Small Cap Value Report (Tue 24 Apr 2018) - PHD, TUNE

Monday, Apr 23 2018 by

Good evening/morning! It's Paul here.

Skip this bit, if you want to just read about shares. The long rambling introduction was written last night, after a particularly good dinner at a local steakhouse.

UK Investor Show - what a lovely, and simultaneously disastrous day it was for me. Various factors ended up with me cutting it fine, as regards timeliness. The situation then went from bad to worse. One of the organisers, Hannah, rang me to ask if I could be wired for sound, as I was about to go on stage for a keynote session with Nigel Wray.

Sadly that wasn't possible, as instead of being in the foyer of the QEII Centre, I was actually being flung around in the back of a cab, as on my command, my driver was beginning to take hare-raising risks in North London traffic, as it dawned on him that I was ranting on my mobile phone at increasingly high pitched and expletive-laden vocabulary.

In the end, I decided that it wasn't worth causing an RTA, to speak at an investor show, and got him to drop me off at Tottenham Court Road tube station, where I ran down the escalators & platforms, diving into a train just as the doors were closing. Eating my pre-presentation banana (the sugar rush helps control nerves), I pondered my fate. Undoubtedly I was about to be the worst villain since my late arrival last year.

What to do? Make lame excuses and hide? Never. Turning up, and facing the music is the only option. We all make mistakes. It's no good being in a state of panic, if something bad happens, even if it's my fault, I just apologise profusely, and the decent people will eventually calm down enough to forgive me. If they don't, then such is life. Ultimately, in 10 years' time, nobody will know, or care. I lost my house & all my money in 2008, so that has made me pretty resilient in dealing with bad situations. Life goes on. It's never as important afterwards as it feels at the time.

Anyway, the domino effect from my lateness, was that Tom Winnifrith got into a lather, and at this point opinions differ. Tom claims that he tried to get Ed Croft (our wonderful boss here at Stockopedia) off the stage early. Ed declined, and said the audience probably wanted…

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PROACTIS Holdings PLC is a United Kingdom-based company, which is a Spend control and e-Procurement solution provider. The Company is engaged in the development and sale of business software, installation and related services. It offers a range of solutions, such as PROACTIS Source-to-Contract, PROACTIS Purchase-to-Pay and PROACTIS Supplier Network solutions. It offers managed services, such as procurement-related managed services, such as Sourcing and Content Management; Finance-related managed services, such as Invoice Data Capture and Accelerated Payment Facility, and information technology (IT)-related managed services, such as Application Hosting & Management. Its Solutions for Finance and Procurement include cloud, hosted or on-premise software applications. PROACTIS Spend Analysis offers company-wide data on users' laptop, tablet or mobile. Its PROACTIS Invoice Data Capture turns paper, fax and Portable Document Format (PDF) invoices into system-ready electronic records. 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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60 Comments on this Article show/hide all

herbie47 24th Apr '18 41 of 60

Further to Paul's comments on profit warnings I had a look at the 1st Q 2018 here:$File/ey-uk-profit-warnings-q1-2018.pdf

Actually these were down on last quarter. Many seem to be in the retail sector and also bar/restaurants sub sector, which confirms that consumers are not spending.

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FREng 24th Apr '18 42 of 60

There hasn't been any big news since the results a month ago, but Tern (LON:TERN) has been on a roll this month – roughly 5-bagging. Does any reader here know why?

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Gromley 24th Apr '18 43 of 60

I wonder if anyone has any views of IMImobile (LON:IMO) who issued a trading statement this morning?

Share price: 283.8p (up 1.4% as at 1pm)

IMImobile, a cloud communications software and solutions provider

That introduction filled me with a sense of dread.  I was expecting to see a loss making, acquisitive debt ridden over priced company growing through acquisition and of questionable merit.

Not a bit of it though, they  listed in 2014 and apart from a hiccup in 2015 (worthy of further investigation) have made decent profits along the way.

They have cash in the bank and haven’t made too much of habit of coming back to shareholders for more money (they did a small £5.4m placing a year ago relating to a capital restructuring and prior to that in November 2014 they increased the share capital by c. 25% to fund an acquisition - Textlocal).

To be fair they have funded subsequent acquisitions out of cashflow and there has been healthy organic growth on top of the acquisitions.

They have a very credible customer base including : Vodafone, Telefonica, Aircel, Capita, BT, BSNL, Ooredoo, MTN, France Telecom, Centrica, Pizza Hut, Tata, the AA, the BBC, EE, Multichoice, Betfair and several major financial institutions.

And they make a profit (although precisely how much is slightly puzzling me -see below)

So the balance sheet is stuffed full of intangibles isn’t it? Of course it is. The NAV of £51m (HY Figures) includes £36m of intangibles, so a TNAV of £15m – against the £173m market cap this is clearly no asset play, but we should not expect it to be.

