Small Cap Value Report (Tue 29 May 2018) - Italy/Euro, BLV, OTMP, IDOX, REDS

Tuesday, May 29 2018 by

Good morning! It's Paul here.

Italy/ Euro

It seems to me that we're entering a new phase of the ongoing crisis with the single currency. Previous measures, centred around Greece, were little more than papering over the cracks, of a currency union which is unworkable in the long term, in my view.

The press are now picking up on the political crisis in Italy, whereby the President has blocked the appointment of a eurosceptic finance minister, thus causing the collapse of the latest Government after 4 days. So new elections are now necessary, which are likely to cause a bigger eurosceptic majority (according to opinion polls), putting Italy on a collision course with the EU establishment.

To me, this seems far more serious than the Greek Euro crisis, because Italy has 2.3 trillion Euros of national debt. We know what the EU's strategy is, in dealing with rebel Governments, since Yanis Varoufakis recorded all his meetings on his iPhone, and then published a book about it - "Adults in the Room" - highly recommended.

I feel that the only solution for the Euro, is for Germany to leave. Running an export surplus of 8% of GDP (breaking the EU rules limiting it to 6%), is sucking money out of the rest of the EU, into Germany. This is one factor is causing the Italian economy to have stagnated for the last 20 years, and its people have had enough. Whether they have the stomach to leave the Euro, and see their banking system collapse, is another matter. Ultimately that's what caused the Greeks to capitulate.

So what to do? Personally, I opened some shorts (via spread bets) on the Italian market, and bonds, last week, which unfortunately got partially stopped out over the weekend. However, the remaining positions are now nicely profitable, which is doing as planned, and protecting the rest of my portfolio.

My small cap shares are too illiquid to trade in & out of generally, so that's why some portfolio hedging is important to me. Also, as I use gearing, then hedging is very important. I'm also in the process of selling all my liquid, large cap positions, to kill my gearing. After all, they're easy enough to buy back, when this Italian crisis has abated.


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Idox plc is a supplier of specialist information management solutions and services to the public sector and to regulated asset intensive industries around the world. The Company operates through five business segments: Public Sector Software (PSS), Engineering Information Management (EIM), Grants (GRS) and Compliance (COMP). PSS segment is an application provider to the United Kingdom local government for core functions relating to land, people and property, such as its planning systems and election management software. The EIM segment delivers engineering document management and control solutions to asset intensive industry sector. The GRS segment delivers funding solutions to private and third sector customers. The COMP segment provides compliance solutions to corporate, public and commercial customers. more »

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Smartspace Software PLC, formerly RedstoneConnect PLC, is engaged in providing technology and services for smart buildings and commercial spaces through its core businesses, Redstone and Connect IB. The Company, through Redstone, provides a range of services, including design, build and installation; and software solutions. The managed services encompasses the provision of outsourcing services spanning network infrastructure management, smart buildings support services, desktop and data center support services and move, add and change services. Redstone offers OneSpace occupancy management product. The Company, through Connect IB, creates digital solutions. Connect IB develops and deploys applications, including those that address mapping and way finding of Smart Buildings and Smart Spaces, such as car parks or retail shopping centers. It serves customers of all sizes, including corporations, such as property developers, landlords and principal occupiers of commercial property. more »

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Belvoir Group PLC, formerly Belvoir Lettings PLC is a United Kingdom-based company engaged in selling, supporting and training residential lettings franchises. The Company operates a nationwide property franchise group with four brands that offer a range of services in property rental, property management, residential lettings, buy to let and property sales. Its property franchise group manages approximately 58,000 properties in Grantham, Lincolnshire. more »

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33 Comments on this Article show/hide all

Paul Scott 29th May '18 14 of 33

In reply to post #367949

Hi John,

So Italy's problems are because Germany makes lots of things that people want to buy?
But so does Italy. It runs a trade surplus with the rest of the EU and with the rest of the world. So they seem to be more competitive in trade than the UK which runs a massive deficit. Or is that the Germans fault too?

I think we need to focus on fixing our own issues.

None of that is relevant for our purposes here.

All I'm interested in, is what the impact on the markets is, of the emerging Italian crisis - I'm hawkish, and think we could be in the early phase of a major financial crisis, triggered by Italy. The causes don't matter for the purposes of this column!

Regards, Paul.

