Small Cap Value Report (Tue 20 Nov 2018) - KCOM, AO., TUNE, PLUS

Tuesday, Nov 20 2018 by

Good morning, it's Paul here.

To get you started today, I've belatedly written last Thursday's report, which is here. It covers 3 interesting shares;

Norcros (LON:NXR)
Card Factory (LON:CARD)
Swallowfield (LON:SWL)

Mello London - next week - 26-27 November

It's almost time for the next Mello investor show, run by my friend, renowned investor, David Stredder. Click on the blue title above to visit Mello's website, where tickets are available.

** STOP PRESS!!! ** - David has just messaged me with a £25 discount code for Stockopedia readers: MLStocko25

Many readers here will have been to previous Mello events, and experienced what positive, friendly, and informative events these are. David is highly selective in choosing which companies  and speakers are allowed in to present to investors. So think decent quality companies, not scammers trying to get the gullible to part with their money, as is sometimes the case at some other investor shows.

The schedule of presentations has just been published, here - with some really excellent speakers.

The Stockopedia team will be there - Ed's talk at 2pm on Monday will, I'm sure be a highlight.

I shall be doing the Small Cap Value Report live, at 1pm on Monday. Graham will be doing the SCVR live on Tuesday morning at 9:20 - I refused to do the morning slot! Then at 4pm on Tuesday I'll be doing a talk on small caps - themes & ideas.

We have socialising & poker in the evenings too, so I wonder if Graham and I can make it a SCVR clean sweep again?! (I won the poker tournament at Mello Derby on day 1, and Graham won it on day 2!)

I'm very much looking forward to catching up with many of you at this event. I'm not interested in, and won't be appearing at any other investor shows - to be honest I hate doing talks, as it's incredibly stressful. But the atmosphere at Mello is so warm & supportive, that it's a pleasure to meet up with many investor friends who attend Mello events, and chat about small caps for 2 days!


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KCOM Group PLC is engaged in providing information technology (IT) and communications services. The Company's segments include Enterprise, Hull and East Yorkshire and National Network Services. The Enterprise segment is engaged in providing IT and integration services, including cloud-based infrastructure and contact and collaboration solutions, to the United Kingdom-based public and private sector organizations. The Hull and East Yorkshire segment is engaged in providing communication services, including broadband and telephony services for consumers and businesses within Hull and East Yorkshire. The National Network Services segment is engaged in providing connectivity-based services to national organizations in both direct and indirect market. more »

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AO World Plc is an online retailer of electrical products. The Company operates through two segments: online retailing of domestic appliances to customers in the UK, and online retailing of domestic appliances to customers in Europe (excluding the United Kingdom). The Company offers over 5,500 stock keeping units (SKUs) in the United Kingdom, approximately 2,000 in Germany and over 600 in the Netherlands. The Company offers a range of ancillary services, such as customer finance options, an unpack and recycle service, product care packs, and disposal and connection services. In the United Kingdom, the Company operates in approximately three categories: Major Domestic Appliances (MDA), Small Domestic Appliances (SDA) and Audio Visual (AV). The MDA market offers built-in appliances, such as dishwashers. The SDA market comprises small appliances, food preparation and floor care. The AV market includes television, audio, set-top boxes, digital versatile disc (DVD) and Blu-Ray players. more »

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Focusrite Plc is a music and audio products company supplying hardware and software products used by professional and amateur musicians. The Company is engaged in the development, manufacture and marketing of professional audio and electronic music products. It operates through three segments: Focusrite, Novation and Distribution. The Focusrite segment includes the sales of Focusrite branded products. The Novation segment includes the sales of Novation branded products. The Distribution segment includes distribution of third-party brands, including KRK speakers, Ableton, Stanton, Cakewalk and sE Electronics. The Company sells its products in approximately 160 territories and countries around the world. The Company offers Scarlett, which is an audio interface; Blocs Wave application, which is used by musicians to create their own sounds and songs on any iPhone Operating System (iOS) smartphone or tablet, and e-commerce Websites. more »

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

42 Comments on this Article show/hide all

JDW72 20th Nov '18 23 of 42

Yet another positive trading update from PLUS.

