Small Cap Value Report (Thu 26 Apr 2018) - SNX, BWNG

Good  morning!! It's Paul here, reporting from the Derby Conference Centre, at the Mello 2018 investor show!

Graham and I have been cajoled into doing a SCVR Live, on stage here at 9am, today and tomorrow. However, I thought we need to look after everyone else that isn't at Derby too. So here are some comments on this morning's RNS.

It's now 7:07, and guess what? The RNS feed is broken again. Great, just great! In that case, I'll nip downstairs and have a Full English, and hopefully the news feed will be working again soon.

Very nice that was too. OK, the news feed is working now. Some quick comments before I go on stage;

Synectics (LON:SNX)

Share price: 200p (up 5.3% at 08:24)
No. shares: 17.8m
Market cap: £35.6m

Trading update

Synectics plc (AIM: SNX), a leader in the design, integration, control and management of advanced surveillance technology and networked security systems, is holding its Annual General Meeting at 11.00am today, at which the Chairman, David Coghlan, will make the following statement.

The company has a 30 November financial year end.

The first paragraph sounds ominous - note the word I have bolded;

"In the first four months of this financial year, the trends we see in the various end market sectors Synectics serves have remained largely as set out in last year's Annual Report ...

This sounds like the company is warming us up for a profit warning.

More detail is given, of different sectors, some up, some down. The suspense is lifted with a reassuring final sentence;

"Based on Synectics' current order book and pipeline of anticipated new business, the Board expects that the Company will announce full year results in line with market expectations."

Stockopedia is showing consensus forecast of 14.6p EPS, so at the current share price of 200p, I make that a PER of 13.7, which sounds about right for this type of business. The business model here suffers from tending to have lumpy contracts, so it should really be on a below-average PER rating.

My opinion - this share doesn't interest me, as it's difficult to see much upside, unless the order book substantially increases. That could happen, as historically the company did well from the oil & gas sector, which is now showing signs of life again;

"In the Oil & Gas market, there are now signs of renewed commitment to capital investment by certain producers, an area which has been severely depressed since 2014.

This will still take some time to filter through to orders for Synectics' market-leading specialist security solutions, but we are increasingly optimistic for future growth in this area.

That has interesting read-across for other companies supplying the oil & gas sector. Maybe now could be a good time to revisit oil services company shares?

I'm not convinced that SNX has any usp. There are so many similar companies in the security/CCTV space. So overall, it's not for me.

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N Brown (LON:BWNG)

Share price: 204p (up 5% today, at 12:48)
No. shares: 283.4m
Market cap: £578.1m

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

Full year results - for the 52 weeks ended 3 March 2018.

This group calls itself;

N Brown Group Plc, the online, specialist fit, fashion retailer ...

The interesting thing here, is that this is by far the cheapest (on a PER basis) online retailer that I can find. It has an unusual business model, in that a lot of its profit comes from financial services income - offering customers extended credit. That does bring with it a degree of regulatory risk, in this age of so-called mis-selling, etc.

This share has been caught in the sector-wide down-draught, with the share price having dropped considerably since last autumn. I think that's presenting a buying opportunity in this case, hence why I hold the share.

Some figures;

Adjusted EPS of 23.06p is ahead of the 22.0p consensus forecast shown on Stockopedia. This gives a PER of only 8.8 - a bit different to Asos or BooHoo! Although to be fair, it's not growing at an exciting pace, unlike those two.

Dividends - the payout of 14.23p has been static for several years now, and is covered 1.62 times - which seems adequate, but is a bit lower than most companies. The yield is outstanding, at 7.0% - assuming that level of payout can be continued.

Balance sheet - this is interesting, because it is dominated by the huge receivables book (money owed to the company by its retail customers) of £598.8m. A key consideration is what provisions the company has made against bad and doubtful debts, and whether that is adequate? The auditors should check that thoroughly.

On the other side of things, the company has net debt of £346.8m. Although as you can see, the money owed to the group, is much larger than what it owes to its banks. Therefore I consider, for valuation purposes, that the whole thing is effectively debt-free.

Outlook - sounds OK overall;

"March was a challenging month for fashion retail, however, trade is improving through April, and at this early stage in the new financial year our overall expectations are unchanged."

My opinion - I don't have time today to plough through all the detailed figures & narrative.

However, this seems to me a strikingly cheap valuation for a business that is growing, and seems to be predominantly online. Yet the valuation seems to be more appropriate for a declining bricks & mortar business. I can't work that out!

The chart looks like a company which has warned on profits, but it hasn't. Actually it has produced results which are in line with expectations. Very odd.

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I'll have to leave it there for today, as the Financial Times want to interview me next - how I'm going up in the world, lol!!!

I've had a good chat with the effervescent CEO of SRT Marine Systems (LON:SRT) here at Mello. I see his share price has risen nicely today, so he must be striking the right tone with people here in Derby.

Best wishes, Paul.