Small Cap Value Report (Thu 11 May 2017) - LOOK, FLOW, SAL, PTCM, RBN, ASY, OTB

Good morning, it's Paul here.

Today I am reporting on the following;

Lookers (LON:LOOK) - another car dealership reporting a positive Q1 performance (boosted by changed in excise duty)

Spaceandpeople (LON:SAL) - shares have soared 45% on a positive trading update

Flowgroup (LON:FLOW) - yet another blue sky company that has dismally failed. Major fundraising announced at just 1.5p.

On The Beach (LON:OTB) - Interim results

Robinson (LON:RBN) - trading update

Andrews Sykes (LON:ASY) - final results

Porta Communications (LON:PTCM) - final results

OnTheBeach (LON:OTB) - interim results

So that's quite a lot of work for me to plough through. I'll be taking my time, so will be updating this article throughout the afternoon. So (as usual) please refresh this page later for more sections added.

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Lookers (LON:LOOK)

Share price: 122.5p (up 0.4% today)
No. shares: 396.6m
Market cap: £485.8m

Q1 trading update - covering Jan-Mar 2017.

This is a chain of car dealerships.

These figures look stunningly good. However, as was pointed out yesterday in an RNS from another car dealer, Vertu Motors (LON:VTU) , changes in vehicle tax rates were implemented from 1 April 2017. This triggered advanced purchasing to beat the 1 April deadline.

For this reason, I think the Q1 figures from Lookers are largely meaningless.

On new cars the LFL growth in gross profit was +9%

What I'm scratching my head over though, is that used car gross profit was +17% in the quarter, also on an LFL basis. I don't see that there would be any benefit from accelerating purchases of used cars, so this is a bit of mystery as to why used sales were so strong, and on good margins by the looks of it.

Outlook - overall the company says it is trading in line with expectations for the whole of 2017.

My opinion - another car dealership which appears to be in rude health. We had a good discussion yesterday about the factors affecting this sector.

Lookers seems to be quite a bit more expensive than Vertu, on both a price to tangible book value basis, and a forward PER basis. Therefore I would say Vertu looks better value, out of these 2.

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Flowgroup (LON:FLOW) - just a quick note here. I see the share is down nearly 40% today to just 1.89p.

This is due to an announcement stating that a major fundraising (over £20m) is to be done at 1.5p, with some convertible loans at 1.8p.

I've never rated this company - its main product seemed to be creating an uneconomic solution to a problem that doesn't exist. Then when that didn't work, they branched out into another area in the energy sector.

Why on earth would people pour more money into something that has dismally failed? Crazy.

Blue sky shares practically always fail. I cannot fathom why investors are drawn to blue sky "investing" (i.e. punting), when the failure rate is so extraordinarily high? Maybe it's just laziness - that people can't be bothered to analyse the numbers for proper companies, so instead just punt on a blue sky story?

Anyway, blue sky shares tend to seriously damage your wealth. My performance has dramatically improved since I developed the discipline to (most of the time) steer clear of blue sky stuff. Although the odd one does occasionally slip through into my portfolio unfortunately.

The other risk with blue sky stocks, is that you keep averaging down. This can turn a small initial loss into a huge eventual loss. I'm sure most of us have done that. Averaging down on good quality companies which happen to be in a bad patch can be very lucrative. However, averaging down on failing blue sky story stocks is usually disastrous.

That's another good reason to avoid blue sky stuff altogether. Even if your initial position size is small, the temptation is to get sucked into buying more as the price falls. Blue sky investing is a complete mug's game, in my view. Risk:reward is usually terrible, and these things are often priced to perfection too - even though they've often delivered nothing in commercial results.

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Spaceandpeople (LON:SAL)

Share price: 37p (up 45% today)
No. shares: 19.5m
Market cap: £7.2m

Trading update - covering Jan-Apr 2017.

It's good to see this accident-prone minnow apparently turning the corner, after a whole series of problems in recent years.

These are the key points from today's announcement;

Revenue & profit ahead of management expectations.

Main drivers of this are a strong performance from its UK promotions business, and cost reductions.

Confidence that the strong start to 2017 will be maintained.

The company reiterates that its business is seasonally weighted to H2 every year.

The key retail contract in Germany has been successfully renegotiated, which will further improve profits. This is key, as without a renegotiation the German business would have been finished.

Very helpfully, the company provides guidance for this year (all companies should do this), of profit before tax of £1.1m, and EPS of 4.5p.

This translates into a PER of 8.2

Cash generation has been good - they expect to end the year with net cash of £1.25m - also good news, as this should remove investor fears about the balance sheet, which was starting to look a tad weak.

Divis - no mention is made of this, but I imagine the company might reintroduce a small divi (maybe 1p?) at the end of this year. It has proven keen to pay divis in the past, when trading well.

My opinion - I'm delighted that management seem to be getting the business back on track. I'd be even more delighted if I still held shares in it, but Sod's Law kicked in, and I ditched them pretty much at the all time low. Never mind, these things happen.

I'm not planning on revisiting this share, because it doesn't meet my tougher investing criteria these days. I'm looking for growth businesses that can really scale up. Whereas this one has pretty limited market opportunities. It's not likely to grow to say 5 times its current size, probably ever.

Furthermore, as we've seen in the past few years, its businesses are heavily reliant on a few key customers, and results are generally unpredictable. Therefore investors really can't sleep soundly, as you never know when the next profit warning might crop up.

Therefore, I feel the current valuation of about 8 times forecast earnings is probably about right, providing the company meets those revised numbers.