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Wimbledonsprinter 29th May '18 15 of 33

Redstoneconnect (LON:REDS) had got marked down after it came out with a trading statement at the 25 January and said to expect a fuller trading statement for FY18 at the end of Feb, which never came. The full year results were due at the late April and have only now been released. The market feared no news was bad news (also cancelled its planned appearence at Mello Derby in late April). The reason for the radio silence is now clear - it was good news.

The old group was built up through a series of acquisitions ( Redstone in 2013, Commensus and IB Conect in 2016 and Anders + Kern in 2017). The retained software business looks reasonable but revenue is too small for a listed company (even if overheads are reduced). Therefore, the shares are now a bet on current management being able to invest the proceeds of the sale better the company has done in the past.

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IGotPoesJacket 29th May '18 16 of 33

In reply to post #367969


I agree with your analysis that Germany needs to leave, or at least start economic redistribution of its wealth. It's causing massive economic problems. One of your commentators said "we need to sort out own problems". Well I would assert our "own problems" are driven largely by the fact that German goods are spectacularly underpriced due to the undervaluation of the Euro. I would also assert that European attempts to strait-jacket London as a financial centre are a economic headwind for the UK. Lastly, the Galileo debacle tells us everything we need to know about the future direction of Europe and who calls the shots.

On R4 Today some time back they had a German minister on - when put the question of degree level educated youth unemployment across Southern Europe (in the interview they were talking particularly about Spain iirc), the German minister said something like - "they should move to Germany, we have plenty of jobs".

He appeared to genuinely not see an issue with that approach.

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Asagi 29th May '18 17 of 33

Dear paulypilot and board,

On Belvoir Lettings (LON:BLV) and tenancy fee changes:

Response to the Autumn Statement, 24 November 2016:

At this stage, Belvoir cannot fully predict the likely financial impact on the results for the year ended December 2017 and beyond. Based on the Group's experience following a similar decision in Scotland in 2012, however, the Board anticipates that mitigating action should be possible over time and indeed it should be noted that no franchisees were lost in Scotland as a consequence.

Pre-Close Trading Update, 23 January 2017

following the ban on tenant fees in Scotland, our franchisees adapted quickly and effectively such that there was no discernible impact on revenue to either the franchisees or the Group.

despite this clear risk to future earnings, reflected in the market price of the shares, we do have two years of forecast earnings growth, likely put out by the retained research house.

Asagi (no position)

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EDWARD FORT 29th May '18 18 of 33

The usual hand-wringing about the plight of Italy.

It's worth remembering that Italy has higher exports than the UK and higher productivity. It's only because we in the UK consume so much more than we can afford that our GDP is larger. Italy's national debt maybe a bit higher than the UK's, but household debt and corporate debt are lower. Socially it's a very conservative country and has no intention of leaving the Euro or the EU.

So dream on Brexiteers if you think it's all going to collapse, because it isn't. Worry more about your own disastrous Brexit project.

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Paul Scott 29th May '18 19 of 33

In reply to post #368004


Sorry, but you've completely misunderstood the point.

This is what I'm talking about - the Italian main stocks index is down 12.5% in the last 3 weeks, because of the political crisis;


Moreover, the yield on Italian Govt 10 year bonds, has shot up dramatically in the last few days.

Here is the price of those bonds for example. Ignore the bond markets at your peril.


Instead of making silly political comments here on Brexit, which don't interest anyone, let's try to focus on the facts & figures, as they affect the financial markets.

There's a serious risk of another major financial crisis, if the Italian situation is mishandled. Ignore that if you wish, but to me it's very important.


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dscollard 29th May '18 20 of 33

Re Redstoneconnect (LON:REDS)

The press release from Excel gives a bit more detail. Given the headcount reduction then central costs are likely to be reduced assuming Redstoneconnect (LON:REDS) have a similar body shop approach to others in these businesses :  headcount needed in service lines is located centrally and the charged out to service lines based on utilisation. In the below the people and assets are transferring to Excel : Redstoneconnect (LON:REDS) has also explicitly cited a channel partnership model with Excel which will allow pull-through  from existing Redstoneconnect (LON:REDS) clients (and  by extension),  from new clients that are on Excel books. 

 In essence , Redstoneconnect (LON:REDS) is not operating a stand-alone software business as it has a go-to-market via the infrastructure side of the new entity with Excel. This brings a lot of advantages and scope for growth .

