Small Cap Value Report (Thu 16 Nov 2017) - Keystone Law, NXR, SRT, VCP, CLG, MACF

Thursday, Nov 16 2017 by

Good morning!

To get you started today, here is the link to yesterday's article. I updated it in the evening, having run out of steam during the afternoon. It now covers;

Ab Dynamics (LON:ABDP) - results

GAME Digital (LON:GMD) - results (I added more to this section)

Wey Education (LON:WEY) - unnecessarily deep discount on placing

Walker Greenbank (LON:WGB) - profit warning

On to today's news...

NB. I tend to update the article header to show what companies I intend reporting on. So please refer to this before posting comments below requesting me to cover companies that I'm already intending to report on. Thanks!

Keystone Law

Intention to float - this announcement caught my eye this morning, and might be potentially interesting. Although I got burned on the disaster that was Fairpoint, which went to zero in the end. So I'm very wary of legal services companies.

Key points;

AIM, ticker "KEYS"

Expected to commence trading on 27 Nov 2017

Placing price 160p

Total shares after placing, 31.27m, market cap of £50.0m

Raising £15m (before costs) - of which £5m goes to the selling shareholder, and £9m goes to the company, however this is mostly (£7.4m) to be used to pay off shareholder loans. So in effect, most of the placing monies are to cash out the selling shareholder. Generally I dislike situations where an existing shareholder is using an IPO to exit, because quite often problems subsequently emerge.

Company will be debt-free after the above transactions.

Panmure Gordon is broker & nomad.

The business model is a disruptive legal firm, with its lawyers being self-employed and working from home. Therefore its central costs are low, and fixed. Also, the suggestion is that it can grow profits in future, from operational gearing - due to having fixed costs.

Good 3 year growth of 20%+ p.a.

Results for y/e 31/1/2017 - revenues of £25.6m, EBITDA of £2.1m - grrrr, why on earth do companies give us EBITDA, and not proper profit? This is such an annoying trend.

I would want to see proper numbers before considering investing here, which would be in the admission document. A point to note is that when private companies…

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Norcros Plc is a holding company for the Norcros Group. The Company's principal activities include development, manufacture and marketing of home consumer products in the United Kingdom and South Africa. The Company's segments include UK and South Africa. The Company has six United Kingdom businesses, including Triton Showers, Vado, Croydex, Abode, Johnson Tiles and Norcros Adhesives, and three businesses in South Africa, including Johnson Tiles South Africa, TAL and Tile Africa. The Company is focused on showers, taps, bathroom accessories, tiles and adhesives. In the United Kingdom, the Company offers a range of bathroom and kitchen products both for domestic and commercial applications. The Company offers mixer showers and accessories; tile and stone adhesives; taps, bathroom accessories and valves; bathroom furnishings; ceramic wall and floor tiles; kitchen sinks; tile adhesives, pourable floor coverings and tiling tools through its United Kingdom and South Africa business. more »

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SRT Marine Systems plc, formerly Software Radio Technology plc, is engaged in the marine technology business. The Company's principal activity includes development and supply of automatic identification system (AIS)-based maritime domain awareness technologies, and derivative product and system solutions for use in a range of maritime applications from safety and security to fishery management and environment protection. AIS is a mesh network radio communications system technology specifically designed for the marine domain, and it uses a combination of global positioning system (GPS) and high frequency radio to enable real time, simultaneous data communication between multiple, independent entities providing information, such as identity, GPS position, speed and other customized data. It offers a range of AIS products and maritime domain monitoring system solutions, which also fuse other maritime sensor technologies, such as radar, closed-circuit television and communications. more »

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Victoria PLC is a designer, manufacturer and distributor of flooring products. The Company's principal activities are the manufacture, distribution and sale of floorcoverings. Its segments include UK and Australia. It manufactures wool and synthetic broadloom carpets, carpet tiles, underlay and flooring accessories. In addition, it markets and distributes a range of luxury vinyl tile (LVT) and hardwood flooring products produced by third-party manufacturers. Its product offering in the United Kingdom ranges from both crafted, woven Wilton carpets to Tufted carpets in a myriad of fashion colors and styles. Its stock range offerings cover saxonies, tonals, velvets, twists and natural loop pile styles for residential use. The Company supplies its products to the mid to high end residential market and contract sector both in the United Kingdom and overseas. Its subsidiary, Munster Carpets Limited, is engaged in the manufacture and distribution of floorcoverings for the contract market. more »

