Small Cap Value Report (Thu 31 Oct 2019) - CPR, FOXT, PHD

30th Oct '19 by Paul Scott

27 comments 6590 reads

Good morning, it's Paul here.

This report is earlier & shorter than Mon-Wed reports. That's because I'm flying out to Malta at lunchtime, for a cheap, end of season break. Am taking my laptop with me, so I'll write Friday's report as usual, just from abroad.

Estimated time of completion: 10 am. Update at 09:29 - today's report is now finished. I managed to cover everything of interest, as there's not much small caps trading/results news today.

Agenda - it's a quiet day for news, thank goodness;

Carpetright (LON:CPR) - possible offer

Foxtons (LON:FOXT) - trading statement

Proactis Holdings (LON:PHD) - results

Carpetright (LON:CPR)

Share price: 9.12p (pre market open)
No. shares: 303.8m
Market cap: £27.7m

Refinancing, possible offer, and trading update

This carpet retailer did a CVA, to dispose of its problem leases, and has been propped up financially for some time by its major shareholders Meditor European Master Fund. Without Meditor's large financial support, Carpetright would have almost certainly gone bust. Note that Meditor bailed out the banks, by buying them out in Aug 2019. It's obvious now that Meditor made a bad mistake supporting Carpetright - a classic investing error of repeatedly throwing good money after bad. I know that feeling well, albeit on a rather smaller scale!

Funding requirement - today's announcement says that Carpetright needs £80m in funding;

The Board believes that approximately £80 million is needed for the Company to (i) repay the Debt Facilities; (ii) meet the Company's ongoing working capital requirements; and (iii) provide the Company with the necessary growth capital to execute its strategy as set out below.

Funding options - the company has explored other funding options, but it sounds as if Meditor is the only game in town.

Possible offer - Meditor has sounded out other institutional shareholders, to see if they would accept a 5p cash offer for the whole company. This makes sense, as Carpetright is totally reliant on Meditor's existing financial backing, that they might as well buy the whole lot. The intention is then to convert debt into equity, and presumably lick their wounds in private, rather than on the public market.

Indications of support for a 5p bid have been received from holders of 24.0% of the shares, plus Meditor's existing c.30% holding, means that they're already more…

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Trident

31st Oct '19

Proactis Holdings (LON:PHD)

The solid core of the business is UK based, with a new acquisition in the Netherlands performing well in an earn-out period.

Undoubtedly the large US acquisition (reverse takeover) and oversight of that by previous US CEO Hamp has been disastrous, and de-focused the business, and now of course is dragging in lots of management time trying to sort it.

The new UK based CEO is very capable but he has a lot on his hands. The original excitement over what is now called bePayed product, which is an invoice finance function, has somewhat palled in the management promotion of the opportunities, and the lack of delivery of results. This is a great shame, because in theory it could be highly profitable, but it is a financial product, and I don't know if on the ground who sells it, and whether it is easy to sell. They haven't really built up a reference base despite what seems like three- four years of talking about it.

I would imagine for a purchaser they would currently struggle to see a clear opportunity. The Group is paying down debts slowly which is good, so that does not offer much of an opportunity for a cash rich buyer to re-finance and add much value at the bottom. So I would estimate whilst it is something of a transition mode of restructuring, an acquirer is going to struggle to see clear advantages.

I expect another couple of years of adjustment, and it is to be hoped that customer don't lose faith in the meantime,

Paul Scott

Yes I'd love to, that would be great, many thanks! I'm actually staying 3 nights on a 42' yacht, moored directly opposite the RMYC! I thought it looked a fun, unusual place to stay, on AirBnB. So Sunday lunch with you would be awesome. Let's discuss logistics on a private message or email.

Hi Desanj,

I had a very quick skim of the results from Smartspace Software (LON:SMRT) but decided not to cover it, as it looks heavily loss-making, £4m in 6 months, on only £3m revenues.

Can you explain why it's of interest? I see there is a placing & acquisition. I don't mind looking at it tomorrow, if there's a good reason to spend time looking at it.

Regards, Paul.

I'm just killing a bit of time at Bou'mth Airport, waiting for my flight to Malta to be called. Flying from smaller airports is so relaxing - short queues, apparently no delays, and it's quiet. So I've had the obligatory full english, and a pint, before boarding.

Had to laugh, I was beckoned over by two "Counter-terrorism Police", who asked me lots of questions, and input the answers into an App on a smartphone. They looked a bit like Hale & Pace. Curious, I couldn't help asking them, "Do I look dodgy, or something?". One replied not at all, they just check people routinely. His colleague then quipped, "Speak for yourself, I thought he looked really shifty!"

doug2500

Hi Paul, enjoy your break.

I'd be very interested in your view on small cap liquidity, specifically the point that if you can't get an electronic quote for the EMS is this a red flag in itself? If you can't get a quote to buy the EMS in a quiet time would you ever be able to get out at a bad time? Or are there other temporary reasons for not being able to get a quote?

I have previously traded a few thousand shares in K3C but today I can't even get a quote for 1500.

