Small Cap Value Report (Tue 30 May 2017) - FXI, KNOS, BLTG, FJET

Tuesday, May 30 2017 by

Good morning, it's Paul here.

I was looking into the horrible case of Fusionex International (LON:FXI) over the weekend, after a friend flagged it to me.  It joins the long list of overseas companies which listed on AIM, and ended up being disastrous for UK shareholders.

I cannot stress enough how investors can protect ourselves by having a default setting whereby we decline to invest in overseas companies on AIM. The reason being simple - because many or even most of them end up being disastrous investments. Exceptions can be made sometimes, particularly where the country risk is lower (e.g. USA, or W.European countries), but I'll cover that in more detail at the end of this article.

As with Globo, and the Chinese AIM frauds, the warning signs were not difficult to spot - they were obvious. As I researched Fusionex over the weekend, the red flags were blatantly obvious. So people who get caught on this type of disaster stock really need to drastically improve their stock selection procedure, whilst they've still got some money left.

We all lose money on some shares, it's a normal part of equity investing. However, returns greatly improve if you have a process which weeds out the obvious wrong 'uns before they blow up. One of my key aims here is to help investors focus on better quality stocks, and avoid the junk. Although in a roaring bull market like this, plenty of junk stocks are doing very well (for now) - so there are opportunities for shrewd traders, nipping in & out of junk stocks for a quick gain. Getting out before the music stops is the tricky bit!

Anyway, on to today's results & trading updates.

Kainos (LON:KNOS)

Share price: 229.25p (down 4.5% today)
No. shares: 118.0m
Market cap: £270.5m

Preliminary results - for the year ended 31 Mar 2017.

This company (HQ in Belfast) describes itself as;

 ...a leading UK-based provider of digital services and platforms

Whatever that means? Checking back on my previous notes, it seems to be an IT company that specialises in UK public sector work. This is quite topical, given recent hacking & blackmail on the NHS (and other) computer systems. It's achieved superb growth in the past, as you can…

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Kainos Group plc is a digital services company. The Company offers information technology products and services to clients in a range of markets, including government, healthcare and financial services. Its segments include Digital Services, Evolve and WorkSmart. The Digital Services segment delivers various system developments of customized online digital solutions for the United Kingdom government and private sector organizations. The Evolve segment is its software platform, which provides over two offerings to the healthcare markets: Evolve electronic medical records (EMR), which is used for digitization, storage and workflow of patient records, and is engaged in the digitization of patient notes in the Acute sector of the national health service (NHS), and Evolve Integrated Care, a cloud-based integrated care solution. The WorkSmart segment provides consulting, project management, integration, support and testing services. It provides software design and development services. more »

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Blancco Technology Group Plc, formerly Regenersis Plc, is a provider of mobile device diagnostics and secure data erasure solutions. The Company's segments include Erasure and Diagnostics. The Erasure segment focuses on development and delivery of solutions, and includes Blancco, which provides erasure software; SafeIT, which is engaged in cloud and networked data erasure business, and Tabernus, which is engaged in providing software erasure products. The Diagnostic segment includes Xcaliber Technologies, a smartphone diagnostics software business. Its secure data erasure solutions include Blancco Management Console, Blancco Cloud, Blancco File, Blancco 5, Blancco Mobile Solutions, Enterprise Erase E800, Enterprise Erase E2400, Enterprise Erase Mobile and Ontrack Eraser Degausser. Its mobile diagnostics solutions include fault diagnostics, repair and program enablement. It serves manufacturers, financial institutions, healthcare providers and government organizations across the world. more »

