Small Cap Value Report (Thu 15 Mar 2018) - Bitcoin, PMP, TFW

Hi, it's Paul here with a shorter & earlier than usual report.

NB. No reader requests today please, because I won't have time to do them - I have to attend a conference in London all afternoon & evening, so this will be a shorter & earlier report than usual. 

However, please feel free to leave your own comments on results & trading updates from companies that you find interesting, explaining why you think they look interesting. It's a team effort!

I completed yesterday's report in the evening, as the whole day was taken up with Conviviality (LON:CVR) . Additional sections on Somero Enterprises Inc (LON:SOM) and Empresaria (LON:EMR) were added. So here's the link for yesterday's full report, to get you started today.

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Bitcoin

I see that is falling again. It's down to $7900. The recent peak was $20,000.

Recent developments have been that Google has apparently banned all advertising for fantasy currencies, following on from a similar ban by Facebook. Christine Lagarde of the IMF made extremely negative comments about fantasy currencies, saying they may need to be banned.

All this is inevitable because there is no way that governments will allow criminals and fantasists to undermine or replace the existing financial system, it just won't happen. Any such threats will ultimately be banned, although authorities tend to be very slow to react.

So I reiterate my previous firm conviction that fantasy currencies are doomed to failure. The fact that they have zero value is also rather important. You only have to go on to social media to see the type of people who are bullish on this stuff – these are not financially sophisticated people by and large. I don't know any serious investors who would go near crypto-currencies, because they can see it for what it is – a giant financial speculative bubble.

I've done quite a lot of research on block chain technology, and I feel that some form of adaptation of this could become very successful and of widespread use. However the speculative mania over completely artificial valuations put on the so-called coins, seems to be nearing the inevitable end-game – of total collapse.

Anyway, I am watching from the sidelines these days, having learned the hard way that the volatility of bitcoin is such that it's incredibly difficult to make any worthwhile amount of money betting either long or short, because stop losses get taken out on short-term spikes up and down. Therefore to make any meaningful profit, you have to take big risks. Well done to anyone who gambled on this and made a fortune, but the key question is will they still have that fortune when this financial mania has ended?

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Portmeirion (LON:PMP)

Share price: 1,045p (up 0.7% today, at 09:08)
No. shares: 10.85m
Market cap: £113.4m

Final results

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

This is the UK-based decorative pottery & candles group, announcing its preliminary results for the year ended 31st of December 2017.

• Revenue up 10.6% to £84.8 million
• Pre-tax profit up 13% to £8.8 million - I like it when profit rises faster than revenue
• Basic earnings per share up 9.2% to 65.07p – I will have to check whether this adjusts out goodwill amortisation or not. Checking the balance sheet, goodwill is unchanged at £7.229 million, so it looks as if goodwill is not amortised, which I think is a new accounting standard, as I've seen that treatment elsewhere. Other intangible assets have dropped from £6.6 million to £6.1 million, implying an amortisation charge of about £0.5 million
• Net debt – it's pleasing to see that the group has moved back into a net cash position of £1.6 million. This compares with net debt of £2.3 million a year earlier.

Stockopedia shows broker consensus of 66.7p earnings per share. I'll have to check whether that is comparable to the 65.07p actual figure reported today. That gives a PER of 16.1 calculated on 1045p share price, and 65.07p basic EPS for 2017. Given the positive outlook comments, I think we can expect EPS to rise again in 2018, so the PER should drop.

Normally analysts work on adjusted earnings per share, whereas Portmeirion only report basic earnings per share, so I need to investigate whether the two numbers are comparable to determine whether this is an earnings beat, meet, or shortfall. The numbers are in the same ballpark, so it's probably no great shakes either way. I've just called the company, but the FD is busy currently, so I've left a message to ask for a callback to clarify this point. Will update this later, probably tomorrow, once I have the answer.

I've noticed a trend in recent weeks, for nervous investors to bank profits, even if results are satisfactory. Note also that Portmeirion shares have had a good run recently. It's a surprisingly illiquid share, and can be quite difficult to buy and sell, so clearly the shares are fairly tightly held.

Balance sheet – looks very strong.

Current assets of £39 million (including cash of £8.5 million) dwarfs current liabilities of £13 million. That is a current ratio of 3.0 – extremely healthy. Why does this matter? It means the company has firepower for more acquisitions, without needing to issue more equity. My estimate is that the company could comfortably afford another acquisition up to about £15 million, using existing cash and fresh bank borrowings, if it wanted to.