 I like the new business model but then I am a bit biased.

I assume more details will follow prior to the June meeting. 

London, UK, 29th May 2018 — Excel I.T. Ltd has announced an agreement to acquire Commensus Limited and Comunica Holdings Limited – the sole shareholder in Redstone Converged Solutions Limited – from RedstoneConnect plc. The acquisition is subject to RedstoneConnect shareholder approval.
The acquisition will create the UK’s largest pure play network, connectivity and IT infrastructure company, with expertise throughout the data centre, office and smart building environments.
The agreement is for Excel I.T. to acquire the assets, people and customer contracts of the Redstone Converged Solutions and Commensus operations. RedstoneConnect plc will retain ownership of its Connect and OneSpace software operations.
The merged business will operate under a new ExcelRedstone brand.
Excel I.T. CEO Barry Horgan said: “Both Excel I.T. and Redstone Converged Solutions are well established as leading providers of IT infrastructure, managed services and smart building technology to a large and growing base of enterprise and mid-market clients in the UK and abroad.
“By combining these already successful business operations we are creating a unique new force in the data centre and intelligent infrastructure markets, with the scale, quality and breadth of competencies needed to meet clients’ increasingly complex and critical IT infrastructure requirements.
“ExcelRedstone will have an enviable client list from day one, including many of the world’s leading financial institutions, multi-national corporations and largest hyperscale data centre providers.
“Responding to the increasingly international outlook of these clients, we are creating not just a new market-leader for the UK market but a platform from which we can build the largest IT infrastructure specialist across the EMEA region, with the capability to follow customers globally.”
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dscollard 29th May '18 21 of 33

In reply to post #368024

Presumably relative Euro strength/weakness will act as a proxy for systemic risk. Potential hedging strategy would be long GBP short Euro or long dollar?

NMX has also rallied about 15% off March lows as well as the seasonal sell in May so profit taking is inevitable

The CBOE VIX is still very sanguine though it is rallying as protection has been cheap: another worry trade indicator is gold which hasn't done much of late but then that is inversely correlated to dollar which has been strong. That correlation breaks down when real fear is in play so a spike in gold would support this

I keep an eye to bonds, major currency pairs (especially the Yen), gold and the metals (Dr Copper) and the Fear and Greed indicator (currently at 39 = Fear)

Like you say, always need to keep an eye to to the weather even if the sailing looks good .

“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria,”

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EDWARD FORT 29th May '18 This post has been moderated
Edward John Canham 29th May '18 23 of 33

In reply to post #368044

Think it's you that misses the point.

In 2011 (I think) the EU effectively enforced a government on the Italian people - they haven't forgotten this - and I believe this was the reason for the recent poll result.

Now in 2018 a EU proxy (their own President) has done it again - effectively saying you can have democracy ONLY if comply with the EU - I suspect you will see the people of Italy on the streets imminently. The next elected government in Italy will be anti EU because of this arrogance and it will be interesting to see how that pans out - its not Greece - its a major player. The EU bureaucrats have potentially seeded the roots of their own demise, IMO, by this one action.

Therefore there is a huge potential risk and I for one am considering how to deal with this in the context of my portfolio. This has nothing to do with Brexit.

For the avoidance of doubt I voted to stay in.


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tjl 29th May '18 24 of 33

A pal who works for a leading British bank told me they have done research which shows that it would take two years with all bank note printing factories in Europe at full stretch to print enough new lira notes if Italy was to leave the Euro. Not sure what tells us other than to but De La Rue if Italy shows signs of crashing out of euro!

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ambrosia 29th May '18 25 of 33

it has become so hard to have a rational, pragmatic debate about the EU, everyone feels the need to say which side of the fence theyre on so anyone of the other side of the fence can instantly attack you or discount what youre saying. However one thing i can confirm 'the adults in the room' is a cracking read and highly recommended

i find it interesting when Paul writes an economic overview, or something on new patterns and behaviours the market is showing, its a good addition to the company reports and big thumbs up from me

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davidjhill 29th May '18 26 of 33

Back on Redstoneconnect (LON:REDS) for a moment, I have had a few minutes to take a quick glance through the numbers in the results and a couple of things come through to me that I wouldn't mind views on.

