Small Cap Value Report (Tue 26 March 2019) - DPP, MOSB, QTX, VNET, FEVR, SUS, XLM, MYSL

I hold T Clarke (LON:CTO) and the full year 2018 results today look very solid, as indicated in the trading update in Jan. The is a significant hike in the dividend (above market expectations) to 4p. The new news in the report today is that the Chairman states that TClarke is well placed to hit the long targeted 3% margin target in 2019 (before the company had been reluctant to put a date to this target). The rapid growth in higher margin technologies business (which in 2018 accounted for more than 100% of the revenue increase) seems to be the main driver, as well as the surprisingly resilient commercial building market. CTO also reports today the order book has risen further in the first two months of 2019.

The pension deficit has fallen only marginally in 2018, perhaps surpringly, as T Clarke (LON:CTO) has reduced life expentancies by around half a year (we can expect many schemes to do likewise). The DB pension can not be overlooked in valuing the company - the gross liabilities still exceed the market cap.

Very good results from Pelatro (LON:PTRO) - finnCap forecast eps 15.4c for this year for p/e 7.7 and target price 125p. (I hold).

I also hold Synectics (LON:SNX) which announced a significant contract win this morning with a casino in Macau. It is worth checking RNS on these - the last contract win was issued as an RNS-R (for information) whereas this was as an ordinary RNS.

Profit warning from Coral Products (LON:CRU) this morning. Two years ago there was a profit warning and I sold as a result of having watched the Stocko webinar a few weeks earlier. It had been creeping up since and I had wondered if I had done the right thing but this morning I know that I had! So thanks to Ed and the team. If you haven't seen it then it is here:

https://www.youtube.com/watch?v=YayTZn4c7I0

Thanks for the requests/comments, I'm digesting everything and will cover as much as I reasonably can. G

In reply to post #461773

Morning Graham, Another request for Alliance Pharma (LON:APH) please.

A number of things have, so far, caught my attention:
- LfL sales growth of 4% is OK but not really enough and the gradual de-rating over the last 12 months looks to be right considering this. A PERf of 13x for 4% growth, is that about right or too generous?
- Kelo Cote really is turning into the star of the show.
- Too early to get a good sense of how well Nizoral could do.
- Still no guidance on the potential for Xoneva - Have to give them the benefit of the doubt on this one so far.
- International sales doing well, particularly China.
- UK sales -5%. Reasons cited Manufacturing and ordering issues partic with Menadiol. Peter Butterfield stated at a recent investor event that the business really was about logistics and supply chain management. This is worrying in light of that!
- I worry that they are complacent about local brands. Anti Malarial drug competition and subsequent ending of manufacturing hit sales by £0.6m but resulted in an intangible impairment of £4.3m. They talk of investment in star brands but I don't get that sense with local brands.
- FCF down from 2017 level but explanations seem fair - increase in inventory, Xoneva launch costs and FMD implementation. Expect that FCF will be above 2017 level this year.
- As per usual, leverage will decrease (ONLY IF NO PURCHASES). Why not say, if we can buy something decent we will, so don't expect leverage to reduce too much if we find a purchase!

I too hold Alliance Pharma (LON:APH) for the growth opportunity, so am actually not worried if they make further prudent purchases. The intangibles aren't a concern for me as they largely all have a secondary value and that could in many cases be in excess of carrying value. However, what concerns me is local brands, a new unproven CEO and the risk of substantially increased debt if a big opportunity arises. For me, this year should be about consolidation and debt reduction to prove that both can be done. They have plenty of plates spinning and don't need another one right now.

In reply to post #461853

Hi Graham

Given mojomogoz's comments on Pelatro above, it looks a nice opportunity for you to demonstrate your skills at unpicking a balance sheet, should you be so inclined.

I talked to the CEO at Mello and concluded that while his shareholders might do well, he definitely would.

Jon

In reply to post #461868

Couldn't agree more Jon, Graham's insights here would be much appreciated - CEO seemed to me very "Del Boy ish" (if there's such a term) at the presentation - He was actually the primary reason I didn't invest.

In reply to post #461823

Thank you Mojomogoz.

1 One would imagine the 2 vehicles purchased by Pelatro (costing $279,000, so approx $140k each) were for the 2 most highly paid directors, also earning $223,000 and $210,000.
Quite substantial considering the size of the company.   

