Small Cap Value Report (Tue 13 Mar 2018) - FCCN, TAST, TCM

12th Mar '18 by Paul Scott

64 comments 17637 reads

Good morning, it's Paul here.

I'm trying out a slightly different format today, because I installed some voice recognition software called Dragon, and am dictating this into a microphone. The reason being RSI all the way up my right arm, which should be alleviated by reduced use of keyboard & mouse.

Satellite Solutions Worldwide (SAT), announces that it is part of a £2.1 million grant funded project to explore how to provide 5G wireless broadband. It doesn't sound financially significant, being EBITDA neutral this financial year, and positive EBITDA of £100,000 in year two.But it does increase their potential market penetration from 70% to 90% of customers, which sounds good longer term.

The first set of company results for y/e 31 Jan 2018 today which have caught my eye are those from...

French Connection (LON:FCCN)

Share price: 37.3p (up 10.7% today)
No. shares: 96.3m
Market cap: £35.9m

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

Preliminary results - for the year ended 31 Jan 2018.

The share price rose 14% yesterday and I wondered why. So it might have been some insider dealing, or just speculative buyers hoping that the results will be good. Let's have a look.

Wow, this actually looks rather exciting! Bear in mind that most investors have completely written off this company years ago, expectations are extremely low.

Revenue is up 0.5% to £154 million, despite closing 11 loss-making shops
like-for-like sales up 0.8% for the year (not bad at all, many retailers have struggled to achieve positive LFLs)
wholesale revenue up 8.6%, very good
underlying operating loss reduced to -£0.6m, compared with a -£3.7m loss last year (note that in H1 underlying operating loss was -£5.7m. So the company made a profit of £5.1m in H2 - not bad going, but the usual seasonality)

The divisional split of performance is even more striking than in prior years;

Wholesale division made £12.5 million profit which is up 25% on last year
Licensing income made a profit of £6.3 million, flat against last year
But the retail division lost -£8.3 million, a terrible result, but a bit of an improvement against the -£9.8 million loss last year.

If only they could properly turn around the retail division, then this would be a nicely profitable business.

Group overheads of £10.4 million looks extremely high, and is…

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ACounsell

13th Mar '18

Agree entirely re Computacenter (LON:CCC) - see my reply to ls2g08, post #18 for my perspective on the results

Elric Langton

Isn't it normal for a company to fall post divi c value of the divi? It's usually the divi chasers exiting and and shifgting their wonga to a new divi play.

Looks like I wasted my time re Computacenter (LON:CCC) analysis as have just discovered that my stop loss (-15% from share high since purchase 21/12/17) on the AJ Bell Platform was activated this morning at 8:06 at a price of £10.0672 which appears to be someway below the prevailing market price! This is causing me to question the whole issue of stop losses based on share price volatility given that the Stockopedia risk style metric for Computacenter (LON:CCC) was 'Balanced' indicating a stock with relatively low volatility. A -15% stop loss wasn't enough for Computacenter (LON:CCC) or another of my previous holdings Headlam (LON:HEAD) another 'Balanced' stock - back to the drawing board!

matylda

Yu (LON:YU.) - I don't hold.

But with Cash in the bank what's the point of this ? Bookbuild - Anyone with an insight into this kind of placing, most welcome.

ricky65

Paul, I hope you're having an easier time writing these reports with the voice recognition software. Hope your RSI gets better.

Thunderball

You have my sympathy, I am very cynical of stop losses. I had some ‘handbrake’ stop losses set at -30% and remember getting bumped out of 32Red for a real world 25% loss one day for basically no reason, a spike, that was momentary, minutes later usual service was presumed and the day price barely moved. I note the Naked Trader has a cynical outlook on them too. AIM is a risky place for stop losses.

Gromley

Bookbuild - Anyone with an insight into this kind of placing, most welcome.

At first sight I thought it was the same as the one IQE did in November to which gus 1065 gave some useful insight, but on reading it this one is slightly different.