Firstly NTAV post sale
1) Net cash is £1.2m but presumably we add back the £1.4m of inter-company debt = cash position of £2.6m
2) Proceeds of £21.6m
3) NTAV before sale was £6m so looks like £29m post sale
4) Can't work out if there is tax on any of the sale but at most 20% on £11m so £2.2m meaning NTAV £26.8m so we have a book value of £1.29 per share

Then residual value of continuing operations
1) Software sales more than trebled from £1.6m to £5.3m
2) Market is growing at compound 25% p/a so one would expect a minimum of £6.6m in current year @ 83% margins = gross profits of £5.48m which would suggest that even if all group overheads transfer to existing business they should be capable of generating breakeven at a minimum.
3) For a business & market growing at this level what valuation should be applied : say 1.5 or even 2 times sales = £10-£13m?

so we have a business worth £36-40m or £1.73 to £1.92 per share with upside if software continues to perform as it has. Perhaps a floor of £1 p/s assuming money isn't just frittered but investment case doesn't play out?

Looks like a rock solid balance sheet play with a 15p risk for a 75p+ reward = 5:1 investment decision?

Am I wrong? What have I missed?

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davidjhill 29th May '18 27 of 33

In reply to post #368024

Hi Paul

Agree on several points, especially re not ignoring Bond Markets or credit spreads but the numbers not causing me too much alarm at this stage.

10y yields are circa 3.16%, a long way off the 7% generally accepted as "at risk of bail out" and numbers we saw back in 2011. So whilst a big jump in its own right, not yet flashing red by any stretch.

5Y CDS spreads at 174bps, decent jump but again nothing to be too concerned about at this stage.

whilst equities are down they are still trading at Sep17 levels and are still up a whopping 33% since Dec16 so a correction based on political uncertainty but not yet flashing red.

Italian politics also have a habit of being very short tenure, several restricting what can be enacted by parliament. I ponder whether a "leave of the EU" would just prove a stretch too far for anyone to go before getting derailed. It's a much bigger step than the UK just because of the single currency.

For me the numbers in themselves are warning against complacency rather than imminent risk. Certainly a situation to be watching for any further signs of deterioration though.

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tony777x 29th May '18 28 of 33

In reply to post #367949

The euro is not all to blame for Italian woes. Infact when Italy initially entered the euro it did very well as it does export a lot more than it imports. Although the EU could do with reforming it has brought a lot more organisation to Italian life. I know what banks were like 20 years ago! A lot of the Italian problem is to do with not wanting to modernise its trade union laws and professional sectors.Italians are industrious people but do not like change. The parliamentary system which tends to return weak coalitions was put in place to stop dictatorial regimes ever getting into power again. A lot of the older generation are euro sceptic but the younger are generally not. Not much different to our country in that respect maybe?

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Paul Scott 29th May '18 29 of 33

In reply to post #368059

Hi tjl,

A pal who works for a leading British bank told me they have done research which shows that it would take two years with all bank note printing factories in Europe at full stretch to print enough new lira notes if Italy was to leave the Euro. Not sure what tells us other than to but De La Rue if Italy shows signs of crashing out of euro!

Most money is electronic, so it's actually quite straightforward (at first anyway) to change currency. A rebel Italian Government could just close the banks for a few days, and when they re-open, every Euro account has been re-denominated electronically into New Lira. The banks could required in advance to prepare for this eventuality, and have the IT ready to go, if required.

As regards banknotes, I believe what Greece was planning on doing, was to pass a law requiring that all citizens present their Euro banknotes at a nearby bank, and they would then be stamped by hand, or by a machine, which would then turn them into New Drachma. Capital controls would also need to be imposed, making it illegal to take any banknotes out of the country, and payment systems would not allow money to be sent abroad.

The other element of Greece's plan B, was to have an electronic parallel payments system. Varoufakis envisaged this being tax credits - which would be transferable, allowing people to settle bills with businesses through an online payment system. The Government could then credit people with pensions, benefits for the poor, etc, through these electronic credits.

According to his book, the Troika crushed Greece through a policy of divide & rule, exploiting internal divisions within Greece. Also, the Troika installed functionaries into Greek Govt departments, to emasculate Greek politicians. so the Greek tax office for example, reported to Troika officials, and carried out their bidding.

As part of their negotiating tactics, the Troika would manipulate the bond market, to reward Greece when it complied with their demands, and punish it when it didn't.

