Small Cap Value Report (Thu 1 Feb 2018) - IGE, COM, SPSY, CTO, ALU | Paul Scott

31st Jan '18 by Paul Scott

52 comments 16759 reads

Good morning, it's Paul here. I have a lunchtime meeting in London, so will only be able to rattle out a few sections early. I'm hoping that Graham might then be able to add a bit more this afternoon.

I added more sections to yesterday's report last night, so here's the link to that.

Let's start with a profit warning;

Image Scan Holdings (LON:IGE)

Share price: 4.25p (down 38.2% today, at 08:21)
No. shares: 136.0m
Market cap: £5.8m

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

Trading update (profit warning)

Image Scan (AIM:IGE), the specialist supplier of X-ray screening systems to the security and industrial inspection markets provides a trading update for the year to 30 September 2018 ("FY18").

This is a tiny company, below our usual market cap size. However, 2 readers have already mentioned it this morning, and I hold personally (more's the pity), so I naturally want to look at it, and see what's gone wrong.

The company made a series of positive updates over the summer, which drove the share price up substantially. This also allowed a big holder to exit, via a discounted secondary placing done through the house broker. I took part in that placing, thinking I was getting a bargain. They tried first to sell at 10p, then reduced the price to 8p, when the market price had been around 11-12p. So an apparent bargain. Since then, the share price has dropped by almost two thirds.

There was the first sign of trouble, which I mentioned here on 6 Dec 2017, with the company referring to delivery dates not yet being finalised on a proportion (not stated) of the order book. A reader mentions in the comments that he sold out at the time, sensing trouble ahead. That was a great move. Sadly I didn't have that option, due to my having a position size that's too big to sell in the open market. So I'm in for the duration here.

Profit warning - today the company drops a bombshell, that a £1m order is likely to be cancelled (on unknown terms). That's a material figure - the company did £5.0m revenues last year, and £3.3m in…

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Camtab

1st Feb '18

I know what you mean Gus. I keep looking at Alumasc in so many ways it looks like a good investment. Strong balance sheet , good divi well covered. Low PE ratio and so on. The chief black mark as far as I can see is the huge pension fund deficit, but I can't help feeling interest rates are only going one way which should see this reduce over time. I can appreciate it is not a growth business any longer but the construction industry always offers up cheap opportunities by its very nature. Erm....... will continue to sit on the fence if only because in short term cannot see anything which will drive share price and I feel shares are a bit toppy anyway.

Ramridge

Hi Paul Re Image Scan Holdings (LON:IGE)
You wrote "At this price, I certainly won't be selling, and could even be tempted to top-up "

Before you or others are tempted to buy, it might be worth reviewing Ed's excellent study "The Profit Warning Survival Guide".

- Within the last 6 months, IGE's SP fall from peak to yesterday was -46%

- At the time of writing, the SP has fallen some 30%

- You can make up your own mind about the likelihood of the last two future events

As usual, DYOR

Nicowilson

Understood. Thanks Paul

janebolacha

" Does nobody sense-check these announcements before they're published? "

"Sense-check", nice term, Paul, I'll use that.

Gromley

Well above the normal market cap threshold here, but I wonder if today's report from SIG (LON:SHI) of Historical overstatement of profit is worth a review as to any learn-able lessons.

A quick précis of the announcement :

The Group has identified a historical overstatement of profit relating to the year ended 31 December 2016 and prior years and relating to the half year ended 30 June 2017.

The issues were found :

Following a whistleblowing allegation of potential accounting irregularity.

(Beware companies like Barclays (LON:BARC) who believe that attempts to persecute whistelblowers are only a minor misdemeanour.)

The issues were around :

the recoverability of a number of balances recognised at 31 December 2016 [and also continuing in to H1 2017] in relation to rebates and other potential recoveries from suppliers.

Further the investigations

confirm that a number of these balances were overstated at 31 December 2016, in some cases intentionally.