The announcement says [selective cut]

Placing to raise £12.0 million by way of the Bookbuild which will open with immediate effect following this Announcement;
·      Price per Placing Share shall not be less than £10.0 and will be determined through the Bookbuild;
·      Shore Capital is acting as Sole Bookrunner in connection with the Placing;
·      The Placing is conditional on, inter alia, Admission (defined below) which is expected to occur on 21 March 2018

My **non-expert** reading of this therefore is that :

Shore Capital will phone round the likely candidates (institutions) and get a view of how many shares they would subscribe to at prices of £10 / share or above.
Once they have collated this information they will do the sums and work out the price at which they can raise the £12m by issuing the smallest number of shares - or put another way, the highest price at which there is enough demand to raise the £12m.
I presume that everyone will pay the same price, rather than this being like a Dutch auction.

A couple of thoughts that occur to me on this.

(1) Unless all of the arrangements have already been done on the QT there is a possibility for Private Investors "of size" to call up Shore Capital and make an offer - whether they will pick up the phone to you is another matter.

and

(2) Again if this is not already pre-arranged, there is imho a serious risk of collusion between institutions agreeing collectively not to offer to buy many shares at a higher valuation.

If I were right on this second point then I would expect the placing price to come in very close to the minimum £10 / share figure.

I wonder if Shore Capital are incentivised to get the price as high as possible?

Thanks for taking the time to pen those insights, much appreciated.

I wonder why though they wish to do it - I may be missing something here or just being daft, most likely both.

sharw

You have just reminded me why I avoid programmed stop losses. I seem to remember someone once asking if they could be made to exclude the volatile 8 to 8 30 period!

However, you say "..at 8:06 at a price of £10.0672 which appears to be someway below the prevailing market price!". Not so - if you look at the trades for 08 06 (around 3 dozen) you will see that in the one second period 08 06 06 the bid moved from 1006 to 1010 as 11 trades took place and one at 1006.39 was lower than yours!

I have been caught out in the other direction in the past - buying something with good results at open as the price moved up only to find that the market changed its mind later in the day and sent it downwards giving a similar 'back to the drawing board' moment to yours.

Paul Scott

14th Mar '18

Hi Ben1,

Yes, I had a quick look at Indigovision (LON:IND) results over the weekend.

They look poor, obviously.

I'm concerned that the cash balance has reduced, and it seems to have too much inventories & debtors, but not too different to last year.

There's been a change of management.. This company has always had great tech, but crap management. It could have made me very, very rich, but sadly didn't.

I've mentally moved on, as we need our mental energy to inject into our best ideas, like BOO and G4M.

I'll keep an eye on it though, maybe the new CEO could get things moving? The last 2 were oddballs, at best. My problem is, I befriend useless CEOs, which then clouds my judgement about getting rid of them.

Regards, Paul.

Paul, I hope you're having an easier time writing these reports with the voice recognition software. Hope your RSI gets better.

Thanks ricky65

The voice recog software just gives a chance to let go of the mouse, sit back, and dictate, whilst letting the muscles relax. So far, so good! My right hand is like a claw, but it's improving. CockneyRebel gave me the idea, and it's a good one. The software adapts to you, and improves.

First World problems!

Seeing my cousin last weekend, just having come out of a coma, after a massive stroke, really put things into perspective. All my problems are trivial, and I very much focused on that today, when the sun came out & it was time for a cup of tea on the terrace. I'm hoping to see Penny again in April, and with any luck, she might be able to speak a little. I still see her as a little girl of 8, the youngest of us 5, throwing the Monopoly board up in the air, in frustration & hilarity, but now in a brain injury unit. Life can be so unfair.

Love, Paul.

Hi Asagi,

Yup, you picked up on a very good point, about the TAST disposals.

I've done an extra section on that above (clearly marked with EDIT, and then end of EDIT, as I don't like changing the original reports).

So , yes, my original doubts about sovency in 2018 were wrong.
That said, I reckon they're probably selling off profitable sites, to raise cash. They merge comments on loss-making sites, and disposals. It's not clear which are which. You wouldn't get £2.7m for a loss-making site, that must be one of their top-performing sites.

So cash crisis probably deferred, whilst best sites are being sold off, is my view.

Tempting to have a dabble here, but bottom line, they operate pretty rubbish formats. Selling off the good sites to pay off the bank. I think the Kayes are pretty clueless now - competition has overtaken them by miles.

Then again, £7m mkt cap is dirt cheap, so with bank debt less of an issue, might be a good punt. Dunno. What do you think??

