Small Cap Value Report (Tue 21 Nov 2017) - ACRL, EMR, SRT, TUNE, SFR, XLM, JWNG, AO.

Tuesday, Nov 21 2017 by

Good morning! It's Paul here. Drat - just remembered that I didn't put up a placeholder article last night. I went to bed at 9:30pm, and my alarm to put up a placeholder article goes off at 10pm. Sorry about that.

Please note that Graham added some more sections to yesterday's report, which you might have missed. Here is the link to yesterday's report. I was particularly interested in the situation with disastrous toilet roll processor, Accrol Group (LON:ACRL) . What worries me is whether the placing is likely to go ahead at 50p? Since the share price has now fallen to 40p in the market, the key question is whether placees have signed anything binding to put in fresh equity at 50p? What's to stop placees pulling out, or demanding a reduced price? Normally with deeply discounted fundraisings, the share price stabilises a bit above the placing price. In this case though, the market price is now itself at a 20% discount to the originally deeply discounted placing price of 50p. It makes me wonder why the company/broker lifted the suspension on the shares? Surely it would have been better to leave the shares suspended, until the fundraising had been completed?

I was tempted to have a nibble at these shares yesterday, in the hope that the price would be pushed back above the 50p placing price. However, reading Graham's article on it yesterday, I decided to avoid Accrol. As Graham pointed out, the £18m placing doesn't seem to be enough to solve the company's financing issues. Plus, the fact that net debt will only be slightly reduced, implies that the company has been trading at enormous losses recently.

I think Accrol's business model just looks bad. In fact all these issues were flagged up in its admission document, which I reported on here, in Nov 2016. The company even flagged up that pulp reels were unusually cheap, due to over-supply (thus boosting Accrol's profits at the time it floated);

Parent Reel price volatility

The Group considers that, due to an oversupply of Parent Reels and pulp at presentParent Reel prices are currently comparatively low.

However, if Parent Reel prices were to rise above the Group’s expectations and the Group was unable to offset such increases through cost savings or price increases, that could…

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Empresaria Group plc is a United Kingdom-based international specialist staffing company. The Company's principal activity is the provision of staffing and recruitment services. The Company is organized across three regions: UK, Continental Europe and Rest of the World and operates across seven key sectors. The Company targets a balanced and diversified spread of operations across its regions and sectors. The Company also targets professional and specialist job levels where its brands can offer value added services to clients. The Company has three main service lines, temporary recruitment, permanent recruitment and offshore recruitment services. The Company’s offshore recruitment services represents a range of different recruitment services and provides training services in South East Asia. The Company's brands include Alternattiva, Ball and Hoolahan, Become, FastTrack and Greycoat. It has operations in 21 countries. more »

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Accrol Group Holdings plc, formerly Accrol Group Holdings Limited, is an independent tissue converter manufacturing toilet rolls, kitchen rolls, facial tissues and away from home products (AFH). Its AFH products include Centrefeeds, Hand Towels, Hygiene Rolls, Toilet Tissue, Wiping Rolls, Standard Jumbo and Mini Jumbo. Its Consumer Paper Products include Envirosoft, Facial Tissues, Handy, Mega, Mighty, Sofcell, Softy, Thirsty Bubbles and Triple Softy. The Company supplies a range of Independents, Discounters and Multiples, as well as a range of AFH customers throughout the United Kingdom. It imports Parent Reels from around the world and converts them into finished goods at its manufacturing, storage and distribution facility in Blackburn, Lancashire. The Company has 15 converting lines in operation providing capacity of approximately 118,000 tons per annum. Its subsidiaries include Accrol UK Limited, Accrol Holdings Limited and Accrol Papers Limited. more »

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SRT Marine Systems plc, formerly Software Radio Technology plc, is engaged in the marine technology business. The Company's principal activity includes development and supply of automatic identification system (AIS)-based maritime domain awareness technologies, and derivative product and system solutions for use in a range of maritime applications from safety and security to fishery management and environment protection. AIS is a mesh network radio communications system technology specifically designed for the marine domain, and it uses a combination of global positioning system (GPS) and high frequency radio to enable real time, simultaneous data communication between multiple, independent entities providing information, such as identity, GPS position, speed and other customized data. It offers a range of AIS products and maritime domain monitoring system solutions, which also fuse other maritime sensor technologies, such as radar, closed-circuit television and communications. more »

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57 Comments on this Article show/hide all

bestace 21st Nov '17 38 of 57

AO World (LON:AO.)

I'm very uneasy about the extent of the accrued income. This reminds me very much of Utilitywise (LON:UTW) - where the company was booking sales in advance of the monies being received.

Accrued income isn't necessarily a marker of over-aggressive income recognition, so I'm not sure it's fair to evoke Utilitywise (LON:UTW) here.

