Small Cap Value Report (Thu 19 Oct 2017) - ZYT, IRV, GAW, TSTL, OMG

18th Oct '17 by Paul Scott

98 comments 27537 reads

Good morning, it's Paul here.

This is a placeholder article, for readers to post your comments & reader requests (small caps please!) from 7am. Then I will be updating the article throughout the morning & early afternoon.

Good morning properly! Thanks for your comments posted so far today. I'll have a look through those in a moment, and make a list of the small cap shares that readers want me to look at. I see that Interserve (LON:IRV) has dropped 31% on another profit warning, so that's already on my list of things to look at.

Here's the link to yesterday's report, in case you missed my afternoon updates on Foxtons (LON:FOXT) and Flybe (LON:FLYB) .

Zytronic (LON:ZYT)

Share price: 577.5p (down 4.2% today)
No. shares: 16.0m
Market cap: £92.4m

Trading update - this is a pre-close update for the year ended 30 Sep 2017.

Zytronic is a UK manufacturer of bespoke & innovative touch screens, for e.g. cashpoint, gaming, and vending machines.

Revenues have continued to show good progress over the prior period, and results are expected to be in line with market expectations.

Sounds alright to me. So why has the share price dropped 4.2% today? It should be emphasised that only 23,763 shares have traded so far today (although there could be more trades reported later - as bigger transactions are reported later). So the immediate share price reaction to news on lots of small caps is often just a knee-jerk reaction from small traders, who are notoriously fickle!

The other thing that strikes me, is that I wonder whether in line with expectations updates are enough, now that many shares have re-rated onto higher PERs?

As you can see from the usual Stockopedia graphics below, Zytronic is a good quality company, but a PER of 20 is historically high for this share;

There's a really neat feature on Stockopedia whereby you can look back at historic StockReports for any company, by pressing the "Print" button, which then calls up a drop-down menu, allowing you to select any previous month's StockReport. This is…

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timarr

20th Oct '17

Hi PP

That was true but as we can see from the recent commentary it's no longer the case - they are very focused on their core customers.

Even in the lean times the FCF in the business was great. It a company generates cash then it can fix its problems, no matter how idiotic the current management. Fixing the basic store profitability and re-focusing on their core customers means that the operational gearing drops straight through - the cost base is pretty fixed, so earnings drop through to the bottom line and most of that accrues to the shareholders.

Don't get me wrong - the business looks fully priced at the current level, probably a bit over-priced and the big question is whether the current levels of profitability can be sustained - although the trading statement suggests they can. But even with those concerns the underlying characteristics are ones I like in a business. As Buffet once said - you want a business that can be run by an idiot because eventually it will be.

timarr

PortsmouthPirate

On the plus side, the idiot in question is gone! Maybe I'm being too harsh on Kirby. He did an awful lot of good for the business but I feel he lost his way a bit. Rountree seems to be doing everything right at the moment and I'm in full support of him.
I agree with you re the profitability, excellent returns on capital etc... but as the share price performance prior to the last year or so proves, these qualities by themselves are not enough to buy into a business in good faith. They are the perfect place to start when screening for quality companies, but then I spend an awful lot of time on the qualitative side. It took ten years for the share price to recover from the crash in 2005... I concede that the company was paying some nice dividends, but I'm glad I wasn't a shareholder during that volatile period.
I still hold fears over 3D printing in the future, but I've got a lot of work to do and I REALLY don't want to open that can of worms now :D perhaps I'll get to it tomorrow or Sunday.
Best,
Portsmouth Pirate

TheArb

21st Oct '17

I've always been curious of how one-man stores deal with holidays, illness and hangovers. Or is it not important if the store is closed for the odd day?

They are typically closed Monday and Tuesday, I believe, so gamers can visit on the weeeknds. Sick days are probably just closed, whereas I presume holidays are scheduled with HQ who provide temporary staff cover.. it is not ideal.

Weasel

23rd Oct '17

Fantastic post, cheers!

Cockerhoop

24th Oct '17

Abtan,

Whilst I agree they didn't say much (GAW style), the house brokers 2018 upgrade from 99p to £1.61 via £1.37 say everything you need to know imo.

abtan

Hi Cockerhoop.

I don't really look at broker forecasts (unless they're going down); they never served me well in the past.

GL to all Games Workshop (LON:GAW) holders.

A

Each to their own but Peel Hunt will have been assured that the company are happy with that forecast level of EPS and since Kevin has been CEO those forecasts have generally proven very conservative.

For example last winter 2017 F/C's
Oct 16 PH 40p
Nov 16 PH 45p
Dec 16 PH 58p
Feb 17 PH 68p
Jun 17 PH 92p they ended up doing 93.4p)
So all last winter Peel Hunt were consistently conservative! They may have changed tack and become super aggressive in their targets but I somewhat doubt Kevin would allow it.

25th Oct '17

I didn't think that analysts checked with companies to make sure all were in agreement with forecasts? My understanding was that analysts have as much information as we do and aren't even allowed talk to the brokers. Irrespective, I still remain very wary of all forecasts; I'm sure PH have got it wrong in the past.