On a personal level, I got to know management here quite well in the last few years, and I know how hard they've tried to get the business back on track. So it's really pleasing to see their efforts come together with a better performance.

i doubt there is much sustainable upside on this share for now, after today's 45% rise. The reason being that there must be so many stale bulls in the stock. The problem with that, is that share price rises tend to be snuffed out by relieved holders who've been waiting for a more favourable exit price.

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Porta Communications (LON:PTCM)

Just a brief comment, as I consider this share uninvestable.

The main reason is its car crash balance sheet. The capital structure is all wrong, with Bob Morton's expensive loans propping up what would otherwise be an insolvent group.

The P&L looks awful too. The adjusted EBITDA numbers are meaningless here, as we've seen before how aggressive the accounting is. Every year there are loads of restructuring costs, and other items which are massaged out of the way. The reality is that this company doesn't really make any money. Anything it does make would be needed to repay the expensive loans.

Overall then, I think the existing shares are worth nothing as things stand now. At some point the group has to do a financial restructuring. It's a safe bet to assume that Bob Morton will come out on top. So why put your money lower down the financial hierarchy than this known sharp operator?

I think the Board departures here were positive. Maybe new management will be better? Their main priority is to sort out the horrendous balance sheet, and the whole capital structure.

On the upside, current trading sounds good. If management is able to convince a different lender to finance the repayment of Mr Morton's loans, then there could be light at the end of the tunnel. Do I want to punt on that happening? No.

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Robinson (LON:RBN)

Share price: 131p
No. shares: 16.6m
Market cap: £21.7m

AGM trading statement - this company describes itself as "the custom manufacturer of plastic and paperboard packaging based in Chesterfield".

It has a 31 Dec year end, so this update is for Jan-Mar 2017, as follows;

"In the first quarter of 2017, revenues were at the same level as the previous year.

New business gains continue to come on stream slower than expected but the projects remain in the pipeline and will benefit the second half."

I'm quite quite suprised that the shares didn't sell off on this news, which is hardly inspiring.

Stockopedia shows the broker consensus forecast being a 10.9% increase in revenues for 2017 as a whole. Therefore if no increase has been achieved in Q1, that leaves a steeper hill to climb in Q2-4.

Slower than expected new business gains hardly gives confidence either. Although the comment about H2 benefiting from new business wins is the only positive comment in the above paragraph.

Property - there is value in this share from the development potential of surplus land owned by the company. On this matter, the latest update is as follows;

"Following the outline residential and retail planning permission granted in January 2017, work continues in preparation for development of the sites, and we look forward to updating shareholders in due course."

My opinion - this share doesn't interest me. The sector it operates in, is so competitive, that I think customers will be putting constant pressure on suppliers like Robinson to cut prices & margins. So I see Robinson as having little pricing power, hence margins are not likely to grow.

Also there has been little, if any organic revenue growth in recent years. The growth has come from an acquisition of a Polish packaging company.

So the only real point of potential upside seems to be on the property side of things. Potential investors would need to do detailed homework on this, to find out the value of the land, and what (after tax) the company intends doing with the proceeds.

Dividends look quite good though - the forecast yield being about 4.6%. So for people who don't want to take too much risk, then the upside from property disposals, and decent divis in the meantime, might have some attraction.

Note also that this share is extremely illiquid, so it could be difficult to exit a position, once you've bought. There's also the dreaded bid/offer spread to contend with, as with most illiquid shares.

Overall, I feel the market is looking for growth companies at the moment, and things like Robinson are on the sidelines, with little investor interest in them. So there's only really any upside if the value of the property turns out to be more than expected. It doesn't interest me, because there's an opportunity cost to parking money in shares that flatline, when so many other things are roaring upwards.

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Andrews Sykes (LON:ASY)

Share price: 505p
No. shares: 42.3m

Market cap: £213.6m

Final results - for the 12 months to 31 Dec 2016 - so another company with extremely slow reporting - it's really not good enough, leaving shareholders in the dark for such a long period after the year end. There hasn't even been a trading update. So the majority shareholder knows how the company is performing, but outside shareholders are left completely in the dark for 4 and a half months from the year end date.

The company's activities are hiring, and selling temporary air conditioning/heating & water pumps. So its business is highly weather-dependent - i.e. the business does better in extreme weather conditions.

The figures for 2016 look excellent.

Basic EPS rose from 25.55p to 34.25p, although that includes some forex-related gains.

PER is 14.7, which looks good value to me, for a high quality niche business.

Net cash was £17.7m

Balance sheet overall is excellent. You don't often come across an equipment hire company with net cash.

Dividends are generous, albeit flat on last year at 23.8p. That's a yield of 4.7%. Note also that the company has surprised & delighted shareholders with special divis in the past. With the cash piling up again, I'd say there's a fair chance the same might happen again in the not-too-distant future.

Cashflow is (as always) excellent. This business is a terrific cash generator - it seems to occupy a lucrative niche.

My opinion - regulars here will know that this is one of my favourite shares. I really regret selling out, and am pondering whether to buy back in? It's horribly illiquid though, as the vast majority of shares are held by one shareholder. So some people may not like the capital structure, and the uncertainty this brings about what might happen to the company in future.

It's a fantastic business though, as evidenced by another set of excellent numbers. Well worth a look, if you can live with the unconventional capital structure, and the uncertainty that its weather-related activities bring. It might be a share to keep on my watch list, and buy on any plunge from disappointing results in a year where the weather misbehaves?