If the warranties were sold in the reporting period then it seems perfectly reasonable to me to accrue any commission due regardless of whether the cash has been received or not, although perhaps anticipated refunds should be netted off based on past experience. Had the commission been invoiced prior to the (half) year end, it would have appeared within trade receivables rather than accrued income, so just a different bucket within overall receivables.

Mis-selling may well be a risk though, but that's a different issue (PPI anyone?) and overall it's still a crap company (from the point of view as a potential investment rather than as a customer).

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simoan 21st Nov '17 39 of 57

In reply to post #243553

Re Focusrite (LON:TUNE) Panmure are forecasting eps of 15.2p for 2018 and 16.6p for 2019, on this basis the shares don't seem cheap as they are on a pe of more than 20 and forecast profit growth is not that much. Also, what if the exchange rate gains reverse? So on that basis where is the value?  

It's too simplistic to value any share based on PER and PEG alone. If you can show me another company with ROCE of 29%, Operating margin of 15% and with significant cash on the balance sheet on a PER < 20, I'll buy some. I can only think of Somero Enterprises Inc (LON:SOM) and I already have a large holding.

Also with regard to exchange rates the company clearly states that for USD there is a natural hedge as they buy product in USD and 60% of revenue is USD. They hedge their EUR exposure. So I don't see too much of a problem.

All the best, Si

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bestace 21st Nov '17 40 of 57
We... see North America as a major opportunity for the Group to grow in various verticals, such as financial services, cyber security, mobile apps and, as markets increasingly regulate, online gambling.  Accordingly, the Board remains confident in the continued performance of the business.

I think XLMedia (LON:XLM) may well be in a sweet spot where its technology can be applied in multiple and diverse sectors and territories. That gives them great diversification but more importantly it gives them a long runway for future growth/compounding opportunities where they can expand into new areas, buying website assets with cash generated organically from previous website investments.

Then rinse and repeat...

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dgold 21st Nov '17 41 of 57

In reply to post #243748

Actually, I have long wished that someone would explain to me why ROCE is so important. I can understand a bit in the context of a bank where one of the main restrictive factors on the bank's being able to increase profits is its capital, so one of the main challenges is to produce as much profits per capital as possible and ROCE is thus important as to an extent it shows the potential to increase profits with an increase in capital (from future profits/capital raising). But with other businesses the amount of capital held is not such a big factor in determining profits, so why is it so important? The eps contains the net result achieved which is surely all we need to know.

Margins are admittedly important though as they affect the sensitivity of profits to increases in costs or reductions in selling prices.

Net cash is about 23p/share so could be looked at as reducing the pe to about 19, still high. Although you could argue I suppose that it provides a safety net as well.

Somero Enterprises Inc (LON:SOM) is on a pe of about 12.5 after allowing for net cash, so arguably better value despite being more cyclical.

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herbie47 21st Nov '17 42 of 57

In reply to post #243748

How about Central Asia Metals (LON:CAML). That seems to meet all your criteria apart from ROCE is only 28, op m. Is 51%, div. is over 6%. PE is only 11.

Plus500 (LON:PLUS) ?

IG Group (LON:IGG)

Games Workshop (LON:GAW)

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Paul Scott 21st Nov '17 43 of 57

In reply to post #243628

Hi handy,

SRT Interview. I haven't accessed interviews before. I can get to the page showing ST signing the latest enormous contract but the toolbar below is blank. I don't have Facebook, Twitter etc etc. How can I listen?

You just need to click on the play audio button (circled in screenshot below)


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Paul Scott 21st Nov '17 44 of 57

In reply to post #243698

Hi Ramridge,

Paul - the epic code for Severfield is Severfield (LON:SFR)

Thanks for flagging up my typo! I've now corrected it.

Cheers, Paul.

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simoan 21st Nov '17 45 of 57

In reply to post #243773

Actually, I have long wished that someone would explain to me why ROCE is so important. 

I can suggest nothing better than listening to Terry Smith on this subject. 

All the best, Si

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dgold 21st Nov '17 46 of 57

In reply to post #243748

About exchange rates, I am not sure but the company does also say that profits were boosted by the exchange rate movement. Maybe this is because the resultant profits which were in dollars or euros etc, when converted into pounds is more. (I.e translational impact of forex movements, not transactional where costs are in a different currency to revenues - hopefully I have my terms correct).

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simoan 22nd Nov '17 47 of 57

In reply to post #243783


I already have a large holding in IG Group (LON:IGG). Like Paul, I'm not interested in mining companies and they are even more exposed to exchange rates, as well as commodity prices. I'm amazed at the negativity towards Focusrite (LON:TUNE). Bloody hell you guys are hard to please...

All the best, Si.