PP.

Ben1

Paul

Thanks for your thoughts on IND, I didn't know if you still had an interest or had given up on them. I still have a very small holding having sold most a while ago. You're right probably should move on completely.

Don't be hard on yourself, getting to know CEO's can of course be very useful.

Really appreciate the effort you put in to these reports, and am profiting from you bringing the likes of BOO and G4M to my attention (to mention just a couple), and from the general education.

davetparkes

NOTHING is more important than your health.

Many thanks for the very helpful ideas about reducing my RSI.
Sometimes the simplest ideas are the best – I've switched my mouse over from right-hand to left-hand. I think it's the mouse more than typing which is causing my RSI, so hopefully this should help.

Thanks again, Paul.

HHR

15th Mar '18

The fact that it is now 10 weeks since year end and Telit Communications (LON:TCM) still doesn't know what it's FY revenue is suggests they have some way to go before they achieve Richard Kilsby's target of "the highest standards of corporate governance and transparency".
The poor Q4 2018 revenue compared to heroic Q4 2017 suggests to me that the shorters may have had a point when they accused tcm of stuffing inventory into some friendly dealers to achieve its 2017 numbers, although in fairness the late volte certifications could also be a partial explanation for the poor finish to the year.
On the other hand, over the last 10 years tcm has built a world leading business in a high growth market with little equity issuance and manageable debt.

Sorry, got my 2016's 17s and 18s muddled up - maybe I should apply for a job in tcm's finance depatment......

The Phoenix

15th Jun '18

Hi Paul,

Just noted FCCN off a bit last few days, no trading statements due for a bit and volume around average just wondered if any thoughts normal market movement or something else ?

Cheers

StudyingHard

This is an amateur opinion, would love to see more experienced investors respond. But this is what I think (I own a small stake in FCCN myself purchased at 62p).

I'd noticed FCCN had peaked a lot when I bought. But given that this was a long term investment, and that it's tough to predict peaks and downturns I bought the stock.

Ever since it has been gradually going down. It's mostly been at negative 10-15% from my purchase price. Moving down and up again, down and up again. Today it seems to have broken down quite a bit.

To me, it looks a lot like people are getting cold feet. I think a lot of investors bought this stock on Paul's advice rather than their own research and as such are panic selling. Keep in mind though, for every sale, there is a buyer. Dumb money out, smart money in? I am amateur money myself so I don't know. But I hope so.

I suspect that now with this latest drop we'll get a gradual climb back up as those with steadier nerves see an opportunity to load up more in what to me still seems like a good long term hold.

But honestly, this is an amateur's "gut feeling". For me this is an experiment. I have a few small positions, of which FCCN is one because I read over Pauls research and it seemed a very obvious recovery case long term. I actully figured it might drop 10-20% for a while, given that I bought at a peak. Time will tell if it recovers. For me this is a long term experimental position to learn by experience so I'm kind of pleased with this drop in a perverse way. All my other positions are doing really well and FCCN is proving to be a very good reality check for me.

My hope is that by keeping cool and holding, I will get a good story to tell about the stock that plunged 21% right after I bought it and then got bought out and gave me a 100% gain in one year. Alternately It'll be a valuable lesson that even the obvious recovery candidate is a gamble.

Then again, what isn't a gamble. Go look at the following Norwegian stocks for two examples: VEI - A blue chip dividend machine that just gave out a profit warning. Someone screwed up a cost variable and half a billion NOK has been written off.

SBO - A stock touted earlier this year by one of Norway's permier money men as "free money" (and he was very accurate in his prediction, this was said in January) which just plunged after the CEO was excused by the board with zero explanation as to why. A 98% stock rank.

A bit of a long amateur comment, but for me FCCN's recent drop is a truly interesting case study in the volatility of even "sure things" and I for one look forward to seeing where it goes. Which of course is easy to say when your position is as small as mine.

Thanks for the reply looks like a large trade went through at the end of day but no idea if it was a buy or sell or delayed trade worked over a few days. Market hasn't had a good day so could also be stop losses getting hit, i've checked news wires and can't see any negative news.

Small Cap Value Report (Tue 13 Mar 2018) - FCCN, TAST, TCM

French Connection (LON:FCCN)

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Paul Scott

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