Small Cap Value Report (Tue 3 Apr 2018) - AIR, RNWH, FLYB, HRN, | Paul Scott

3rd Apr '18 by Paul Scott

34 comments 15238 reads

Good morning, it's Paul here!

I'm back from a week's holiday on the west coast of America, which was interesting & enjoyable. If you think we've got a homelessness problem in the UK, then you should visit San Francisco - where the scale of the problem is unbelievably bad, and very sad to observe. All that wealth, yet thousands of people have just been abandoned, to live miserable & squalid lives on the streets.

Many thanks to Graham for doing a sterling job last week, which gave me a chance to have a rest from the markets.

It looks to be a quiet day today. So far I have the following on my list to review;

Air Partner (LON:AIR) - accounting issues
Renew Holdings (LON:RNWH) - trading update
Flybe (LON:FLYB) - trading update
Hornby (LON:HRN) - trading update

So I'll get cracking on those now.

IQE (LON:IQE) - I've just seen the tragic news that its Finance Director, Phillip Rasmussen, has died following a cycling accident abroad. He presented at a Mello evening a couple of years ago. His presentation was an absolute masterclass in how to explain complex subject matter with amazing clarity. Our condolences go to his family, friends & colleagues.

Air Partner (LON:AIR)

Share price: 113.25p (down 21.1% today, at 08:39)
No. shares: 52.2m
Market cap: £59.1m

Year end update (accounting problem)

A reader has asked me to try to explain today's announcement in plain English.

A problem has emerged during the audit of its figures for year ended 31 Jan 2018;

The Board of Air Partner has identified, during the course of its year-end review process, an issue predominantly relating to its accounting for receivables and deferred income.

Following preliminary investigations, the issue principally relates to the collection of receivables from customers and accounting for uncollected amounts since financial year 2010/11.

Certain uncollected receivables were inappropriately offset against deferred income rather than being expensed to the income statement in the appropriate financial year.

This is a non-cash item and has no bearing on the Company's cash balances.

This seems to be…

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matylda

3rd Apr '18

Morning Paul!

Welcome back, hope the trip was great.

Is there any chance you could put the Air Partner (LON:AIR) update into plain English ?

Year End Update – My initial thought is it's some kind of accounting balls up to the tune of £3.3m. The last Trading Update For The 12 Months To End January 2018 mentioned expectations of PBT of at least £6.4m. Does this mean PBT will be halved?

Would be much appreciated - I hold at present.

MrContrarian

My morning smallcap tweet:

1Spatial (LON:SPA), Ukrproduct (LON:UKR), Hornby (LON:HRN), Flybe (LON:FLYB), Air Partner (LON:AIR), IG Design (LON:IGR)

1Spatial (SPA) wins £1.6m contract over 5 years. Current T/O is £22m.
UKRproduct Group (UKR) expects to report increased FY revenue and gross margin. An overall loss for the year is expected, due to the negative impact of exchange rate differences. No forecasts.
Hornby (HRN) has stopped shooting itself in the foot after the supply debacle: "some trust is coming back with our retailers and customers." "There was an improvement in sales towards the end of the financial year as some of the European product started to arrive, but as expected, the Group sales and profits were lower than last year." Seeking a larger financing facility with new lender. Barclays gives covenant waiver. "Whilst we have managed to make a lot of progress in the first few months, there is still much more to do in terms of reducing costs, streamlining processes and adding routes to market."
Flybe Group (FLYB) Q4 load factors were up by 6.8 ppts to 73.5%. But weather in February and March led to airport closures and flight cancellations. Estimates hit of £4m rev inc. additional care and assistance costs. Very early indications of summer trading encouraging.
Air Partner (AIR) has overstated profit in last 8 years by failing to account for bad debts correctly. "Principally relates to the collection of receivables from customers and accounting for uncollected amounts since financial year 2010/11. Certain uncollected receivables were inappropriately offset against deferred income rather than being expensed to the income statement in the appropriate financial year. This is a non-cash item and has no bearing on the Company's cash balances." Total £3.3m. "At no point was a customer, operator or supplier impacted or disadvantaged. Further, the Group continues to maintain a strong net cash position."
IG Design Group (IGR) sells property for £2.5m for a gain of £1.1 - £1.3m.

Albertos

Quarterly dividends on AIM? Never !

Diversified Gas & Oil (LON:DGOC) has announced this is what its going to do - which was a surprise this morning. Guess it makes up for taking 4 months to prepare its accounts.

