Small Cap Value Report (Tue 23 Oct 2018) - CMS, OTMP, FLO, BMY, PCF

Tuesday, Oct 23 2018 by

Good morning, it's Paul here!

In case you missed it yesterday, after spending several hours in the hammock with Stella Rimington's book, I added 4 more brief sections to yesterday's report (on Cerillion, GFinity, CML Microsystems, and Croma Security) - here is the link

Following on from weekend press reports that a co-founder of Superdry (LON:SDRY) is highly critical of management strategy. Another co-founder called James Holder has reinforced this view, saying that "an urgent sea change" is needed in approach.

The 2 co-founders hold 28% of the shares, so I wonder if an EGM could be in the offing, to sack the CEO? This could get interesting. At some point, the market might start to see turnaround potential, and get bullish on the shares again? the big question though, is when? I'm very reluctant to risk catching a falling knife at the moment.

Communisis (LON:CMS)

Recommended cash bid at 71p

Congratulations to shareholders here, who have received a cash bid at 71p, which is a 40% premium to yesterday's price. That's a decent premium, and the offer looks fair & reasonable to me.

It means that CMS shareholders get to cash out at around the peak price the shares have achieved in the last 10 years. Given that there's not much organic growth in evidence, and that the balance sheet is weak, this represents a good outcome.

Big shareholders seem to be supportive of the deal, with 42.9% having given either irrevocable support, or letters of intent. Institutions often agree to takeover bids, because it creates a one-off liquidity event for them. The rest of the time, they couldn't sell, even if they wanted to. This is where private investors have a massive advantage over instis - if you have a small shareholding, then you can usually sell whenever you like.

There's always an outside chance someone else might come along with an increased offer, but on balance I'd say this looks a done deal.

I wonder how many other bombed out shares will receive bidding interest? CMS is one of many which had sold off in the general market correction recently. The bidder for CMS is called OSG Holdings Inc, and is an acquisitive American group.

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Communisis PLC is a United Kingdom-based integrated marketing services company. The Company helps in communication between brands and their customers. It creates content and delivers across multiple customer touch-points in digital, broadcast and print channels. It operates in three segments: Design, Produce and Deploy. The Design segment offers marketing expertise, communications consultancy and creative services specializing in customer relationship marketing, shopper marketing, brand activation and financial services content. The Produce segment includes its outbound transactional services for billing and statements for financial services and utilities. The Produce segment includes its capabilities, such as document composition, workflow management, and digital output, such as e-mail. The Deploy segment offers brand deployment support with service lines, such as campaign management, studio services, supplier sourcing, governance, in-store activation, and warehousing and logistics. more »

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OnTheMarket plc is a United Kingdom-based holding company that provides online property portal services to businesses in the estate and lettings agency industry. The Company operates the United Kingdom online residential property portal, The Company's portal allows agents to display their properties to an audience of property seekers. Its online platform offers a search service and lists of homes for sale or to rent. The Company's portal offers saved search and property alert facilities to property seekers by creating a MyOnTheMarket account. Its portal provides an access to tools that enables manual property uploading, editing of property details and branch details. The Company serves home developers, online agent companies, commercials and property advertisers. The Company's subsidiary include Agents' Mutual Limited and On The Market (Europe) Limited. more »

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Flowtech Fluidpower plc is a United Kingdom-based distributor of technical fluid power products. The Company operates through two divisions: Flowtechnology, which is geographically split into Flowtechnology UK (FTUK) and Flowtechnology Benelux (FTB), and Power Motion Control (PMC). FTUK and FTB focus on supplying distributors and resellers of industrial maintenance, repair and operation (MRO) products, primarily serving urgent orders rather than bulk offerings. The PMC division is engaged in the design and assembly of engineering components and hydraulic systems, which are managed by component supply along with a service and repair function. Its business is focused on its distribution offering in over three categories: Pneumatics (products that enable the use of gases to provide mechanical motion), Hydraulics (products that enable the use of fluids to provide mechanical motion) and Industrial (products and accessories that act as conduits for gases and liquids). more »

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

16 Comments on this Article show/hide all

Mancman 23rd Oct '18 1 of 16

Flowtech Fluidpower (FLO). Its 9 month trading update has been released this morning. It seems to have addressed concerns in half year report (18/9/2018) which led to a fall in share price to around £1 from a 2018 high of over £1.90. The sp has recovered a little, but the fall still seems overdone.

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gus 1065 23rd Oct '18 2 of 16

Recommended all cash bid for Communisis (LON:CMS) announced at 71p per share.

Looks pretty much a done deal unless a rival bidder appears. Decent outcome for shareholders given recent share price weakness and offer premium is at or close to all time share price high.


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MrContrarian 23rd Oct '18 3 of 16

My morning smallcap tweet: Coral recovering after long dive.

Communisis (LON:CMS), Coral Products (LON:CRU)

Communisis (CMS) rec offer 71p, a 40% premium.
Coral Products (CRU) AGM stmt. "a very much improved performance" in first 5 months. Sales, gross margin, EBITDA and pretax already materially ahead of entire prior H1. No mention of mkt expectations.

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jonno 23rd Oct '18 4 of 16

Positive interims from Bloomsbury Publishing (LON:BMY) this morning. Good cash conversion, healthy balance sheet, good progress across consumer and academic offerings and positive outlook.