The TNAV is coincidentally approximately the same as cash, although the striking feature of the balance sheet to me is the high level of Receivables (£35m) and payables (£39m) – not far of half a years turnover., however they give a detailed breakdown of this and it appears to be logical in the nature of the business. On the subject of cash, by the way, they have hinted at possible share buybacks, although prioritising further M&A and investments.

So, on to the trading statement (for Year ending 31-Mar – results due in June) :

There was strong trading momentum and organic revenue growth over the year with turnover ahead of market expectations, up over 45%.
Year on year gross profit growth of over 17%

So that implies revenues of c. £110m (above the forecast), and Gross Profit of around £51m (46% - down from 57% in 2017, but consistent with H1)

EBITDA and PAT were in line with market expectations following the anticipated investment in various growth initiatives.

I’ll come on to those expectations shortly.

Continued strong cash conversion, over 85%.

That’s a little less convincing for me given that H1 was 100%, but I presume this relates to the investment in growth opportunities.

So, the profitability puzzle.

In 2017 they made PAT of £4.1m which gives statutory EPS of 6.7p.

Stockopedia quotes normalised EPS of 7.44p, the company however claims adjusted diluted EPS of 11p. They comprehensively detail all of their assumption in getting to the adjusted number – the biggest one being “share based payments” and I know I’m not alone in considering that not to be an acceptable adjustment.

And what is the forecast which this profit will be in line with? 11.2p according to the stock report.

This shows up as a 50% EPS growth – fantastic! BUT in fact I am pretty sure that the forecasts relates to the companies own measure not Stocko’s so a much less impressive 2% increase!

(If you look back at the Stock report for May last year – before the results were announced the forecast for 2017 was 10.6p EPS and the result (11p) was said to be slightly ahead).

So working this back, I think PAT will be broadly flat year on year. This does not actually seem like a bad result to me as they are building out for their next growth phase, but I wonder how the market will take it?

On reflection, I like this company and was sorely tempted to buy, but on reflection I think I will await the results in June and might consider buying if the heady valuation takes a bit of a knock.

Anyone else have any views?

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Bignozen 24th Apr '18 44 of 60

A full marathon is obviously a lot harder than going half the distance but it still takes a lot of doing. Well done for having the determination to do it.
Any chance of a comment on Sigma Capital?

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sharw 24th Apr '18 45 of 60

In reply to post #356638

Regarding Tern (LON:TERN) I looked at this one out of curiosity. Today (AGM day) there are 368 posts and counting on just one of the threads for this company at ADVFN. It reminds me of Ed's piece of research showing that share performance was in reverse proportion to the frequency of bulletin board posts.

(My own experience is that my best performing share has had 720 posts in 12 years on its ADVFN thread).

Ed on this is 9m 50s in here:

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FREng 24th Apr '18 46 of 60

In reply to post #356668

Well, if holding an AGM causes Tern (LON:TERN) to rise 37% in a day, perhaps they should hold them more often, despite the hysteria it creates on ADVFN.

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jonthetourist 24th Apr '18 47 of 60

There was a discussion about Proactis Holdings (LON:PHD) here back in July when they announced the reverse takeover. At the time I said:

"I am struggling with this deal. Proactis is my biggest holding and I have long seen it as a safe growth story. Whatever the merits of the deal it inevitably as a lot of execution risk, so I think a reducing of my position may be necessary.

Having already trimmed a lot of my holdings this year I don't really want to be in a lot more cash, but I am not seeing any competing opportunities. Plus there are serious CGT consequences of cashing in. I could really have done without this deal."

I sold three tranches at prices averaging 185p, but I should have bitten the bullet and paid the tax. Whether it recovers or not from this setback it's not the safe one-way bet I originally built a stake in.

We live and learn.


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mammyoko 24th Apr '18 48 of 60

In reply to post #356643

I have held IMImobile (LON:IMO) in the past. Paul has also held in the past. There are three areas that I recommend you satisfy yourself on 1) the minority interests in the subsidiaries 2) excessive share options in the past with potential for massive dilution 3) it's an overseas company.

When I heard that Tosca were involved I sold out. I can't see Tosca on the list of significant shareholders now but perhaps they are involved with SPARK India? (BTW, Take a look at some of the howlers Tosca have had to see why this was the deciding factor for me e.g. InternetQ). I think IMImobile (LON:IMO) has some of the characteristics of other companies that I have held in the past but now steer clear of, like Taptica International (LON:TAP), Plus500 (LON:PLUS) and XLMedia (LON:XLM), There's something not quite right about IMImobile (LON:IMO) that I can't put my finger on but which will, I think, eventually become apparent. Although I have held all of these in the past I sold all of them without making big money so clearly I could be entirely wrong. Cleverer people than me will make money on the way up on shares like this. But at least I won't be holding the baby when the music stops. For me, there are just too many genuinely good quality companies out there that I don't care if I miss out on companies like IMImobile (LON:IMO), Plus500 (LON:PLUS) or XLMedia (LON:XLM). I simply don't trust the numbers on companies like these and don't think the mechanical quality rating on Stockopedia accurately reflects the real quality / sustainability of their earnings.

