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

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, I mentioned how the buyer of Vislink's legacy business didn't seem to have the money to actually pay for it! More than a slight problem. So xG had to renegotiate the deal for defer the bulk of the purchase price for 45 days. That sort of thing is just a massive red flag in my view, and I'm amazed the share price hasn't fallen further, as this looks fraught with risk.

Today we have more problems announced. The profit warning is as follows;

The Company informs shareholders that the results for FY2016 are expected to be materially below the Board's previous expectations.

There was a fall in performance at VCS which was due to the uncertainty caused by the lengthy sale process. In addition there are significant write offs to recognise the final sale price achieved.

Since this is related to the business which is being sold, I suppose it's not necessarily of that much importance, it could be argued. So how is the ongoing business performing?

Performance at PBS was also slightly below expectations, but with a pipeline at its highest ever and an order intake for January at its highest since 2014, it is fully expected that recent levels of growth will return in 2017.

That sounds great, but personally I wouldn't be inclined to place much reliance on anything the company says right now.

Bank financing - this is of greater concern;

The bank increased the Company's facility to £17.8m in the weeks immediately prior to the sale. While the initial proceeds received from the sale of VCS (£5.5m) will reduce this in the medium term, under the terms of the Business Purchase Agreement the Company has to settle creditors in VCS that are over 30 days old.

Therefore, the need to settle these and with certain short term financing advisory costs it is not expected that the current level of bank financing will reduce before mid-March. The Board remains in regular dialogue with its bank, who remain supportive. The deferred payment of c. £8m ($9.5m) due mid-March will reduce bank borrowings significantly.

The way I read it, this sounds as if the £5.5m initial sale proceeds has still not been received.

As I mentioned before, xG has very weak finances, and I think there's considerable doubt whether this deal is actually going to complete. If it doesn't, then things could get very ugly indeed - a rescue fundraising, or worse?

My opinion - this looks a very wobbly situation to me. I'm worried that xG may not be able to complete the deal, which would then leave PEB high & dry, with a mountain of bank debt. Personally, if I held this share, I'd ditch them for anything I could get. Even if things do turn out OK, why take an unnecessary risk?

Punch Taverns (LON:PUB)

Share price: 178.75p (up 0.4% today)
No. shares: 222.0m
Market cap: £396.8m

(at the time of writing, I hold a long position in this share)

Statement re offer for punch taverns - today's update from the one remaining bidder for Punch Taverns (with a 180p cash bid) discloses that it has acquired 28.5% of the company at 180p per share. Therefore it seems now very likely that this bid approach may succeed.

That's a pity, as I was hoping for a repeat of the Lavendon situation, with multiple bidders, which has worked so well there. Unfortunately in this case, the other bidder pulled out last week - as announced here.

My opinion - I'm torn between banking the profit now, or holding out for a tiny bit more (the full 180p), or holding out in the hope that a late-stage competing, higher bid might emerge.

On balance, I'll probably sit tight for now. It's only my 17th largest long position, so no great shakes either way. Also, it looks to me as if the downside risk (of the bid falling through altogether) now seems minimal, given that the bidder has already bought 28.5% of the company.

The only risk that worries me is if the competition regulators get involved and block the deal. So it's a tricky one. 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.

With Punch likely to be taken over, I wonder how many breweries and/or VCs might be poring over the numbers at similar, but twice the size Enterprise Inns (LON:ETI) ? I reckon that's a potential bid target too.

Boohoo.Com (LON:BOO) - a quick mention of an RNS today confirming that BooHoo has successfully bid for the assets of Nasty Gal in the USA. That gives the company another complementary brand, plus a customer list to add to the existing strings to its bow.

Put that together with recently acquired PrettyLittleThing, and this further boosts already strong organic growth. With sector-leading margins, BOO deserves a premium price I think. It's growing rapidly into a valuation that looks very high.

Whether there will be any reputational damage from the adverse TV coverage recently, who knows? Anyone who's worked in a retail warehouse, at height of the season, will know that it's a highly pressured environment, where staff are leaned on heavily to achieve targets. That doesn't condone poor treatment of staff though, so I hope any necessary changes are made.

Advanced Oncotherapy (LON:AVO) - yet another blue sky AIM stock goes horribly wrong. This company's shares soared a while back, on what seemed like big orders from a Chinese customer. Well guess what? The orders have been cancelled! AVO has returned a $250k deposit to the customer. I'm surprised the shares haven't dropped a lot lower on this news. Why do people punt on this kind of thing, when hardly any of this type of blue sky AIM share is actually successful?!

I put it down to laziness - people can't be bothered to properly research companies & do the hard work poring over all the numbers. So instead they look for easy riches from story stocks. Instead, they're usually just unwittingly lining up to get fleeced by company promoters.