There are a couple of key reasons which people don’t necessarily understand why I think they are likely to be the enduring dominating company in their markets.

1. They own the IP and code for their trading platform as opposed to paying a license to a third party. Whilst this delivers obvious bottom line help (licenses are not cheap for their competitors and enables PLUS to compete on price) that’s not the main benefit. Because they own the IP and hence don’t have to pay a per-account fee, when trial accounts are opened, they can leave them open forever instead of restricting them to a month or 3 months which is what others do. PLUS then use push notifications to remind the trial users of opportunities (e.g. during the crypto instability earlier this year) which prompts trial users to deposit funds and become active users. This often happens 10 - 12 months after the initial account was opened and long after competitors would have closed trial accounts due to the costs. Perpetual trial accounts enable free marketing, directly into the hands of customers, at the point when they are most likely to act.

2. They are ultra-conservative about how they calculate customer retention and new customer numbers. I won’t go into the specific details but give an example that a returning customer (let’s say one who traded for a bit then empties their account and didn’t trade for 18 months) is not counted as a new customer (again different to competitors) so their customer numbers and retention are always better than the headline numbers suggest.

I have a long position which I have used the recent weakness to continue to add to.

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FREng 20th Nov '18 24 of 42

In reply to post #420329

I topped up recently too, because the medium term profit at Burford Capital (LON:BUR) should be unaffected by Brexit, Greece or other political turmoil. It surprises me that BUR has a beta as high as 0.88.

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Chrisfarrell21 20th Nov '18 25 of 42

In reply to post #420329

I agree that a principal reason for Burford Capital (LON:BUR) regularly drifting down between results (particularly between August and March) is the six-monthly reporting. If they had been able to come out in the last couple of weeks and give an update (presuming it would be ok to good), then I think this would have supported the price somewhat. As they don't do that, then I think people become nervous and just ditch holdings. This appears to have happened previously in benign market conditions, so my guess is the effect is exaggerated in current conditions.

Equally, it's worth considering that I think a lot of institutions who were in Burford early and made a lot of money (an obvious example being Investec but there are many others), have been selling over the last six-nine months, and that has possibly accelerated in the recent sell-off. It appears to be in a Minervini-type distribution phase now, and how long that lasts is anyone's guess.

If we believe that the recent placing was "well oversubscribed", as Burford Capital (LON:BUR) said it was, then there should be plenty of institutions waiting to buy out the current sellers. If that is correct, then the question is when do those institutions start doing that. Probably not in earnest just yet.

Just my twopenneth.


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Reacher 20th Nov '18 26 of 42

In reply to post #420354

I would highly recommend the recent Capital Markets presentation that is currently available through their website:

I've got through half the 2+ hours and it gives an insight into the business, the market and the competition; they address common investor questions and take you through how the progress of a case looks in the Income Statement and Balance Sheet.

There are a number of presenters from the business.

Be aware, that it is only available for another few days.

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Reacher 20th Nov '18 27 of 42

In reply to post #420259

I thought the Focusrite (LON:TUNE) results looked good - organic revenue growth across both segments and in all geographies, and costs were controlled.

The improvement in gross margin was a result of the strengthening EUR:GBP FX rate and closer management of customer discounts. There's very little the company can do with FX volatility but if they are able to sell more products without discounting, then this suggests they have good quality products and an economic moat.

They spend approximately 6% of turnover on R&D. Not all of this will be capitalised but this is where judgement enters into the frame. It may be better to look at operating profit v operating cash less investment spend:

Operating profit £11.9m (2017: £9.5m)
Operating cash - investment spend £10.8m (2017: £10.1m)

This shows 91% of operating profit was converted into cash compared to 106% in 2017.

Similar to what Paul mentioned, the outlook statement did not fulfill me with confidence and implied the first two months have not shown growth in revenue. However, it then goes on to state the company is "well placed to deliver further growth".