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DJCP 24th Apr '18 49 of 60

Now the market has closed, I'll post O/T re Paul's Royal Baby name comment.
I was thinking at he was born on St George's day, that would be an easy bet ... oh ! ... forgot about the first one, so perhaps not.
Another idea would be Bob :o) ... Prince Bob
Named after the singer/musician Prince ... Prince Prince ! (or should that be Prince Symbol ?)

Re the marathon - I did one of those last year - very tiring, doing 1/2 mile per week ! ... oh, you mean all at once ! Sod that !

Good luck to all the Boohoo.Com (LON:BOO) holders. See you up bright and early in the morning, having just added a short-term block to my already oversized core holding.

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Trident 24th Apr '18 50 of 60

Just for those that occasionally review Tracsis (LON:TRCS) with the great assistance of Paul's once a year chats with the management, their share price appears to be making a bit of a come back after the general market correction, and seems to be on track to pass through its previous market high of £5.8.

They come with the usual constraints of being a smallish outfit, with an large spread on the share price, and general illiquidity in their market profile. The management make a virtue of their acquisition philosophy being set out on their website, which unlike say Proactis Holdings (LON:PHD) is not primarily to get to an aggregate size to get more visibility on the market. So it is for the generally patient.

Could surprise on the upside with its US exposure at some point, but has also made longer term investments in R&D based outfits at early stage, which could be fruitful, but could also be written down if they don';t deliver. Its a small dividend payer as part of cautious cash generation policy.

I am a holder.

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ed_miller 24th Apr '18 51 of 60

In reply to post #356643

I don't have a position in IMImobile (LON:IMO) - I looked at it a couple of years ago and reluctantly concluded that I couldn't buy because the directors seemed disgracefully greedy in awarding themselves huge amounts of share options. I too suggest anyone thinking of buying check the percentage earnings dilution if all share options are taken up: in the past such dilution certainly was "massive."

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Michael Mortphew 24th Apr '18 52 of 60

In reply to post #356433

Would that have been Mark Allinson? I used to work with him when he was a progammer. He liked his food then.

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jonthetourist 24th Apr '18 53 of 60


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cafcash49 24th Apr '18 54 of 60

Hi Paul, Great to see you again on Saturday and have a drink with a good man. Don't let the bastards grind you down, there are a few out there as you well know, stick with the good ones. Your mate Brian Basham sounds like a diamond and I will make a donation which he well deserves doing a marathon at 74. Of course the dreaded prostate problems is something we all live in fear of. See you at Mello. Charles

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john652 24th Apr '18 55 of 60

In reply to post #356703

Hi mammyoko,

Can I ask why you are negative on XLMedia? I have a reasonable holding here, I've researched them well and they look a strong company, although not the easiest to understand, so would appreciate the more negative view.


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Gromley 24th Apr '18 56 of 60

In reply to post #356703

Thanks mammyoko (& also ed miller) for your observations, always useful :

There are three areas that I recommend you satisfy yourself on 1) the minority interests in the subsidiaries

I believe this is a very minor factor now, following the Jan-17 capital restructuring I mentioned, which was the conversion of shares in "IMI Mobile Private Limited" to full shares. There I think still some minority interests from other subsidiaries but these look pretty small and actually have accrued losses in the very recent past.

2) excessive share options in the past with potential for massive dilution [also raised by ed]

I agree the share options do look very generous (I hesitate to say overly as I haven't looked at total Director remuneration and to be fair the actual performance of the business since float does look very impressive). In terms of dilution, there are 61.1m ordinary shares and 7.8m of options, so it IS significant but not horrendously so imho.

3) it's an overseas company.

I'll happily be corrected, but I don't think that is true - their articles of association are definitely UK. Clearly they are a multi-national with significant earnings  in other territories (with tax implications - the "underlying" tax rate seems to be quite high) , but I think they are UK headquartered.

Grateful though to be corrected if I got that wrong.

There's something not quite right about IMImobile (LON:IMO) that I can't put my finger on but which will, I think, eventually become apparent.
For me, there are just too many genuinely good quality companies out there that I don't care if I miss out on companies like IMImobile (LON:IMO)

Not much I can say about that really. I certainly don't dismiss the "gut feel" view that something is just not what it seems, but in this case its not a view that I personally share - despite my initial reaction to the word "cloud" and my worry about the definition of "adjusted" earnings.

