Small Cap Value Report (Mon 6 Feb 2017) - ACSO, PEB, PUB, BOO

6th Feb '17 by Paul Scott

30 comments 18759 reads

Good morning!

Friday's late report is here - apologies for the delay in posting it.

In it, I had a look at;

NetDimensions Holdings (LON:NETD) - 100p cash takeover bid

Zamano (LON:ZMNO) - business being shut down, turning into a cash shell

Johnston Press (LON:JPR) - trading update

On to today's trading updates then.

accesso Technology (LON:ACSO)

Share price: 1545p (pre-open, so likely to change later)
No. shares: 22.3m
Market cap: £344.5m

Trading update - this update for calendar year 2016 reads positively. Key points;

2016 revenues to be in line with expectations.
2016 profit ahead of expectations.
"The Board is also pleased to report a strong start to 2017 where all accesso business lines are reporting good momentum."

Forecasts - one broker has put out a note this morning, saying that it is increasing its profit forecasts by 2-3%.

Valuation - the Stockopedia rolling 12 month forecast PER is currently showing 36. That's a warm rating, but this market loves growth stocks, so it's not outlandishly expensive relative to other growth companies.

Mind you, to maintain that rich PER, the company will need to keep growing at a fair old clip.

My opinion - Accesso does seem to have sewn up a decent niche market, globally, largely to itself. It has recurring revenues, and high quality customers, so I can see the attraction of the shares, and indeed it's one I held for a while after the blockbuster deal with Merlin was announced.

Overall, I think it's a high quality company, with a price which reflects that. I'm not convinced that there's enough growth on the table to justify re-entering at the moment, at the current price.

Pebble Beach Systems (LON:PEB)

Share price: 12.25p (down 29.5% today)
No. shares: 124.6m (estimated from recent holding in company RNS)
Market cap: £15.3m

Trading update (profit warning) - this company only adopted its new name on Friday last week, so it's a pretty inauspicious start to the newly-named company to put out a profit warning on day 2.

This company is what's left of Vislink, with the original core business being pending a disposal, which itself is looking decidedly risky & uncertain. In my report here of 16 Jan 2017,…

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vik2001

6th Feb '17

hi paul
did you get the 32 red report finished that you said you started?

Glaws2

I believe all BOO US sales are handled by the UK warehouse.

Laughton

I wonder how practical that will be going forward. (a) Presumably they must be anticipating a v. big uplift in US turnover and (b) given President Trump's plans to hit importers.

WhaleHQ

I also wonder how their 'fast fashion' approach will cope with multiple distribution centres in the future? Will it become 'not so fast fashion'?

paraic84

Paul I'd love to hear more about your aforementioned MySale (LON:MYSL) visit - appreciate these things take time to write up though!

Congrats on some of your calls so far this year. Purplebricks (LON:PURP) for example is having an amazing ride of late.

cholertonandrew

In my view there's now something of a credibility issue with Advanced Oncotherapy's management. It sounds like they've completely rolled over in their disagreement with Sinophi and have even returned Sinophi's deposit. This suggests to me Sinophi must have had contractual grounds to break the deal perhaps over failure by Advanced Oncotherapy to meet certain developmental milestones. When Sinophi first announced their intention to terminate the deal Advanced Oncotherapy were still claiming that Sinophi were trying to place the machines elsewhere and when the discrepancy in statements was pointed out, through I think great work by Tom Winnifrith, Advanced claimed that the parties must have taken away different interpretations of what was discussed. That doesn't build confidence!

I also think they've been trying to spin the news flow somewhat rather than just being transparent. They put out an RNS about a non dilutive financing plan on 23 January which was essentially rehashing old news followed the next day by a Sinophi update acknowledging Sinophi's
intention to cancel. Even then they claimed Sinophi had no basis to do so and yet now they seem to have conceded that in fact they do.