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rmillaree 20th Nov '18 28 of 42

In reply to post #420264

CML Microsystems (LON:CML)

HY results completely in line with trading update issued on 22nd October when share price remained pretty much unchanged (though had fallen back in previous weeks) yet this morning shares down c. 8%. No logic in that as far as I can see.

I would say outlook is wishy washy at best  - ok they expect to be on track this year but the following isn't going to result in broker upgrades after that i would imagine. 

per outlook

With a growing number of customer products reaching production, the Board is confident that meaningful advances will be made as end market dynamics normalise and remains excited about the Group's future prospects.

One other item that is always relevant is the amount of capitalised costs - they mention higher r&d. Looking at the balance sheet development costs have increased by £1.2 mill net and that total is now nearly 6 months turnover and the increase is nearly 50% of profit made H1. One needs faith in the company to presume this isn't a mini red flag warning. in that respect.

So as someone who knows nowt about this stock these results in isolation don't look great on an initial inspection.  This may mean a better entry point though if the r&d/development they are making pays of mid term though and at that  net stage the increased capitalised amounts cease What are EPS forecasts for next year ?

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InvestorJohn 20th Nov '18 29 of 42

In reply to post #420234

I wasn't overly excited either but I hold since 16p - I think its time to think about relocating for better growth prospects...

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donald pond 20th Nov '18 30 of 42

I think Burford Capital (LON:BUR) could benefit from giving a short quarterly update. The period between July and March without any news makes it difficult to have an orderly market, even when results are supplemented by capital markets events. The sad thing is that it actually discourages long term holders.

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Chrisfarrell21 20th Nov '18 31 of 42

In reply to post #420359

Thanks, yes I read the slides, but haven't heard the presentation of them. The slides re-confirmed everything I like about Burford Capital (LON:BUR) (disc: I'm long), but then it would as both me and the slides are bullish on the prospects.

But as the slides don't comment on current trading (although they do imply certain consequences as a result of the massively increased investment in the last few years), if you are a nervous investor (professional or retail) you might still decide to ditch what appears to be a sinking share.



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alihaouas 20th Nov '18 32 of 42

what about accesso-anyone knows why it hasn 't stopped falling?

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LeoInvestorUK 20th Nov '18 33 of 42

In reply to post #420414

accesso Technology (LON:ACSO) . I keep getting price alerts about this. There is some shorting activity but I suspect today's move is to do with movements in US tech stocks. Here are my notes about why I haven't started buying:

Large earnings adjustments (possible manipulation).
Some growth by acquisition.
No dividends - cashflow?
Some time until next meaningful results (H2 weighted). Potential accident waiting happen.
"Falling star". Recent estimate trend slightly down.
Poor cashflow - price to free cashflow about 70.
Poor balance sheet - negative tangible assets.

There is a good thread here:

Blog: LeoInvestorUK
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DJCP 20th Nov '18 34 of 42

@alihaouas (#32) and @leoleo73 (#33)

Only this weekend I decided to look back into accesso Technology (LON:ACSO) to see what's been happening in the past few months. It's always been a share I wished I had bought (many years ago, from back in the Lo-Q days), but stopped by the assumption that I'd missed the boat on each occasion. Dohh !

Quite scary to see the halving from near 3000p to 1500p in the last six weeks, and a drop today to 1330p !

Have put on my watchlist to DYOR at some stage soon, as this drop does, at first glance, seem excessive even compared to the general falls.

One consolation, is that the market cap. (£380m) means it qualifies for inclusion in a SCVR now ! (sorry to all holders for that reminder !)

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DJCP 20th Nov '18 35 of 42

As it's now outside trading hours, I'd be grateful for any ideas/answers on how to buy paper certificate shares, if it's at all possible.

I know nearly everything is online nowdays, but I'm looking to buy a very small amount of shares for someone as an xmas present. I know charges etc. will eat into this, but it's not an investment as such (although that would be nice), but something I'd want to put in a frame for them.