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  Is LON:NXR fundamentally strong or weak? Find out More »

49 Comments on this Article show/hide all

fifthcolumn 16th Nov '17 30 of 49

In reply to post #241798

Thanks to everyone for their comments on Macfarlane. I bought a nice chunk of shares after they passed my system criteria 18 months ago but have felt a little disappointed by their lacklustre performance. Despite a recent encouraging heads up from Investors Chronicle I was thinking of selling but having read todays comments I think I will stay onboard for a while longer.

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LeoInvestorUK 16th Nov '17 31 of 49

In reply to post #241713

Wey Education (LON:WEY) the business.

I spent a few hours researching them yesterday morning.

* There is a massive and natural moat / barrier to entry here. Parents are generally quite risk averse as regards their children and ideally want to see a track record before "sending" their child to a school. InterHigh have that track record. That is before you consider any expertise and technology investments.
* I had previously considered home schooling and never thought of or came across a virtual school as an option. This chimes exactly with what David Massie said in the interview - I think the return on advertising expenditure would be enormous in the early stages.
* Mumsnet has many wonderful stories about how virtual schooling has turned around the education of their child. This is a company that can make a genuinely positive difference to people's lives and if sanity prevails they should make a lot of money doing it.
* The prices are very low, yet they have good feedback and are making money. The prices are clearly much lower than the state can educate children, let alone a good private school. Indeed some children are having their fees paid for by councils. (Caveat: PE and things like after school clubs are not included and parents should be incuring some extra costs in providing the equivalent).
* The only negative feedback I could find was from parents who had signed up without reading the contract, pulled their child out (let's hope not to be home schooled) and then got upset when they were chased for money. Some said it was not for their child (as is to be expected), some said there were individual teachers who were not so good (like any school), but pretty much every feedback was positive.
* I can see it being ideal for parents who move around a lot for their work, or split their week between different locations or countries. (but there are legal risks as laws vary between countries).
* Home schooling in the UK is very lightly regulated, certainly compared to elsewhere. Although a potential threat I think InterHigh would benefit for any move towards more regulation as they provide much more structure than typical home schooling.
* The existence of high-quality provision like this can only increase the market for home-schooling to parents who would have never considered it before. Lessons are only taught in the mornings so it still leaves a lot of flexibility.
* Teachers have many of the same benefits as the children/parents - ability to work from anywhere (including a different country) and having more free time.

Infinity (selective education)
* This seems a natural extension with good synergies.
* Attractive to relative rich parents with an international lifestyle.

ecademy (business to "business")
* Again, a natural extension with good synergies.
* I can see this appealing to schools as a way to enlarge their curriculum, especially for smaller / isolated schools (e.g. the Scottish Islands).

Quoralexis (TEFL - Teaching English as a Foreign Language)
* Like fwyburd I am very sceptical about providing adult TEFL - I can see little synergy or competitive advantage there.
* I can see more potential for child TEFL and cross selling benefits, but I imagine this is still a very competitive market.

International (English education abroad)
* There will be regulatory / legal issues here. In the UK the rule is that children must be educated "at school, or otherwise". Effectively pupils are home schooled and use Wey as a resource. But in many countries attending a recognised school is a legal requirement: In Spain it is thought that quite a few ex-pats illegally home school their children and they may have difficulty trying to get approval while facilitating illegal education.
* English schools in foreign countries are often much more expensive than private schools in the UK and are often not very good. So there is a good market here.
* Perhaps business to business is the best approach.

Blog: LeoInvestorUK
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maillotàpoisrouges 16th Nov '17 32 of 49

In reply to post #241593

Well momentum doesn't seem to care about EBITDA does it?