Ultimately, the only way Greece could have extracted concessions would have been to refuse to compromise, default on its debt, and activate its Plan B. Varoufakis wanted to do that, but the rest of the Greek Government caved in, and decided to capitulate. As a result, Greece remains in "debtors prison", with an impossibly high level of Govt debt (around 180% of GDP), a stagnant economy, massive youth unemployment, and not really much hope of things getting better.

What will happen with Italy? I think it could get messy, but ultimately, the Troika will probably use the same strong arm tactics, and bludgeon Italy into submission too.

The risk is that there could be such a run on the Italian banks, that they collapse, and contagion then spreads to other countries. It doesn't sound as if the Germans are going to be willing to compromise, so I think we're probably heading for a pretty serious showdown if & when Italy does get a populist Government with a working majority.

For the purposes of this forum, we're only interested in discussion the economic & financial markets impact of all of this. It's not related to Brexit, or anything political, so please let's not unlock that Pandora's Box, as it gets very boring after a while.

I think this could become a serious crisis, and have a major effect on the financial system. Hence why I've taken action to protect myself. I've just bought some gold (on a spread bet) too, and am trying to think of other portfolio hedges as insurance.

Fascinating times ahead - this to me seems to be the big issue facing markets this year.

Regards, Paul.

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davidjhill 29th May '18 30 of 33

In reply to post #368089

Interesting thoughts - and appreciate you are playing out an economic possibility, but Italy is not Greece and doesn't have many of its structural problems nor the same relative magnitude of debt / trading prospects. The debt markets are telling us they are only mildly concerned right now, and that's more around the uncertainty than any expected consequence.

Greece was only marginally economically relevant in 2011 as the total gross debt was pretty low and could easily have been swallowed by Europe in the event of default. The bigger issue (rightly or wrongly) for policymakers was not creating a precedent of allowing a member state to leave the single currency when they got into trouble and/or being perceived to allow default without significant penalties.

Italy is an entirely different ball game, and we should also remember that Europe is in a much less fragile position than it was in 2011 as well, so whilst the risk of contagion is not eliminated it is reduced. Look at the Spanish 10Y is still trading at 1.62% suggesting minimal contagion crossover implications at this point.

Definitely a situation to watch diligently and not to be complacent though.

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tjl 30th May '18 31 of 33

In reply to post #368089

I have Varoufakis’s book - maybe I should read it!

I agree that it’s really down to whether the Italians are prepared to defy the EU/German concensus and risk crashing out of the Eurozone with huge contagion across Europe. Greece was too weak to stand up to the EI and Italy first folded the last time Merkel/Sarkozy forced Berlesconi out.

Personally I think the Italians will posture then fold but if they don’t there will be carnage across the markets. For the first time ever I’m thinking of going to cash if there’s any sign that the Italians will reject the Euro.

I also agree wholeheartedly that we should be looking at the financial implications rather than political. Personally I think the Italians would be better off out but that would cause chos in the European markets and I’d want to be prepared.

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Flackwell 31st May '18 32 of 33

In reply to post #368094

No its not Greece but at over 130% of GDP it is only just second to them

In fact on a global stage its worse than Congo, Bhutan, Mozambique and Jamaica

Perhaps that's one reason the markets have reacted the way they have - and who knows how much more is to come?

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davidjhill 31st May '18 33 of 33

In reply to post #368654

I don't think traders are particularly worried about Italy at 130%. They are nowhere near a default scenario and have plenty of cover in contrast to Greece at the time who were actually in default and have a much more limited and less diverse economy. Completely different scenario. Italy is 3rd largest economy in Europe and therefore has much more scope.

Italy GDP is forecast to fall over the next 2/3 years by 13 points to 117%. In contrast the US will have a higher debt to GDP at that point exceeding 120%. Japan is a staggering 253% yet both are under no real pressure. Others in Europe are around the 100% mark with weaker economies than Italy.

My point being that a simple GDP to debt ratio is actually fairly irrelevant in terms of what comes next. Much more relevant is what happens to that debt should a country leave/be forced to leave the EU. Problem with trying to hedge that scenario is that these things can be very protracted and so it's only really long dated out of the money put options that can effectively do that or staying heavily weighted to cash. Both have a fairly significant cost associated to them as Paul also pointed out in his musings this morning.

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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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