Thanks in advance and sorry to clutter up the SCVR, but you readers do seem so knowledgeable :o)

Edit: I should add that  the company is currently trading on the AIM.

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Edward John Canham 20th Nov '18 36 of 42

In reply to post #420479

From memory the question came up on Unilever to vote on the domicile - they were going to enforce certificates to vote.

I thought you just had to contact your nominee broker and request (for a fee) - may be wrong.

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sharw 20th Nov '18 37 of 42

In reply to post #420479

There should be no problem in buying - most brokers have a fee to transfer out into certificated form (e.g. Selftrade £20 ii £50) or you could try Saga - £25 dealing fee for less than £1k value:

However your main problem would be if you want it to be the recipient's name on the framed novelty gift. You would probably only get it in your name from a broker and would then have to get a form from the registrar to transfer it to the recipient (to whom they would send it and not in your frame!).

Good luck

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Aislabie 20th Nov '18 38 of 42

With today's 26% fall Scapa (LON:SCPA) , which I hold, is now (unfortunately) within the scope of an SCVR market cap.
I am not sure it really should have been hit this hard but it is a salutary lesson in the damage that current twitchy markets inflict on good companies with even a modest trading slow down.
Scapa's share price had a long, good, run up to 18 months ago, since when it has stalled but there are still strong underlying improvements in the business. A notable item in the six months to 30 Sept is the reduction in the pension deficit from a slightly uncomfortable £21mm to a easily manageable £9.8mm.
Recent acquisitions should add substantially to the top line over the next 12 months and the company continues to cut back overheads. Trading profits continue to increase and cash generation is strong. I am not increasing my holding yet but this could be a stock where the price slash has been overdone.
In the "jam tomorrow" stocks Falanx (LON:FLX) jumped 23% as Amati disclosed a 11% holding following Miton's 8% and Octopus's 12.5% both disclosed last week. The equity issue of last week has therefore had exactly the institutional support that suggests that Falanx has a serious future.(I hold).
The other "jam" stock Kromek (LON:KMK) (I hold) had a very strong contract win announced that appears to underscore a growing future business. This sort of announcement can sometimes be management smoke and mirrors (see SRT !) but in this case both their broker notes on Research Tree are persuasive that this contract is a major step forward. Yes I know, these are friendly brokers, but worth reading for the argument.

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wavewarrior 20th Nov '18 39 of 42

Hello Paul

With KCOM you wrote ""It's not very good. Only £13m NTAV.""

Do you always compare the NTAV with the Mkt Cap (here £474m) or would it be the Enterprise Value (here £537m) ?

And if so, do you have as a rule of thumb an acceptable minimum percentage?


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rhomboid1 22nd Nov '18 40 of 42

Hi Wave Warrior

The NTAV already takes account of the debt comparing it to EV would in effect be double counting the debt


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Effortless Cool 24th Nov '18 41 of 42

I sold out of TUNE over the course of last week. Whilst my valuation model still suggests they are fair value, I see more downside than upside potential at present.

The risk for me comes from the potential lack of top line growth that is needed to justify the PE rating. The fact that constant FX revenue growth for 2018 FY was 15.3%, compared to 26.0% for 2018 H1, tells a story about 2018 H2. The culprit was the Novation segment, where constant FX revenue in H2 was actually down 6.6% on the prior period.

The results state that the first few months of this year have been "broadly similar" to last year. Broadly similar actually means slightly behind, and so a significant improvement is needed over the balance of the year just to deliver Edison's projected 3.9% growth, which is hardly inspiring in itself.

On balance, although I still like the business, I prefer to sit on the sidelines for the time being.

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simoan 26th Nov '18 42 of 42

In reply to post #421539


RE: Focusrite (LON:TUNE) I came to exactly the same conclusion and sold last week too. The one thing to hang on to that made me a little reluctant was that EV/EBITDA is only around 15 and they could yet use the growing cashpile to make an earnings enhancing acquisition that could make the current rating look reasonable value.  And their record with acquisitions to date (Novation) is pretty good although none since flotation IIRC.

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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