Note that the pension deficit has dropped considerably from £7.1 million to £1.67 million. This is an interesting area, because some companies with pension deficits might be worth investing in, now that interest rates are starting to rise, because that should help reduce pension deficits. Although each case has to be examined individually.

Outlook - 

Trading in the first two months of the current year is nearly 20% ahead of the comparative period in 2017. However, given the Group's second half weighting, the sales in these first two months of the year are low in comparison to the balance of the year.

"We are delighted to be reporting a ninth consecutive year of record revenue and a record profit before taxation.

Our core values of innovation, targeted product development and operational excellence remain unchanged, and we are pleased to report on the successful integration of the Wax Lyrical home fragrance business into the Group.

Trading in the first two months of the current year is ahead of the comparative period in 2017. The outlook for 2018 is positive and we remain confident for the future."

Dividends – total dividends for the year at 7.5% to 34.66p. This gives dividend yield of 3.3%, which is not particularly amazing, however there in mind the track record of annual increases in dividends. In that context, I'm happy with the well covered and growing dividend.

My opinion - I'm happy to continue holding. This company is a long-standing favourite of mine, and I think it makes a decent core, long-term holding, for e.g. a SIPP. It seems to me a likely candidate for a takeover bid, at some point, due to its iconic brands, and decent track record of growth. Management seem safe pairs of hands.

Followers of Mark Minervini, note that this looks like his ideal chart formation - namely a long period forming a base, then a stage 2 breakout, crossing above 50 & 200 day moving averages. I wouldn't have thought PMP is likely to be a multi-bagger, but I'd say it's quite likely that the share price could be maybe 20% higher in a year's time? 

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FW Thorpe (LON:TFW)

Share price: 330p (down 2.9% today, at 10:19)
No. shares: 115.88m
Market cap: £382.4m

Interim results - for the 6 months to 31 Dec 2017.

a group of companies that design, manufacture and supply professional lighting systems

The headlines figures look rather lacklustre for a company which is on a pretty punchy rating - profit & EPS basically flat against H1 last year.

There don't seem to be any broker forecasts available. Therefore, I really do think the company should start doing commissioned research - otherwise investors are in the dark. It's fine for the family shareholders, as they're in the know. But what about outside shareholders?

If full year results are also the same as last year, then EPS would be 12.54p, making a PER of 26.3 - prima facie very expensive for a group with flat earnings.

Balance sheet - is groaning with surplus capital, so this needs to be taken into account in valuation.

Outlook - I really like the tell it how it is honesty of the Chairman, Mike Allcock;

It remains a challenge to maintain last year's result, in spite of the interim performance. Revenue and profits should be bolstered by the addition of Famostar in the second half of the year; however, whilst the Group will endeavour to reach record levels, it seems unlikely.

Within the Group we will, of course, continue to work on and invest in projects that support our vision of stable long-term growth into the future.

Perhaps there might be an element of under-promise, and over-deliver, in the above. Even so, I just cannot see why this share should be priced on a PER of more than, say 15-17?

Therefore it looks significantly over-priced to me. Nice group of companies, and well managed. Just considerably too expensive for me.

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I have to leave it there for today, and there's nothing much else of interest in today's announcements.

Having had a think about it, my plan of action in future is to focus on the stocks that look most interesting to me each day. I'll have a look at the reader comments, but I'd rather you just discuss other companies amongst yourselves in the reader comments, and leave me to focus on the most interesting results/trading updates. That way I don't get bogged down & demotivated by having to write about things that don't interest me.

Although sometimes readers do flag up interesting companies, e.g. Headlam (LON:HEAD) the other day. I ended up liking it, after going through the numbers after a reader request.

Also, thanks to Damian, who suggested that the best cure for my RSI was to swap the mouse over to my left hand. That combined with using Dragon voice recognition software (which worked a treat this morning, I wrote most of the report using it, with very few errors - except "Christine Lagarde" was interpreted by Dragon as "Chrtistine the guard"!! LOL. Voice recog is great value for some hilarious mistakes, as with teletext. The RSI is already improving, after just 1 day of remedial measures.

Have a good day!

Best wishes, Paul.