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Fusionex International Plc is an information technology software company specializing in Analytics, Big Data and the Internet of Things (IoT). The Company operates through two business segments: Products and Services. Its products include Analytics, Mobility, Loyalty, Cloud and Core Systems. Its products and solutions include Corporate Performance Management, Customer Relationship Management, Enterprise Resource Planning, Intelligent Capturing System, Core Banking System, Enterprise Insurance System, Loan Management System, Document Management System, Loyalty Management System, Self Service Kiosk System, Aviation Management System, Geographical Information System, e-Commerce/Internet Booking Engine and Property Management System. It offers its solutions to agriculture, banking, energy and utilities, leisure and gaming, insurance, logistics and transportation, manufacturing, media and market research, public sector, retail, telecommunications, and travel and hospitality industries. more »

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

34 Comments on this Article show/hide all

paraic84 30th May '17 1 of 34

Paul - I bought Kainos (LON:KNOS) just after the Brexit referendum result and made a decent amount from the bounce back, selling last autumn after the half-yearly results. Even then they were flagging that profitability and EPS was flat on H1 2016 results so I was surprised it remained on a high PE multiple since then. One of its biggest customers is the NHS and, as a sector I work in, I know there's been a slowdown in IT spend and this might partly account for slowing growth and profitability. I don't think it ever says how much of its revenue is from the NHS but, checking my notes, last year around 86% of its revenue was from the UK.

Another risk with Kainos (LON:KNOS) is that part of the business (c.14% of revenue and profits) is implementing the software of another company called Workday. If Workday ever changed the fees they give to Kainos (LON:KNOS) then that could harm revenue, albeit not on a massive scale.

On the plus side the company has been spun out of a university and seems to have great staff morale who are loyal. I like those features in businesses I invest in. The CEO has been with the company since 1989 when he started as a graduate software engineer.

On a different note does anyone know why Fulham Shore (LON:FUL) has had a bit of a dip today? I am guessing its simply because it's quite an illiquid share so prone to wild movements but just want to double-check before I top up!

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runthejoules 30th May '17 2 of 34

I'm looking forward to hearing more about Fusionex and what went wrong Paul! I hold Kainos (LON:KNOS). They do digital care plans and are expanding into States & Germany so they're in a position where they're investing, diversifying AND still making cash. Here's Shares' news article. It's still a hold for me in hope next results should be better, after all, demographics are on their side and NHS funding/efficiency will either improve, or they will refocus on private healthcare. Results in 2016 were also exceptionally good so probably should not have expected same again but Cannacord have raised target to 290p.

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vik2001 30th May '17 3 of 34

Hi Paul, wanted to ask your opinion would you consider Franchise brands  (FRAN) to be a growth stock?  not sure if you looked into it, but could be a lot of potential in this stock.

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Hedgecutter 30th May '17 4 of 34

Hi Paul,
Could you comment, please on Eagle Eye (EYE).
Back on 16 November 2016, you said it might be of interest once it had raised more cash. It announced a placing last week and in spite of rather too large a discount to those greedy institutional investors. The SP has gone up significantly. I made a small investment a few weeks ago and topped up last week.
Your thoughts please.

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insy09 30th May '17 5 of 34

In reply to post #189659

Id also be interested to know whats caused the Fulham Shore (LON:FUL) drop today.

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Nick Plantman 30th May '17 6 of 34

Hi Paul I bought this share (KNOS), because it was one of only a few local PLCs and seemed to be doing quite well, but in the end i sold out late last year at a small gain, after the dividend had been paid because I just found it was slow too move and not half as exciting as another local firm First Derivitives (FDP) which provides IT to financials and is now selling its products into retail and engineering companies. It has just posted results and its shares are now trading at £30.00 + an increase of around £4.00 in just a week I suspect in some part due to the floatation of ALFA on the LSE and its (FDP's) growth over the last year.

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Julianh 30th May '17 7 of 34

Very much looking forward to your write up of Fusionex. You are a good teacher. Learning how to avoid the next Fusionex, Globo, or whatever is so valuable.

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N Harley 30th May '17 8 of 34

Hi Paul Is Warpaint not the big new disruptor in the world of global cosmetics? Have you had a look at this one?