However all that said, personally I wouldn't just write off the technology. You've got a lot of people and institutions who have invested large amounts of money in the Company and I think it unlikely they would have done so without large amounts of due diligence. Some of the directors have put in huge amounts of money and Thales will have put in a lot of time around their plans to manufacture.

More generally on your comment about 'laziness' investing in 'blue sky' companies I suspect a lot of people do invest in early stage companies without doing much work and there may not be many numbers to crunch. However I don't feel that will always be the case as there can be large amounts of qualitative research that can usefully be done and which will often take a very large amount of time.

I've learnt though that even if you believe a Company will make it through to profitability and great things, it often doesn't pay investing too early because the cost of finding marginal investment can be very high and therefore require heavy dilution.

Regards
Andrew

flyinghigh

Hi Paul

Could we get your views on 32Red (TTR) ?. I know you had planned a write up prior to the weekend but took ill... (hope you are back at 100% now!).

Even a few lines on your views would be helpful ... and greatly appreciated.

Many thanks

Steve

FREng

The market seems to have liked the contract announcement by Water Intelligence (LON:WATR) today, Up 20% as I write, having been higher. I looked at it after Paul mentioned it a few weeks ago and bought some for the dollar earnings and low PEG. It's cheap enough to be an attractive takeover target.

Aislabie

Have I missed the point where BOO explained why in a "fast fashion" world they hold 3 months of inventory (31/8/16 numbers)
I can see that there would be some packaging and small amount in transit and a small amount of overstocking waiting to be moved on. But £25mm seems a surprisingly large amount for a business that touts its ability to keep ordering very close to sales.

jraitt

cholertonandrew. I agree one should not write off the technology - all their tests have succeeded and on time. Howard de Waldron Trust would not have been making the big investment in the building modifications, currently underway, to the Harley Street properties without a lot of due diligence. Sinofi, as I understand it, seem to be an intermediatary selling it to the chinese hospitals with whom AVO had signed a type of agency deal. Getting rid of them clears the decks for AVO to deal direct with the hospitals in all Asian countries.
The CEO said at a recent presentation that a number of hospitals in the USA and elsewhere were interested and some postponing the purchase of Proton machines until they could see Harley Street up and running. He seemed unconcerned with the Sinofi deal.
The NHS 150 patients pa abroad at a cost £100k per patient to use these machines. The current machines cost 5 times as much, cost much more to install, need an area of two football pitches, are
less powerful and cost more to run. Thales have set up a unit based production system so that components can be produced relatively quickly.
The one remark at the presentation I liked was from Donatella Ungaro who leads the team of physicists at CERN and is involved with this project, when asked about technical problems said" We have build the Hadron Collider which is 27 kilometers long and reaches 99.9999% speed of light - we don't find it a problem to deal with something 24 metres long and 60% speed of light"

aflash

What do readers think? Should I cash in my chips now, or hold out? It was such a pity to miss out on big upside on LVD, that I'm tempted to hold out here with Punch, just in case.

Apples and Oranges. One decision must not influence the next.

From what you (Paul) have told us about 1) position size 2) selling early an obvious suggestion is staggered sales.

You excel in forensic accounting where you can reach a black or white decision but not in evaluating investors' emotions which is more the Eliot Wave Technical analysis area. Furthermore in this case there are the moving parts of corporate action.

David Brightside

As always Paul, Very helpful analysis. Any chance of an update on Porvair(PVR) which you have covered in the past. David H.

Reubencash207

Paul would you yourself consider shorting PEB or are you not a fan of shorting due to the possible infinite downside?

Paul Scott

Hi Hederz,

Hope you don't mind a general off topic spread betting question. You said in the past your downfall was being overleveraged on illiquid small caps. I am at the stage where financially it would make sense for me to trade through spread bets. The deposit factor for medium size trades seems to be about 60%, so if you don't mind me asking, how did you manage to achieve the sort of leverage that near wiped you out?

