Small Cap Value Report (Mon 4 Apr 2016) - SEPU, CTG, BLV, MCO

10th Apr '16 by Paul Scott

8 comments 12783 reads

NB. This report below is a catch-up report for Mon 4 Apr 2016 (a week ago).

For the latest report (Mon 11 Apr 2016) please click here.

Good day!

This is a catch-up report, which I'm writing on Sun 10 Apr 2016. We don't want gaps in the sequence of reports, and a number of readers have asked me specifically to look at Sepura (LON:SEPU) which warned on profits on 4 Apr, so here goes.

Sepura (LON:SEPU)

Share price: 120p (down 39% on the week)
No. shares: 184.4m
Market cap: £221.3m

I last reported on this Cambridge-based maker of special radios for emergency services & others, here on 22 Oct 2015. Without wishing to sound too self-congratulatory, I foresaw the main risks with this share in that report - namely lumpy order intake, and excessive debt, which have given rise to a profit warning on 4 Apr 2016, just after the financial year ended 1 Apr 2016.

Profit warning - the presentation of this statement is very good, with a summary in bullet points, then more detail below. Here are the bullet points (with my wonky highlighting for the key points);

So the main issue is apparently that two orders did not close by the year end date, but are expected to close "early in FY 2017" (FY = financial year ending in 2017, i.e. y/e 1 Apr 2017).In that case, surely the forecasts for FY2017 would be increasing, not remaining static? So that doesn't particularly stack up, to my mind.

When I see order delays, but no increase to subsequent year forecasts, it usually means that the order delays are symptomatic of deeper inadequate demand. Also, order delays are very often order cancellations - but the customer hasn't yet told the supplier that is the case. So there's a heightened risk that there could be a second profit warning from Sepura in FY2017, in my view.

The company has a fundamental problem, and this has been the case for years, that its orders are lumpy & difficult to predict. Delays are frequent, as quite a lot are public sector, where bureaucracy & budget constraints can cause long delays or cancellations. For this reason, I feel Sepura shares should be on quite a low PER, to reflect considerable uncertainty over…

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GgOil

10th Apr '16

Thanks Paul for this. I am wondering if you could give an insight into MayAir Group (MAYA). Apart from its high trade receivables and less than desirable operating cash flow, the current price seems like a significant discount to its intrinsic value.

I understand that it is a foreign company operating in China, so British investors would be put of. However, companies like PureCircle (also based in Malaysia) have seen their stock price rocket.

I did do my research (http://themarketmogul.com/mayair-group-clean-air-future/). So it's disheartening to see what I thought was an undervalued company continue to drop. I
might be forced to sell out my remaining position for a loss and just move on. As you have been in the market far longer than me, what is your opinion.

Paul Scott

Hi GgOil,

All I can say is that my policy of not usually touching any overseas small caps on AIM, has stood me in good stead. I've had a quick look at the interim results from MayAir (LON:MAYA) and they look mighty odd to me! A very strange Balance Sheet, and it doesn't generate any cashflow. What does that tell you?

Plenty of red flags, personally I wouldn't touch it with a bargepole, but it's your money, so up to you.

Regards, Paul.

Howard Adams

11th Apr '16

Paul

Many thanks for the comprehensive treatment of Sepura (SEPU). You helped me take the decision to sell my holdings. Also, thanks for your consistently excellent reports. I'm an avid reader and learn a lot from them.

Regards
Howard

Glen Keedy

Thank you for your excellent vivisection of Sepura. A great reminder of what can go wrong for companies with bank debt and how the market favours the big institutional sharks at the expense of the PIs.

With so much debt and low interest rates, I believe people are ignoring upwards cost pressures of the living wage, oil price shock from Middle East politics and sterling devaluation. These factors lead to inflation going up and so will interest rates. I know doommongers have been saying this for years since 2008, but people now seem to assume inflation will stay low forever (latest prediction 2020 for first rise). Its at this point that such groupthink becomes dangerous and a shock occurs when interest rates start to rise. As markets are always looking forward, any unexpected increase in the inflation rate, even if it's still under 2% required by the BoE, will signal a possible interest rate rise. This could lead to a market sell off and heavily indebted firms will get hit hardest meaning discounted fund raisings and PI wipeout.

Cheery thoughts for Monday morning. Whenever I write one of these comments it takes ages, so I don’t know how Paul manages to write so many words every day, but I’m glad he does!
Cheers
Glen

gekkoluvchild

Excellent report from Paul Scott. The stuff on SEPU was top quality.

bobo

Sepu, your thoughts mirror my comments on LSE. I see three problems that might just sit to one side of your view

1) They made the aquisition already in 2015 which has caused the debt, is it earning?
2) They have the WIP on site for their now 2016 sales, so if there is an upside they will gen cash fast if/when the stuff sells
3) lumpy orders, they need to get a supply kanban in place (ie a lean customer scheduler in place asap)

I'm just watching at the moment, but I like the company they just need to change a bit

1James1n1

12th Apr '16

Paul,

Thanks for this report on Sepura. The detail and comprehensiveness of your reports are outstanding. I also appreciate the great discussion in the comments after the reports - it really adds to the thought around the shares covered and the participation and engagement of readers is impressive.

Frankyboy

Interesting stuff, as ever, Paul. I admire your ability to dissect financial reports and present your view so thoroughly yet clearly AND make it readable too..... even for a 'charter' such as myself! Thanks to your columns I am starting to pick up on fundamentals which, apart from using P/E as a final filter, is an area I haven't really bothered with previously.
Please keep up the good work, it really is appreciated.

Small Cap Value Report (Mon 4 Apr 2016) - SEPU, CTG, BLV, MCO

Sepura (LON:SEPU)

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Paul Scott

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