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gsbmba99 30th May '17 9 of 34

The Blancco Technology (LON:BLTG) announcement is just bizarre. Presumably Mr. Woodward would have felt comfortable with the personalities on the board when he became chairman 2 months ago. If he didn't feel comfortable he could have opted for an interim chairman role while a new chairman was pursued. The only "new" board member is the interim CFO but you'd have to assume that Woodward had a role in picking him. It's hard to imagine the relationships souring so badly in the span of what can't be more than 1-2 board meetings under his leadership. Since he's a former strategy consultant and a former banker I'm going to speculate it's strategy or acquisition related.

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Carcosa 30th May '17 10 of 34

Partly the reason why Fulham Shore (LON:FUL) is down because I sold out of it and given the number of shares I sold it had an effect on the share price. However with a share like this a few percentage point swings either way in a random day should be ignored. Illiquid shares like this react accordingly.

Fusionex International (LON:FXI) is a Malaysian company and (as I live in Malaysia for years) you can guarantee corruption and fleecing of investors for any Malaysian company. Corporate governance does not exist an any meaningful way.

According to the Times Fusionex told its two brokers of its plans on Wednesday night, leading to a row with Peel Hunt, which promptly quit. Its name was absent from Friday’s announcement, which was issued by the nominated adviser Stifel, the other joint-broker. Buchanan PR also quit.

If forecasts are to be believed then shareholders could have expected significant returns in 2018 or so. Obviously too tempting for the BoD scum to allow ordinary shareholders to be rewarded with.

Fastjet (LON:FJET): More of the same in todays RNS. Been discussed on Stockopedia numerous times so should not be any surprise when this comes to a crashing end ;-)

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harvs19 30th May '17 11 of 34

Carcosa - any particular reason why you sold out of Fulham shore ?

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cousinjack 30th May '17 12 of 34

In reply to post #189679

The resignation of the Pizza Express CEO, and the company's suggestion that sales are softening, are likely to be factors in drifting Fulham Shore price. Ironically softening sales for PE likely to be partly due to increased challenge of competitors such as Fulham Shore !

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JASPERTHEDOG 30th May '17 13 of 34


I realise you are, in your column, taking the view of the private investor. You are, of course, absolutely right that an unacceptably large number of foreign based companies on AIM turn out to be 'Norfolk Broads' of one sort or another. This is wrong for all the reasons you, and others, are constantly pointing out.
The fact that the majority of PIs are hopeful amateurs should not mean that their favoured pond should be filled with toxic fish swimming beneath the surface and as such, difficult to spot.
I am almost more concerned that these fish are brought to market by professionals in banking, broking, PR and fund management who earn fees and commissions from their activities. It's bad enough that the shares are offered to PIs who are able to, and should, do a bit of their own research, but far worse that the 'professionals' must stuff these millions of questionable shares into funds over which they have control on behalf of retail investors. Investors who are time-short or unsure of the market and, presumably, somewhat risk averse and who believe that the savings they commit to the funds are responsibly managed.
The slow death of so many of these companies, in spite of the strident warnings from you (and Tom W. et al.) must mean that the institutions continue to hold long after the red flags are spotted. Is it that the fund managers are inept, are they plain lazy, too embarrassed to admit buying a dog or is there something more sinister going on? By this I mean, is there a general agreement, unwritten naturally, that they will collude with the dog's promoter and, in turn, will expect their peers to buy the next bit of rubbish they are in turn promoting?
I cannot, otherwise, understand how it is that these millions of shares are sold into a sophisticated market, time and time again.

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Davidcox 30th May '17 14 of 34

In reply to post #189749

Hi Paul, I was interested to see your opinion on Fusionex as I always thought this was a good company, getting increasing orders, but like so many early starters, running into a few difficulties along the way but largely misunderstood and consequently ignored by investors. Obviously I missed these red flags and look forward to seeing your research so i don't make the same mistakes in my future investments. Dave Cox

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 Are LON:KNOS'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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