Phil

dfs12

I have been to San Francisco twice. Once in the mid 1990's when it clearly had it's rough'ish areas but was generally free of people living on the streets. I loved the place. On the next visit in 2008 the rough areas had turned into extremely run down areas and there were lots of people on the streets. It sounds like that trend has continued. I wonder if it says something about income distribution in the US? I heard on the radio the other day (Radio 4 I think) that income distribution in the UK is pretty good and this is the first recession (post 2008) where the gap between the rich and poor has actually declined. And the reason for the decline? Changes to the UK tax system to benefit the poorest and lowest earners. Their incomes haven't gone up significantly but the disposable income has risen significantly due to changes in tax thresholds and rates. Probably doesn't help those who are totally outside the working world but its still quite heartening to hear.

Paul Scott

Hi dfs12,

Interesting comments. The latest figures from the ONS are quite revealing. This showed that, after taking into account income redistribution through taxes & benefits, the UK has a remarkably low differential between the top & bottom earners.

From memory, the differential between the top quintile & the bottom quintile was only about 4-5 times. This surprised me, as I would have imagined it was over 10 times, but apparently not.

I suppose our perception is different because so much publicity surrounds the super-rich, who are relatively small in number.

Regards, Paul.

Howard Adams

Very sad news.

IQE (LON:IQE)

Twitter posting from FT just now.

The chief financial officer of IQE, which supplies chips to Apple, died in a cycling accident while on holiday abroad over the Easter weekend, the British company said on Tuesday.

https://www.ft.com/content/0d768110-3715-11e8-8eee-e06bde01c544

apad

A recent one missed that you have commented on before is PTSG, Paul.

Interestingly difficult accounts to interpret.

Any chance of a backwards look?

Air Partner (LON:AIR) - Thanks, much appreciated Paul.

I continue to hold for now in the hope some clarity is forth coming.

Thanks again.

Ajay_Gajree

Hi Paul

Any additional comments to add to Graham's ?SOS write up last week? I notice you have a position in it in BMUS.

Not currently a holder but it's on my watchlist!

Andrew Brien

Sanderson (LON:SND)

Hello Paul,
If you have time, would you please comment on the grant of options to the directors on 29th March? I thought they we overly generous, but perhaps I'm being unfair?

brucepackard

Thanks for that on Air Partner (LON:AIR) - my initial reaction was the same. Recognising bad debts in the balance sheet, rather than expensing immediately though the p&l ought to be just a timing issue. Air Partner (LON:AIR) would have overstated profits in the early years, but eventually the deferred income on the balance sheet would be recognised through the p&l, so current or future profits would be understated if they had kept the same accounting treatment.

Anyway good to have a second opinion (even if it is confirmation bias :-) )

For clarity, I have subsequently decided to sell (as updated on my morning post)...

"My reckoning being the FD probably has to go now which is more bad news and then there's the further investigation to come. If the further investigation is worse, well that's more bad news.

Decided - Better out wishing you were in than in wishing you were out!"

MichaelFBS

Air Partner (LON:AIR) Thank you Paul for your analysis though I think the company has not been as clear as I think they could be or should have been.

The question also arises was this deliberate and therefore done to mislead the owners (us the shareholders)?

To me this is basic (I am only part trained accountant having dropped out of Middlesex Poly 35 years ago) accounting and expenses should not have gone through the balance sheet. But maybe somebody can correct me?

So the questions now are:

- can we trust the management, a key for any investment I make?
- should I dump the stock in part, the whole lot or not at all?
- or is it a buying opportunity as the market has over done it?
Tricky.

Hi Ajay,

Re Sosandar (LON:SOS) - I'm perfectly happy with progress to date. This is an early-stage company, so for me it's all about backing management & the concept, both of which I think are excellent.

As regards the numbers, they're in the right ballpark (compared with the Turner Pope note from Aug 2017), although the year end was changed, so we can't directly compare the 9 month figures, with 12 month forecasts.

The operating loss for the 9 month reported figures was a bit higher than I was expecting, but not enough to cause concern. However, revenue is growing nicely (from a start-up), and the gross margin is excellent for such small revenues - suggesting that there's likely to be good upside on gross margin once turnover has risen considerably more.

There's plenty of cash in the bank for anticipated losses in 2018 & 2019, by my reckoning. So it's just a question of sitting back and waiting to see how things develop over the next 2 years. I'm trying to ignore the share price, as it's not relevant to my point of view, as I am treating this as a buy & hold forever situation (providing the growth continues to be strong).

The market has sold off most small caps, especially more speculative stuff, by 30%+ in recent weeks, so SOS has just followed that trend. I don't think the recent share price fall here has anything to do with fundamentals & outlook, which both look positive to me.

Taking a long-term view, if SOS does work out, then this could be a serious multi-bagger. That's why I think it's pretty exciting. Short term, the share price could go up or down, I have no idea!

Small Cap Value Report (Tue 3 Apr 2018) - AIR, RNWH, FLYB, HRN,

Air Partner (LON:AIR)

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Paul Scott

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