2 I also don't know enough about accounting, but as part of my education, it will be interesting to check through the capitalization and revenue recognition with reference to books like "The Signs Were There".

3 I also don't know how many other companies are in this field. I presume there is plenty of clever telco marketing software around. [One example: I had a SIM with True whilst on holiday abroad. They sent a text message with an offer to change to pre-paid, at the True stand on the 4th floor of the Central World shopping centre. I looked up from my bench and the stand was directly in front of me, in an enormous centre. That was the only time in 2 months they sent that offer.  Impressive.]

In reply to post #461803

I agree with you I have just emailed Subash at Pelatro (see below)

Hello Subash ,

Results are good today but I was concerned re the following statement

During the year the Group acquired motor vehicles for the benefit of two Directors at a cost of $270,000 !!

I am not sure who the cars were for possibly you and your brother however more to the point , do you think it is good use of shareholders money to buy cars at such a price ?

Regards

Tony

In reply to post #461788

Hi Rmillaree,

Yes, you are right on XLMedia (LON:XLM). Looking at the research notes, it seems that it is this year that there are reductions: $95.1m revenues, and $38.5m adjusted EBITDA forecast - that was after 26/2.

They seem to have beaten the previous estimates on PBT (20.8 v 17.9) although I am not sure if this is by an arbitrary write-down of intangibles related to discontinued operations.

I do agree with Cenkos in some ways. Acquisitions should be contributing to profit very quickly, as their valuations are due to earning power, not potential (otherwise they could develop that themselves). But that earning power could disappear overnight due to regulation or even Google changing around the algorithms.

I do think this has a lot of risk attached. To date this has been a cash machine, albeit being spent on acquiring other sites. Like Plus500 I feel at the current price either it will be a disaster or a bargain.

(LON:XLM) results presentation, from this morning, is here.  Ory Weihs, CEO, gives a good overview of the business, the numbers (helpful to see the revenue diversification slide), and where they're focussed for growth: Personal Finance and the US gambling opportunity.

From last week, here's the (LON:JDG) FY18 results presentation by David Cicural, CEO & Brad Ormsby, CFO including Q&A with Mark Lavelle, COO.  (Just published).

Well worth a watch.  The JDG business seems to be firing on all cylinders.

In reply to post #461753

Looks like an "in line with market expectations" trading update from Vianet (LON:VNET) and dividend maintained. Steady as she goes....I hold.

Curiously enough I was wondering yesterday when the next announcement from Vianet would be and concluded that it would be in about three weeks time consistent with previous years. Probably nothing to read in to the fact they feel able to give the TU earlier this year.

I agree its an "in line" statement with nothing really to excite much interest in either direction.

In fact it is so dull, that it is almost word for word the same statement they gave last year, with the notable exception that whereas last year they were "broadly in line", they don't now need that qualification.

All very tedious! (I continue to hold)

I do wonder if Mike Ashley would be interested in Moss Bros (LON:MOSB) - perhaps some overlap with Debenhams/House of Fraser.

I think the shares look poor value to an average investor, as they clearly are struggling, and I don't think they have the cash to transform themselves, which they clearly need to do. They are dying a slow death.

In reply to post #461958

Moss Bros (LON:MOSB)

Why bother?
Just through out a bunch of old suits and Moss Bros were some of the earliest I bought. Graduated onto better quality (still working on that transition for investments).
It's the entry level suit company and people who wear suits regularly usually have decent earnings.

The first tux I got from Moss Bros - it made no sense to rent given price difference, especially with risk of people going commando!

Maybe Mike Ashley buying makes sense - risk of sounding like a snob, Moss Bros is to suits what Sports Direct is to Athleisure

I didn't bother requesting commentary on Fevertree Drinks (LON:FEVR) as didn't think you'd consider a £3 billion company but so glad you did - you thinking of joining the club is enough reassurance for me to hang on in there.

There's no way they can continue growing the UK at this rate - but the rest of the world is a very very big market and I remain confident that they are going about breaking it the right way.

Just need to get through the next few days without directors spoiling the party by selling more of their shares - they have history.

Nice crisp report Graham...thanks and look forward to seeing you on Thursday
BTW I have felt similarly about Fevertree and bought an opening position at just over 2700 last month so go for it!