Anyway - no position at the moment for me, but I will read the results with great interest.

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Samsgrandad 24th Apr '18 57 of 60

In reply to post #356718

As a Fools and Horses fan, I favour the name Rodney after Dave. Prince Rodders haha.

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Howard Adams 4th May '18 58 of 60

In reply to post #356638

Hi FREng

I don't have a clear response to your question about Tern (LON:TERN) but after quite some digging today I perceive a sequence of contextual factors are contributing to the rapid share price rise which seems to have kicked in 22/03/18 (SP then 2.75p, at time of writing today 26.35p a rise of 858% in just over a month if my maths are correct).

Looking on Tern (LON:TERN) has had a substantial newsflow throughout 2017 (and in 2016)

In simply terms if you buy shares in Tern (LON:TERN) you are buying management expertise in the Internet of Things (IoT). Specifically then, interests in six of Tern (LON:TERN) s portfolio companies. Tern (LON:TERN) hold 100% of fliexiOPS which owns 90% of Wyld Research

But the important interests lie in two other holdings. 56.8% in Device Authority Then 50% in InVMA

Tern (LON:TERN) explain that they are setting out to glue together investors (eg these from San Fran. who have invested in Device Authority, innovating companies and skilled management experience in the IoT.

Tern (LON:TERN) s recent RNSs (from March onwards) are indicating that both these companies are making progress and that the integration of partnerships and customers is gaining speed.

The latest example being this update about InVMA

Tern (LON:TERN) added to their investment in InVMA 25/04/18

I found a lot more in my digging but have tried to pick out salient points. I started from their Shareholder Conference Call update and followed the trail from their presentation pack

IMO Tern (LON:TERN) could interest those with quite a strong technical background, or those for an eye for following invest type/VCT type companies. It could fizzle out after this initial excitement. Who knows?

Being frisky Friday I have taken a small position .... Insiders hold 22.4% (4 individuals and an institution). Plus, according to IC three other institutions hold 7.38%. This fits pretty well to the Stocko free float figure of 79.8%.

My apologies if this got too long-winded. As is often the case with these types of companies its a spiders web of connections, and I think that is part of the reason the price is spiking so much. Others are beginning to see the possibilities if some of these links develop. I've no idea if they will and would not put too much in this but it might interest a few on Stocko.

Have a nice weekend.

EDIT and this from Tamzin of PI World (June 2017)

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FREng 4th May '18 59 of 60

In reply to post #361103

Thanks, Howard.

The NEC, Ian Ritchie, is a shrewd investor and technology entrepreneur. I got involved when I saw he had been appointed Chair.

The recent growth seem extraordinary, though, and the absence of RNS suggests it's multiple buyers driving it.

Well, sometimes you just have to ride the good fortune, even if you don't understand it.

Have you looked at Mercia Technologies (LON:MERC) which also has some interesting people involved in one of its portfolio companies, MindTrace?

"So it’s still very early days for MindTrace, which brought together three academics (including Professor Steve Furber, who designed the BBC Microcomputer and processors for ARM), and is chaired by former Imagination Technologies CEO Sir Hossein Yassaie. The startup is developing ‘unsupervised learning’ algorithms for autonomous vehicles, but the technology is said to have application in cybersecurity, IoT, and data management.

Mindtrace has raised £1.3m in a seed funding round backed by Accelerated Digital Ventures (ADV) and the Northern Powerhouse Investment Fund, through NPIF – Mercia Equity Finance, which is managed by Mercia Fund Managers, the fund management arm of AIM-listed Mercia Technologies. MindTrace is to build a prototype collision avoidance system for cars that expects to require less power and perform better in poor lighting conditions.".

I hold, because Steve Furber is very smart indeed.

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Howard Adams 4th May '18 60 of 60

In reply to post #361138

Hi FREng

Thanks for that information.

Yes I've watched Mercia Technologies (LON:MERC) for quite a while.

I used to hold a portfolio of IP (LON:IPO), the Imperial University one (IVO - now part of IPO I believe) and Allied Minds (LON:ALM). I was going to add Mercia Technologies (LON:MERC) to that investing theme but the market seemed to move against these type of companies and I (reluctantly) pulled away from them. And to be honest, put them aside for a while.

I now see Tern (LON:TERN) and Judges Scientific (LON:JDG) as being variations of this 'catalysing innovation' theme and now hold these (Tern (LON:TERN) as from this morning). Beyond my interest in investing I am very motivated to want to contribute to the development of great innovative UK companies.

I will look more deeply at Mercia Technologies (LON:MERC) again and dig into some of the personalities, so thank you for the interesting explanation.


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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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