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herbie47 22nd Nov '17 48 of 57

In reply to post #243813

Fulcrum Utility Services (LON:FCRM), I have only just a had quick, seems to be quite a few.

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davidallen77 22nd Nov '17 49 of 57

Great write up on ao Paul thanks

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ISAallowance 22nd Nov '17 50 of 57

In reply to post #243748

Hi Si,

How about £KORS. ROCE 31.5%, op margin 14.3% (slight miss on your criteria), zero borrowings, PER 13.9, P/FCF 9.61.

I hold. I also hold IG Group (LON:IGG) and Central Asia Metals (LON:CAML) suggested by Herbie already.

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Dennis Ayling 22nd Nov '17 51 of 57

Paul, thanks for the interview on SRT Marine Systems (LON:SRT).
As always Paul Tucker comes across as very affable & sincere, a thoroughly nice but perhaps overly optimistic chap you might say. The jam maybe getting closer but you still need a telescope to see it !

I was invested but sold out, at a loss, after the announced delay in the 'big Asian' contract.
May well buy back in when I can see the order pipeline turning into jam with my own eyes.


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alterego 22nd Nov '17 52 of 57

SRT Marine Systems (LON:SRT) Interesting interview with Simon Tucker. He has to be optimistic given the amount of travel he does in the cause of selling his wares. Reading between the lines on some comments he made, I suggest the decision to invest resources and cash in running their own satellite constellation points to some very explicit customer requirements. SRT already had a tie up with Exact Earth to provide satellite data but the implication of going it alone is that customers want direct access to their own data, not via a foreign based company (EE are Canadian btw).
Yes, it's still down the line and the jam tomorrow jibes will no doubt continue to flow but for me, it's clear as daylight that SRT are deadly serious about securing a substantial part of the global AIS project work.
I hold, of course.

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herbie47 22nd Nov '17 53 of 57

In reply to post #243933

I did run a screen and there were 21 UK companies that surpassed Si's criteria, and 30 in Europe. 3 Israeli companies, many were in finance sector, a few surprises Games Workshop (LON:GAW) and Watkin Jones (LON:WJG) considering how much they have risen this yes. Si did say "If you can show me another company with ROCE of 29%, Operating margin of 15% and with significant cash on the balance sheet on a PER < 20, I'll buy some."

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simoan 22nd Nov '17 54 of 57

In reply to post #244023

Si did say "If you can show me another company with ROCE of 29%, Operating margin of 15% and with significant cash on the balance sheet on a PER < 20, I'll buy some."

Well, yes, but you shouldn't take things so literally! Clearly, these are not the only criteria I use because like most people I am not a purely mechanical investor. I have looked closely at Games Workshop (LON:GAW) and Watkin Jones (LON:WJG) in the past but ruled them out due to other factors. I also looked at Fulcrum Utility Services (LON:FCRM) but the historic margins looked all over the place - if you are going to invest with margins as a key criteria you want to see stability and preferably a rising trend. 

I have not looked at Michael Kors before but will now do so for inclusion with my other US holdings, thanks ISAallowance, it looks interesting but I need to understand why the price dropped so much earlier this year and then recovered so strongly.

All the best, Si

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smatthews1 22nd Nov '17 55 of 57

I particularly liked this comment...

"Some have argued that AO is really a loss-making online retailer, which acts as a vehicle to sell profitable extended warranties"

It reminds me of many other retailers such as Car Shop & Currys for instance that are more like glorified finance companies that cant wait to sell you credit.

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jonesj 22nd Nov '17 56 of 57

In an era where banks get done for mis-selling various products, I do wonder why retailers are allowed to do something similar.
After all, the consumer laws require goods to last a reasonable amount of time, which I understand to be at least 6 years for a TV for example, which gives the customer ample scope to claim against the manufacturer. Therefore, the warranties are superfluous.

However, really I think the responsibility should be with the consumer in BOTH cases.

I don't think banks should be done for mis-selling either & the population should take more responsibility for their own affairs, when dealing with both the banks and the retailers.

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herbie47 22nd Nov '17 57 of 57

In reply to post #244228

Well not quite. After 6 months the onus is on the customer to prove that the goods were faulty. If you have a warranty you can just claim against it. I had this with a camera, the manufacturer denied any fault and it was up to me to prove it, in the end I just got it repaired, thought it was not worth going to court and too risky, it also difficult to prove where the fault was. But the contract is with the retailer, so you will have to claim from them. If I had a 3 year I would probably have been covered and not cost me anything extra. A tv maybe more straight forward.

"After six months of ownership, it's up to you to prove that the problem was there when you received the product, even if it has taken until now to come to light.

So, you may need to prove that the fault was not down to ordinary wear and tear, or damage you caused, and that the product (or a component) should have lasted longer than it did.

To do this, you may need an expert's report, for example from an engineer or a mechanic."

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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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