Of course the plus point is that if demand spikes and it's illiquid the price could ramp up quite quickly. It's a two way street that one!

davidallen77

Lots of sos adverts on itv lately dr Martin last night and this morning, have a good break, bou airport so quiet this time of year easy to play from drop of charge a joke!

LongValue

Strongly agree with the final paragraph. It strikes me that AIM not only has a global market and but also has some major advantages - the time zone, the English language, excellent communications and a first-rate legal system. Worldwide, there must be thousands of profitable and well-managed companies that would welcome a London listing. Does anyone have a list of these companies? Is there an orchestrated sales campaign (I say sales, not marketing but sales)? Does anyone physically communicate with the CEOs and FDs of these companies regularly and explain the benefits of a listing on AIM?

SImply a broad observation but London's secondary stock market needs to do more to attract successful and growing companies on a global level. At the same time, it needs to refuse entry to dubious operators. How listing a loss-making resource stock on London's AIM market benefits anyone but the promoters, managers and hangers-on is beyond me. There are resource companies that will never make any money. They simply raise money from British investors and then re-distribute this wealth to a very tiny number of already wealthy people. They pay no taxes in the UK because they make no money. Should they ever get round to digging a hole in the ground, the equipment will probably come from China and their staff on the ground will pay local taxes. If these are foreign aid projects then maybe they should be promoted as such. If they are simply reverse Robin Hood projects then, again, make investors aware.

Just how ludicrous this situation has become hit home to me recently when I asked someone what AIM stocks he would recommend. His immediate response was to tell me that the AIM market is full of junk. The person concerned was the Chairman of an AIM-listed company and this was at a presentation for his company.

Aislabie

By long established tradition nobody except me seems to take the slightest notice of Orchard Funding (LON:ORCH) which reported today. ( I accept that as a finance stock it is not covered by Paul and Graham’s remit)
Being a “steady eddie” type of stock with gentle growth and a 4% yield for the patient it may not attract those in need of a fizzy micro cap.
But I like it, it is in a large and growing market ( financing insurance premiums and professional fees) has a long track record of sound lending policy and a straightforward reporting style with no “EBITDA” in sight. Companies that address Profit after Tax without any ifs and buts are rarer than they should be.
They’re on again with a banking licence application and, sensibly, are not committing to a date, but it should help bring funding costs down. With a market cap of £16million, a p/e of 12 and an eps growth of 18% not much has to go right for me to be joined by other interested parties (I hope). Zero trades so far today!

Desanj

Thanks Paul. Have a great holiday

maxwright

Hi Paul

Have you noticed all the staff at Bournemouth are the same! They check you in, then change and put uniforms on to be the security team, then change again to serve you in the Duty Free shop, then they go and cook your breakfast!

Lastly, the same ones are there to take your boarding pass as you embark.

Then they all go home until tomorrow, when it will start again, for yet another flight!

I live here so know it well!

Have a great trip!!

davidelliott52

Foxtons (LON:FOXT) - impact of the tenant fee ban on our lettings business... - I find it unbelievable how a clear as day scam is such an integral part of their business plan.

fwyburd

Thanks for pointing Orchard Funding (LON:ORCH) out here. I had a quick look and certainly think they look interesting. However, I couldn't get passed the fact that in their last annual report the CEO earns a basic salary of £250,000 and the board costs in total over £400K. That's nearly a quarter of the total profit after tax (£1.63m). So I wonder, for who's benefit do they exist?

By contrast, Mike Creedon at Scientific Digital Imaging (LON:SDI) earns a basic salary of £146,000.

cheers
Francis

derekwb

Great Paul

My email is derekwbroadley@gmail.com - drop me a line - any time for me

James Weston

Your last sentence is absolutely terrifying!!

Samsgrandad

really jealous Paul. On this day in 1983, I was having a seaside picnic at Meliha Bay for my sons 10th birthday. I worked in Valetta for 6 weeks. Fascinating country lots of history if that interests you.

tagware

Broker/Banks - fees being paid in company shares being floated would concentrate their minds. With a lock up of 5 years before they could dump shares. I expect we wouldn't get any takers. However, it would clean up the listings. :o)

On the face of it I would agree that the Ravi and the Board take a bunch of money at Orchard Funding (LON:ORCH) but I look at it slightly differently.
Rightly or wrongly City salaries do not show that £250k is outrageously out of line for a CEO and entrepreneur of a successful enterprise. I am sure that Ravi is also entirely aware that with 54% of the company his shareholding is going to be the decider of his wealth.
Over at Scientific Digital Imaging (LON:SDI) (which I am also happy to hold) Mike Creedon is now up to £205k and in addition upping his share options from 1.385mm to 1.872mm
So I like both companies: the one that produces £1.6mm from 18 employees and the one that produces £1.9mm from 148 employees!

Mind the traffic, they drive on the sunny side of the street and go around roundabouts whichever way is quicker. I believe the word anarchic is derived from the Maltese word for normal.

Ben1

Paul, any chance you could swing back at NXT as you mentioned yesterday?

mercury61

1st Nov '19

Orchard Funding (LON:ORCH) spread is about 12% too...

Small Cap Value Report (Thu 31 Oct 2019) - CPR, FOXT, PHD

Carpetright (LON:CPR)

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Paul Scott

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