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Brookeda 23rd Oct '18 5 of 16

In reply to post #410809

I thought it was a good update this morning from Flowtech Fluidpower (LON:FLO).
Its a well run company in a specialized area so the entry barriers are there. They build by acquisition which I know isn't everyone's cup of tea but have a good track record.
They have lost their way a little bit and need to reduce costs now by taking advantage of their size and reducing the G&A line which they recognize. I full expect them to do this over the next 6-12 months while using the cash flow to bring the debt levels down a bit.
After that clearly they will be eyeing up more acquisitions again.

I hold and added to my position during the drop. I think in the next 12-18 months the share price will recover

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Wimbledonsprinter 23rd Oct '18 6 of 16

I am (pleasantly) surprised that any company (and particularly a US private equity backed vehicle) would bid for Communisis (LON:CMS) given the large pension liabilities of Communisis - gross pension liabilities at end 2017 of £188m and a net deficit of £32m, versus the market cap at the 71p takeout price of £145m. The scheme document makes very little reference to the deficit - merely stating that commitments will be honoured and that the bidder will start discussions with the trustees about scheme funding.

In had assumed that such large relative pension liabilities were an effective poison pill to a takeover. Obviously not. Could be interesting for other “cheap” companies with large DB liabilities.

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mortimer 23rd Oct '18 7 of 16

i am going to take pauls tip .

jog to McDonalds then you will not feel guilty

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danielbird193 23rd Oct '18 8 of 16

In reply to post #410879

Just don't jog home if you want to arrive with your stomach intact!!

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paraic84 23rd Oct '18 9 of 16

I'm not a chartist but I see the S&P 500 is expected to fall below the 200-day moving average which is often a key indicator followed by momentum investors. That doesn't seem like good news!

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Howard Marx 23rd Oct '18 10 of 16

In reply to post #410959

The S&P 500 broke through its 200d ema last Wednesday:

Having broken to the downside on it's short, medium and long term moving averages, it's effectively run out of moving averages to break through!


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bluecurve 23rd Oct '18 11 of 16

Although I have no interest in Onthemarket (LON:OTMP), Paul's comments reminded me of a good book on the subject of competition in the technology sector. It's called "The Gorilla Game" by Geoffrey A. Moore (1999), and discusses how technology companies evolve once they've passed the survival stage. Essentially, Rightmove is the Gorilla in this space and, according to Geoffrey, the Gorilla always wins.

The examples in the book are more weighted towards pure software or hardware plays, but there are some parallels to what is playing out in the portal space. He does present some strategies for how to invest in this type of situation which may be of interest to others.

BTW, Geoffrey A. Moore's earlier books are also cracking reads if you're interested in technology companies and how they grow successfully. ("Crossing the Chasm" and "Inside the Tornado")

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dahokolomoki 23rd Oct '18 12 of 16

In reply to post #410859

Defined benefit pensions schemes are now all getting favourable revaluations in the past few months. Will also be the case for Communisis (LON:CMS) when they revalue next.

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Desanj 23rd Oct '18 13 of 16

Hi Paul
As you likely to look at a Company called OPG (OPG Power Ventures). They presented at a ShareSoc event last year but since then their share prices has gone south, would be interested to here what you have to say about them?

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paraic84 23rd Oct '18 14 of 16

I am not sure the return of the founder to Superdry (LON:SDRY) management would be a good thing. In my personal opinion the two challenges facing the company are:
- Too much retail space which has continued to expand at a time that a lot of clothing retailers are looking for ways to reduce floor space. I can't see from his press comments that he would look to reverse this but I might have missed it.
- A brand that is arguably starting to look tired (although growth in some parts of the world may challenge that view). Founders are often reluctant to change a style that they invented ( French Connection (LON:FCCN) perhaps?).

I did own shares in Superdry (LON:SDRY) because I thought it was looking cheap but sold out on the recent profit warning. It might have been particularly affected by the warm weather and bounce back in 6-12 months, but my doubts about its retail strategy mean I prefer to sit on the sidelines for the time being.

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Nick Ray 24th Oct '18 15 of 16

In reply to post #410994

Having broken to the downside on it's short, medium and long term moving averages, it's effectively run out of moving averages to break through!

Personally I think sometimes too much of an aura surrounds the idea of breaking through an MA.

A 200-day MA is basically a smoothed version of the stock price 100 days ago. So when a stock breaks through the 200-SMA it just means that it has returned to roughly the price 100 days ago - a fact which you can also see by looking at the chart.

In fact if P is the stock price and SMA(P,N) is the N-day SMA then (P/SMA(P,N)-1) is the gain in N/2 days so (P/SMA(P,N)-1)/(N/2) is proportional to the drift (average return) of the stock and the case where P = SMA(P,N) (i.e. the price crosses the SMA) is just the special case where the drift is zero.

It surprises me that there is not more focus on setting a drift>0 that you would not want to go below and then checking that (P/SMA(P,N)-1)/(N/2) > drift rather than always using drift = 0.

This is very easy to chart. You just move the SMA vertically up by a suitable amount and it will trigger a bit sooner. But waiting until drift=0 before thinking about selling is a bit late if you are using it as a sell trigger. (NB: I am not saying you should sell btw. There is a good argument to be made to hold "good stocks" throughout the downturn.)

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Laughton 24th Oct '18 16 of 16

Some people presumably expecting a higher offer for Communisis (LON:CMS) - paying over 71p late today.

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 Are LON:CMS's fundamentals sound as an investment? Find out More »

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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