This resulted in an overstatement of profit for the year ended 31 December 2016 of up to c.£3.7m, with up to a further c.£0.4m overstatement of profit relating to years before 2016. (Even before this revelation that made a significant loss in 2016)

The review has also identified an overstatement of balances at 30 June 2017 relating to recoverable balances brought forward from 2016 and some additional receivables accrued in the first half of 2017. This resulted in up to a further c.£2.5m overstatement of profit for the half year ended 30 June 2017.

This last part confuses me as they also say :

The expectations for underlying profitability for the year ended 31 December 2017 remain unchanged.

How can this be so?

Certainly the prior year adjustments will not form part of the "underlying" numbers, but the £2.5m overstatement in H1 and I would guess a £2.5m+ overstatement in the assumed run rate into H2 will certainly have to come out of the underlying - to me that points to a near 10% miss on the projected £57m Net profit expectation - so unless they have found a completly different £5m down the back of the sofa - I don't see how they can hit expectations.

The shares are 'only' down around 5% so far this morning, although the shares also fell nearly 4% after 2:30pm yesterday afternoon.

Findings from this ongoing review were presented to the Audit Committee of the Board on 31 January 2018

I wonder what time that board meeting finished? Not a happy coincidence for a company impacted by potentially fraudulent behaviour by its employees!!

Anyway, given the level of forensic investigation Paul & Graham often offer up, I wonder if there are any lessons to be learned - could we have seen this coming?

Stocko Earnings Manipulation Risk indicator would not have helped in this case - ranking the likelihood of manipulation as low.

andrea34

I'm sorry to ask this question again, but I'm just out of hospital after major op and don't have access to all my usual links that I use at work - please can someone tell me good sites to view (1) most shorted stocks, and (2) free tools for momentum stock analysis?

gus 1065

Hi andrea34l - hope you’re feeling better soon. Link below to Short Tracker to get you started ...

https://shorttracker.co.uk

Gus.

Reacher

Thanks for the write up on Spectra Systems (LON:SPSY) . Graham has mentioned this company previously. It has been highlighted that customer information is closely guarded and somewhat mysterious.

However, in previous announcements the company made reference to significant prospects in China and also being able to use its technology for real-time fraud control and risk management systems for gaming operators which could potentially be a big market.

Finally, there was mention of being able to use its technology on smartphones to verify products.

I realise now that my last sentence (re Image Scan Holdings (LON:IGE) ) on having sold out before this warning sounds a little smug.

That wasn't the intention at all, but I have been putting a lot of focus recently on when not to buy (or hold) stocks even if I believe(d) the longer term story. This has been a very valuable exercise and IGE is just one case in point. On the flip side as I'm not seeing too much that I do want to buy at the moment so if this carries on I'll be out of the market altogether! (But maybe I'll look back and realise with hindsight that is not a bad place to be!)

Anyway, I just wanted to highlight a couple of points that tell me that there is room for further caution here :

Whilst the Board expects FY18 sales to be weighted towards the second half and the Company to remain profitable for the financial year

I read the first part of that statement (and statements like it) as saying we don't know how yet, but we 'intend' to over-perform our previous expectations in the second half in order to (somewhat) offset the poor H1.

And if that first part does not come to fruition, then "remain profitable" is clearly also in doubt.

Secondly :

The order was made up of largely standard portable X-ray products and, though the Board is confident these units can be sold to other customers, this may not occur in FY18.

I don't really know the pace of technological development here, but I one would have to wonder what level of discounting may be necessary in order to sell the 2017 model in 2019?

So the clear risk here is that not only do they lose the margins they would have made on 20% of their expected revenues - having already manufactured some/all of the kit - they also face write downs in stock.

Hopefully some of this can be recovered from the prospective customer, but as they are "currently negotiating terms for the cancellation of that order. " , that cannot be taken for granted.

In the past, if I still believed the longer term story (I'm not sure now in this case), I would have been very tempted to think that the price fall represents a great opportunity to buy for the longer term.

Now, I am more than happy to wait and possibly buy at a higher price, if the path to the promised land becomes clearer.

Tracsis (LON:TRCS) has announced two small(ish) acquisitions today. The announcement reveals revenues and profit before tax, but nothing about how much the company paid for the two businesses (and whether it was cash, debt or equity).