Just further to tomps comments above. I met Ory Weihs at an investor show about five years ago and was extremely impressed. He was sharp, informative and quite clear on the objectives of XLM. I never invested despite the stock being very cheap on most counts and having a generous dividend. The business was a bit difficult to grasp (it was mostly directing ads for online casino companies based on data collection), the registration for the dividend was quite involved as the Israeli authorities take a big cut and it was necessary to get evidence from HMRC, and finally the major shareholders sounded a bit like a Tel Aviv cabal. I watched as the share climbed and climbed, read about an intended change of direction and acquisitions and then saw the price collapse. But I return to my first sentence - Mr Weihs may well respond to an interview request. The stock is on an historic x6 p/e, there seems to be plenty of cash, today's release implies a return to organic investment and steadier earnings.. There is a presentation on Thursday as well. This might be worth a little more digging.

In reply to post #461903

Hi

Re Pelatro (LON:PTRO) this was picked up by @rhomboid on twitter this morning as well and prompted me to email the info@ address on the web site with a similar question and I also asked about the leasehold property they took on, as it occurred to me this might be simply a directors crash pad in Bangalore rather than say a leasehold office.

I suspect they wont reply.

I may look in to this company a little more but I suspect that it and Mr Subash will go on the barge pole list.

Best wishes
Michael

In reply to post #462033

XLMedia (LON:XLM)

WDWombat

The stock is on an historic x6 p/e, there seems to be plenty of cash, today's release implies a return to organic investment and steadier earnings.. There is a presentation on Thursday as well. This might be worth a little more digging.

With regard to "steadier earnings" does todays announcement actually say that though?

It's only 26/2/2019 since they advise the following  

Does the guidance of the 26/2/2019 still hold? presumably  it does in which case i don't see what is steady about what is a pretty material decline this year.

I couldn't make any sense of whether they were saying they are on track for this previously notified decline or not (Ie things now picking up) - to be honest - if they are talking positive while expecting such declines this year that all seems out of kilter with reality somewhat. Perhaps the broker notes or presentations will make things slightly more clear. I would also be slightly worried about their plans to do well in the gambling sector - this is  a tricky area to deliver in and can be subject to regulatory woes - i know 188bet and betbright have both shutup shop with regard to uk operations at short notice recently. All it takes is a bit of EU or US legislation in the wrong area and presumably the whole sector could be hit - eg if companies were prevented from advertising in areas they don't have  a licence for? - or the advertising rules became stricter if they are regulated - or if Google decided to make the sites less easy to find.

Hi,

I would appreciate your thoughts on yesterday's BBB (Big Blue Broadband) results, AIM Mkt Cap £66m. It's continued to grow confidently and has built itself a role across the whole of the EU acting between the two large satellite companies (Eutelsat, Viasat) using their Pathfinder software to on-board consumers - 80% domestic.

Apparently there are 27m underserved households in the EU and only remaining real competition comes locally from an Orange subsidiary in France. Subscribers are growing organically (and increasingly with Government assistance), gross margin is growing, admin cost hike taken on-board for step-up in volume as satellites become dramatically more capable. Concern is the increase in customer churn, which we are assured was temporary now that data package sizes have been increased (at no on-cost!).

Would appreciate your thoughts. Tightfist

Thanks for another fine report Graham.

I don't entirely understand the following comment.
"There are very positive-sounding inceases in new installations in the UK, France and USA (watch out - this is the second derivative of sales)."
I presume each new installation is equivalent to one sale, so increases in installations would be the first derivative of sales and accelerating increases in installations would be the second derivative. Unless I miss something.

As for the Pizza business. Dominos have done very well in high GDP countries. The DPEU business also seems to have done well in Turkey, with a GDP per capita of $10,500 (before Turkey's self inflicted economic problems).
Meanwhile DPP propose to continue losing money until 2022, in a country with a GDP per capita of $13821.
I don't know where this is going wrong, but imagine either DPP lack the management capability to run a pizza business OR the Polish market must be unusually competitive.    
Disclosure: No position.

Incidentally, the UK Dominos business was one of my biggest investing errors (of omission), since I had a very good look at the business in 2005 and the only thing that stopped me investing was lack of clarity over terms for ownership the UK master franchise. Therefore missing a >10 bagger.