Well, my problems with spread betting occurred about 10 years ago now. Back then, they didn't have tiered margin requirements as they do now. The newer tiered margin system is vastly better, and safer, than the old system.

So what used to be the case is that the margin requirement was set by the market cap. So my big holding at the time was Indigovision, and it was margined at (from memory, I think) 20% at one spread bet company, and 25% at another. So I had this big holding in the company, which was split into two, at those 2 difference companies.

When the financial crisis really hit, the market cap of Indigovision fell heavily, and it dropped under whatever the threshold was (maybe $50m mkt cap, I can't remember exactly), and that triggered it instantly rising from 20% margin, to 40% margin at one SB company. Clearly that caused me an absolute nightmare, so I had no choice by to sell heavily at whatever price we could get, to reduce the spread bet.

As the share price plunged, this just increased my margin calls. By the time we'd hit the worst of the crisis in Sep-Oct 2008, all my equity had been wiped out, and I couldn't sell on the way down because there were no bids of any size in the market at all - liquidity had just completely dried up.

What I learned from it, was as follows;

To diversify more, so that no single position could ever pull down my whole portfolio.
Welcoming higher margin requirements - rather than trying to do special deals with SB cos for lower margin. So the tiered margin system now used by most SB cos is excellent, and I am happy to be paying 75% margin on the highest tranche of my larger positions now.
To look carefully at the liquidity in every stock I hold, and only size my position at such a level where I could exit completely in 2 days, even in a tough market.
Not spread betting at all on very tiny, or speculative shares - it's just not suitable for this.
Keeping close tabs on the total gearing, through an overall exposure spreadsheet, and chopping the gearing right back whenever the market goes wobbly (e.g. before Brexit, and in Jan 2016).

Putting all that together means that I'm confident there is no chance of a repeat of the disastrous mistakes I made in 2008.

Hope that helps.

Regards, Paul.

Hi Reubencash207,

No, I don't usually short small or micro caps - it's too dangerous, and sucks out too much mental energy, which can be better deployed on other things with more upside.

Hi flyinghigh,

Sorry I didn't get round to revisiting 32Red (LON:TTR) - have got a bit of a mental block on it, don't know why.

For what it's worth though, the share looks good value, if they hit 2017 forecasts. The latest update sounded quite good.

Personally I'm not a fan of the sector, hence probably why I couldn't muster the energy to dig into it any more. Looking at so many companies, I just sometimes get overloaded & can't reach a view on a share, which is what happened with this one.

Apologies, Paul.

Martin5760

7th Feb '17

Paul - re your comments in the above posts. Thats partly why I value your opinions on this site - your willingness to acknowledge when you have not got something right or don't have an answer. Something most investors can learn from.

Jraitt, hi thanks for sharing your thoughts. I hadn't heard that presentation so those comments are really useful to know. It'll be interesting to hear more details on the Company's non-diluting finance plans when they announce them.

Regards
Andrew

Thanks Paul! We really appreciate what you do get to comment on.. so no apology needed for those you don't get to :-) .

I guess a good number of investors would agree with you (not a sector that is particularly appealing) since the share seems to tread water an awful lot of time and yet.... looks decent on fundamentals. That has been my dilemma ... was I missing something or is it that it is a share "waiting to happen". I see one broker put out a 250p target... so I'll wait and see.

Howard Adams

Paul (and any Revolution Bars (LON:RBG) holders)

RSN just released about an hour ago .....

The Directors of Revolution Bars Group PLC ("the Group") announce that Chris Chambers has informed the Board of his decision to resign as Chief Financial Officer of the Group for family reasons.

Chris will remain with the business until his successor is found. A search is now underway for his replacement.

Regards
HOward

Small Cap Value Report (Mon 6 Feb 2017) - ACSO, PEB, PUB, BOO

accesso Technology (LON:ACSO)

Pebble Beach Systems (LON:PEB)

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Paul Scott

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