as a listed company, I would have wanted to see vastly more progress than seems to be showing in today's figures.

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I can't find any other results or trading updates of interest today, in my universe of stocks.

So let's leave it there for today. As always, your comments are very much welcomed, in the comments section below.

Best wishes, Paul.