To me, this is worse than useless as we have no basis to value if this is a good deal or not.

matylda

Paul,

Thanks for covering Spectra Systems (LON:SPSY), much appreciated.

Love the digs at broker coverage.

How much did you spend in Revolution Bars (LON:RBG) - Up 2.76% as I write!

Enjoy the meet and thanks again for the coverage.

MrContrarian

I mis-read £SPSY's prev RNS. That was flagging a beat for 2018.
Also T Clarke (LON:CTO) did thank the leaving FD.

gsbmba99

The Image Scan Holdings (LON:IGE) announcement has raised a more general question for me. For companies that have long, international order books, how do they handle contractual agreements to deliver beyond March 2019? Is it possible contractually to agree to deliver products to non-UK markets with the present level of uncertainty?

beatingmrindex

Paul,

Every day you get new readers who don't know what is reviewed here. I would suggest adding a standardized note in each daily template at the top indicating what shares you review and at your discretion. Otherwise its newbies unaware that will continue to request other shares.....

Wol

Hello andrea34l
I also hope you recover well and soon. On your question about momentum stock analysis you could try:
* the various momentum screens offered on Stockopedia. Stockopedia is great in that it gives the performance of all these screens so you can assess which ones to use. Just click on Screens at the top of the Stockopedia page. There is a whole section on momentum screens
* Paul Scott's SCVR of yesterday (good timing for you) talked about the momentum screens he uses and gave details of a screen that Paul has created following the momentum indicators favoured by Mark Minervini (whose book is great by the way). Here is a link to Paul's Small Cap Value Report that includes his discussion of momentum screens.
https://www.stockopedia.com/content/small-cap-value-report-weds-31-jan-2018-botb-joul-bst-sat-rnwh-306923/
I hope that helps

ed_miller

Re exports beyond March 2019 (and, nominally, Image Scan Holdings (LON:IGE) ): Do you expect an impact on deliveries to non-EEA countries?

Re: Requests for reviews of non-smallcaps, one would think the name Smallcap Value Report ought to be a sufficient clue, but apparently it is not!

InvestedGeordie

Hi Gromley,

FWIW I certainly didn't see your initial post as smug, and I think this follow up is well worth reading, for those interested. As mentioned on twitter, today, my sympathies to all holders. As the old addage goes: "If in doubt, Get out!"

I, like Gromley, used to hold a significant percentage of my portfolio in Image Scan Holdings (LON:IGE) I sold my entire position 2/1/18. Like all my buys & sells, I reported this on Twitter.

Why did I sell?

I was asked this by Conkers on Twitter, today. Good question. When I go back to review my trade, I made a mistake - I held on too long, when I knew something wasn't right, and took a loss of ~15%. If I had have been more decisive, I could have exited my position sooner - perhaps even in its entirety on 6/12 when the prelims came out at ~8.6p rather than ~7.8p in Jan.

That said, the decline in the SP made up my mind, and it was gone.

Thanks,

IG

@InvestedGeordie on twitter

wildshot

Good suggestion Julianh and they are tools I am looking at. However the original poster asked for "free" screens and to access the momentum screen in Stockopedia you need a paid subscription. I know this because I recently moved from being a free user of this site to being a paid subscriber.

The suggestion on the short tracker is a good call. As for "free" momentum screens online I'm not sure where these can be found and would be interested if anyone has any suggestions.

fft100

Hi Paul,

SPSY has paid a dividend of 5c in June 2017. The following is from the Preliminary Results RNS in March 2017 :

"With the Company having reached sustainable profits and having sufficient resources to execute on its growth plans with its existing cash reserves, the Board is delighted to start paying dividends. It intends to pay an inaugural annual dividend of USD 0.05 per share in June of 2017 and thereafter to pay the dividend in June after the audited close of each fiscal year."

With the constant increase in forecasts - which are probably still short of what will be reported - I would be surprised if the dividend is not increased this year.

Small Cap Value Report (Thu 1 Feb 2018) - IGE, COM, SPSY, CTO, ALU

Image Scan Holdings (LON:IGE)

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Paul Scott

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