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sharmvr 16th Nov '17 33 of 49

In reply to post #241828

Very much agree with your 2nd paragraph and mimics what I thought when first announced. I was very anti at the time, given size/price/debt but have been coming round especially after a solid results and progress of past acquisitions. The revenue synergy is attractive and I don't doubt Nick Kelsall's salesmanship but he seems to have been pretty good with acquisitions too! Woud have much preferred a bolt on deal! Oh well - still got 16 hours to decide! Appreciate your perspective ley and others who have commented, and of course Paul!

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Roger Lawson 16th Nov '17 34 of 49

Paul, re Keystone Law, I have been using them on a certain recent libel case. It looks like there will be a satisfactory outcome so I am happy. But I do like aggressive lawyers. Must have spent too much time in the USA.

As regards Wey Education (£WEY) one could argue at length about the placing price but it's a tricky company to value and I did not consider it worth anywhere near the market price before the placing, or now. Just looks like one of those stocks everyone thinks they have to buy so the price is driven by demand, not fundamentals. The riskiness of the business plan seems to be ignored. But one oddity is that the placing seems to be for acquiring a company which is not just unnamed, but the deal may not even happen. All rather odd.

Website: Roliscon
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seadoc 16th Nov '17 35 of 49

In reply to post #241758

Norcros (LON:NXR) When/if I take up an offer and if it is not a round number of shares then I tend to put my hand up for just a few more in the hope of ending up with a round number. From memory this was 10 for 51. I like the company, yield over 4%, PER in single figures and ROCE in double figures and I see the pension deficit as a bonus because I think there is every chance of discount rates climbing.

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Paul Scott 17th Nov '17 36 of 49

In reply to post #241868

Hi leoleo,

A comprehensive list of positives for Wey Education (LON:WEY) re internet schooling. It looks like we've been googling the same things! I also grew much more positive about the company, the more stuff I dug up online.

One key point you missed, is that online schooling completely neutralises the whole issue of bullying, and disruption in classes. If a child becomes disruptive in an online school, the teacher simply silences them by clicking a button. So every lesson continues with little to no disruption. The children like this, and of course it's also great for teachers - they can actually teach, instead of spending most of their time battling to retain control of a group of rowdy kids.

WEY pays its teachers standard English pay rates, but they can work from home, and don't have any problems with disruptive kids.

The valuation of WEY is clearly almost a finger in the air job. It's clearly not worth anything like the current valuation on historic numbers. But people are buying into the great opportunity that it has going forwards.

Regards, Paul.

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CorporateLawyer 17th Nov '17 37 of 49

£ + Keystone Law = It will be interesting to see the 'Risk Factors' in their Admission Document in due course (I gather it's not presently available & I'll wager - Was not prepared by any of their Solicitors?!).

The business model has historically represented the 'Ubersiation' of legal services in the UK ('Solicitors on zero-hours contracts'), and has historically been greatly helped by a quite restrictive regulatory environment imposed by the Solicitors Regulation Authority (SRA) - Which has historicallyallowed Keystone's owner / manager to make high profits off the back of not particularly entrepreneurial lawyers who would otherwise have likely left the profession because they could not otherwise practise = No longer employed / in partnership and not able (for a range of reasons to self-employ - e.g. unable to manage a business / uninsurable etc.)

I've never understood how anyone would want an [individual] business advisor who is not able to establish themselves in business and instead pays a substantial proportion of their earnings for someone to undertake their admin! At least Barristers Chambers (much cheaper) have office space and provide real infrastructure to 'their lawyers'.

However, the regulatory landscape is changing fast, with considerable likely forthcoming de-regulation allowing individual Solicitors to compete with Keystone directly =

This float largely looks like a 'knowledgeable cash out' by the present owner(s) / manager(s) leaving the 'uninitiated / ignorant' to buy into a business likely to be facing very different pressures in the future - compared with the favourable position they have historically experienced.

There is nothing very revolutionary about this business (Uber does at least have technology and it doesn't make money! =

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LeoInvestorUK 17th Nov '17 38 of 49

In reply to post #241898

I doubt I am alone in carefully watching your conduct in this libel case.

I would like to thank you for your great work with ShareSoc and sincerely hope that the case does not end up detracting from this or undermining its good name.

Blog: LeoInvestorUK
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Roger Lawson 17th Nov '17 39 of 49

In reply to post #241995

Leoleo73: ShareSoc is not directly involved in the legal case, and I think everyone will be satisfied with the outcome.