Another controversial comment coming up (am I the only one with some scepticism of £GAW?) - for me the jury is still out on the CEO.

The following had zero impact on my decision to sell (indeed I held for a long time after) but his use of the first person in the last annual report was somewhat dictatorial eg "I have put in place a flat structure: the people with senior responsibility who make all of the big decisions report directly to me. My team is...."

He seemed to take credit for a lot, and cocky people, sooner or later, start to piss people off. Of course I'm probably reading too much into it as I've never met him and he could be quite affable. And that's not to say he's bad at what he does, but he has been on the board for a decade now (CFO + COO + now CEO), so why the sudden improvement? Is it really all down to him? And does it really matter if it's not?

cig

You are certainly not the only sceptic. My view is that the risk the hobby runs out of fashion or morphs into something where they are not needed (e.g. open communities) is too high for the price.

FREng

It works on my Mac, but it's important to leave a space after the ticker. Any puctuation there will stop the generation of a live link.

Aislabie

Thanks FREng I think it is working ok now, much appreciated. Thanks also to Lion Tamer

Richard Goodwin

I'm no expert but most of Games Workshop (LON:GAW) profit comes from UK based manufacturing and export so they will have benefited from exchange rates on a largely fixed cost base.

26th Oct '17

Abtan,

The house broker notes will certainly have been run past the company to ensure they are happy with any assumptions used and are comfortable with the numbers.

I have met Kevin Rountree and found him to be extremely modest. I think what he has achieved is to end the 'here's our great product - buy it or f@#k off' mentality of the previous management which wound up the diehard players/collectors. The investment in social media content and proper marketing is also paying dividends. They are really looking to embrace the customer now.
He has also been able to remove some staff that were considered to be resistant to change, ie producing different model construction for the far east for example.

Richard,
They handily breakout the sales growth which was 34% or 21% in constant currency for 2017 over 2016.

Morning Cockerhoop

A genuine query for either yourself, or anyone reading, on how forecasts are made/approved/published.

A colleague of mine works on the IR team for a reputable UK listed company (all UK-based readers will know the company in question).

Here are snippets of our recent conversation discussing brokers vs equity analysts:

"...the broking side don't publish forecasts, just the equity analysts...the broking side have too much insider knowledge to publish anything...there are tight compliance rules so they don't speak to each other...they can't even email each other...equity analysts of the house broker don't get permission to publish anything, they are independent and don't have access to non-public information anyway..."

You seem quite confident in your statement about running published numbers past a company, even though the comments above says that equity analysts who do publish forecasts don't speak with the respective company. I'm not saying you're wrong; I'm genuinely trying to understand how your view differs to someone who works in the area. Am I misunderstanding something?

Thoughts from anyone appreciated.

A

Samsgrandad

5th Nov '17

Thanks for the report Paul. Sorry to be late in adding to it, I hope to answer your question about what makes Tristel (LON:TSTL) unique.

I'm pretty certain that Tristel (LON:TSTL) IP is in the production on demand of ClO2 by patented means such as a trigger spray which has 2 separate parts for the pre-cursor chemicals and which mix as the trigger is used, or a wipe in a sachet soaked in one chemical which is activated with a spray of another chemical from an aerosol. I have seen their products demonstrated on YouTube where there are many videos the most useful one I think is -

https://www.youtube.com/watch?v=G46JoFloZ5s

This perfectly demonstrates the difference between a solution which takes 7mins and requires an expensive machine to the Tristel method which takes much less time and also is portable and requires no expensive capital equipment ( important in an outpatient clinic where throughput is a factor and where a clinic could also be in an isolated third world rural location )

Effortless Cool

I used to be CFO of a FTSE-250 company. I was surprised when I came into that role how reliant the analysts were on "feedback" from the company before they published their figures. Most, including the house broker, would just run their key projections past me to confirm they were broadly in line with management expectations. Some went so far as to send their model to me and ask for comment. A commendable minority would just have a management meeting and then come up with their own figures without reference back.

Hi EC

Many thanks for your insight. Very interesting!

So in an attempt to put all the pieces together here is my understanding of how the system works, based on your experience, and my colleague who works in a FTSE-listed IR team (mentioned in a previous post):

The Broking/Advisory team at the House Broker communicate directly with a company, but cannot publish forecasts because they have too much insider knowledge
The Research Analysts team at the House Broker cannot communicate with their own Broking/Advisory team, BUT can speak directly with a company (such as a CFO) in order to publish more accurate forecasts.

Something just doesn't seem right there, but again, maybe I'm missing something. Is my understanding correct?

Thanks

The broking/advisory team are salesmen for the most part, and contact is generally limited. Insider knowledge, such as it is, comes from reviewing price-sensitive RNSs before they are issued and reviewing any information prepared to support a fund-raising. The latter is their main interest, since that is where they make most of their money. They also accompany directors to institutional meetings to make sure you don't say anything off-piste.

Small Cap Value Report (Thu 19 Oct 2017) - ZYT, IRV, GAW, TSTL, OMG

Zytronic (LON:ZYT)

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Paul Scott

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