Website: Roliscon
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Julianh 17th Nov '17 40 of 49

In reply to post #241493

The Shares event looks interesting. Thanks for the info. I have just registered.

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woodlandantics 17th Nov '17 41 of 49

In reply to post #241663

Hello EC,

thanks for your great work on the Macfarlane (LON:MACF) thread on ADVFN - not often that you can say good things about ADVFN threads!

I am quite satisfied with the steady progress at MACF, quite a turnaround over the last few years and I would prefer that progress at both the company and shareprice remains steady for years to come.

One of the few negative points is the pension deficit - and the substantial payments being made by the company at the moment. Worth bearing in mind though that not all pension deficits are equal - and note 10 to the final results is well worth a read for a surprisingly clear and understandable presentation of the defined benefit pension deficit. This fund closed to new members in 2002 and froze contributions in 2010.

The irony is that the assets of the fund are listed in the note and corporate bonds/gilts have been reduced to zero. Draw your own conclusion of the validity of the IAS19 calculated deficit (which assumes the entire fund is composed of corporate bonds/gilts to derive the present value of the liabilities)! Unfortunately while the deficit may not be real, the current payments being made by the company to reduce the apparent deficit most certainly are real.



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paraic84 17th Nov '17 42 of 49

Norcros (LON:NXR) 's half year results are all the more impressive in the context of other home improvement companies issuing profit warnings. However, it looks like their revenue growth at constant currency is softening slightly:

15/16: +11%
16/17: +10.6%
H1 17/18: +7.2%

Fine for now in the context of a wider slowdown, but something to keep an eye on.

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Effortless Cool 17th Nov '17 43 of 49

In reply to post #242078

Thanks, Illiswilgig - glad you found the Macfarlane (LON:MACF) thread useful.

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Edward John Canham 19th Nov '17 44 of 49

I've been looking at Norcros over the weekend.

It's quoted EPS of 14p is on a Diluted underlying basis - the normal Reported EPS and Normalised EPS are much less at 8.6p and 10p according to Stockopedia interim income statements. I suspect the brokers target is on the same basis (see difference between TTM and 2018E) and explains the low forward PER of 6 - on a normal basis I would estimate 8+.


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simoan 20th Nov '17 45 of 49

In reply to post #241828

It is issuing its own shares at c. 0.4x sales to buy a company on 2.0x sales. Once acquired, Merlyn will then be valued on 0.4x sales. Destroying value.

But that's only one measure of "value". Look at the operating margins of Merlyn which were approx. 20% for 2017 - way in excess of those of the rest of Norcros (LON:NXR).  So it's clearly a company with some pricing power and differentiation in the market they operate which will further increase and diversify earnings. 

In these situations, you either trust management based on their previous acquisitions (which have all been excellent) or you don't. At this point they have my trust based on their track record to date and so I'm happy to take up an excess entitlement, although I don't expect it to get filled.

All the best, Si

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tiswas 20th Nov '17 46 of 49

In reply to post #241943

I exited Wey Education (LON:WEY) this morning having ducked in and out several times successfully over the last 12 months.

It could of course go a lot higher but I fail to see what the moat/barriers to entry are and I have yet to see anything about the management that convinces me they have done anything similar previously.

Clearly the broker/management did not expect the share price to run up to anything like this or they would not have placed the shares at such a large discount.

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Effortless Cool 21st Nov '17 47 of 49

Thanks for the SRT interview, Paul - very interesting.

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Nick Ray 21st Nov '17 48 of 49

In reply to post #242968

Wey Education (LON:WEY)

Wow: 104% one-year volatility according to Stocko! That is not one for people who want to use stop-losses. As Paul says, it is hard to value and that is basically what 104% volatility means.

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simoan 24th Nov '17 49 of 49

In reply to post #242963

I'm happy to take up an excess entitlement, although I don't expect it to get filled.

Well, Happy Days! I didn't expect to get my full excess entitlement in the Norcros (LON:NXR) open offer, but did. I wish I'd asked for lots more because I'm surprised the market is allowing me to flip them for 176p right now. It's not often the market gives you a quick and very easy 2%+ return.

All the best, Si

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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