Small Cap Value Report (Tue 4 Apr 2017) - FUL, KWS, UTW, NFC, KOOV, ADT, UNG, FLO, TPT, NANO

4th Apr '17 by Paul Scott

67 comments 38537 reads

Good morning! It's Paul here.

I've just about recovered from a fantastic weekend - in particular, participating in the UK Investor Show. I (perhaps foolishly!) agreed to be interviewed by Tom Winnifrith, in a "live bearcast". We didn't get off to a good start, as I had a brainstorm, and turned up at the wrong venue - a North London conference centre. Only to realise, with complete horror, that there was a room full of people, and a very angry Tom Winnifrith, waiting for me at the QE Centre, a couple of miles south of my actual location!

Anyway, I hopped on the tube, and arrived in time to be torn to shreds by Tom. Although I did manage to get some quite good points in, during the brief gaps when Tom paused his monologues to draw breath! Anyway, it was all a bit of fun, and I popped over (well, spent the next 2 hours in) the Westminster Arms, and had all sorts of interesting conversations with various readers of my articles here.

Then it was back over to the QE2 Centre, to do a main stage stint. If you had told me, when I was in the depths of despair, from 2008-2012, that in 2017 I would be on the main stage, interviewing Nigel Wray, I would have laughed at the implausibility of such a suggestion. Yet that's what happened, and the initial stage fright immediately dissipated, and it was a thoroughly enjoyable half hour.

The trick is to prepare really thoroughly in the days beforehand, and practice exactly what you want to say, and how to say it. Also, I telephoned both Nigel Wray & Paul Mumford, and ran through all the questions with them, so had a good idea what they wanted to say.

So I think I've finally cracked how to do public speaking, which for most people (certainly including me) is something which seems very daunting. However, the only way to overcome those worries, is to tackle it head on, by getting up & doing it. That involves accepting that at first, you'll be pretty rubbish at it, but that hopefully each subsequent time is an improvement.

Fulham Shore (LON:FUL)

Share price: 19p
No. shares: 571.4m
Market cap: £108.6m

(at the time of writing, I hold a long position in this share)

Trading update - for the year…

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FREng

5th Apr '17

Styles and Wood (LON:STY) are down 7% today (Wednesday) on a trading statement that seems to be good news despite lower that previous year revenue. Looks like a buying opportunity - what's the bear agrument?

Ramridge

FREng - re. Styles and Wood (LON:STY) I had a look at this stock this morning. My take is
- the 9% drop in rev compared to 2015 becomes approx 15% against broker forecast
- the RNS is careful in saying that management is expecting to meet the Board's expectations, not market expectations
- if you believe that they will meet market expectations for profit and eps despite a 15% fall in revenues, then your faith in this management is a lot stronger than mine

This is a company with lumpy revenues prone to swings as even a change in a single large contract can have a major impact on reported numbers. For this reason I am staying away.

Gus. Re: "I do wish you wouldn't sit on the fence with your opinions on the likes of Koovs though."

I think that Paul was more robust on Twitter, and said that he was now short. That limits what he can say here.

FREng

Ram

You said on 31/8/16 that " although too late for this FY, revenue growth from this deal could be around 15% p.a. for 5 years" and that you had bought. I have come to respect your judgement through your postings here, so I would be interested to know when and why you sold again (if you have), given that you didn't expect revenue from the 5 year deal in the 2016 FY.

Cheers, FREng

Trident

I am not an accounting expert, but I was interested to look under the bonnet of a publicly quoted company's subsidiaries the other day. It was a way of doing my own total of the consolidated operating profit.

In doing so I came across a subsidiary company they had acquired which itself had a holding company. They had maintained the holding company structure. The trading subsidiary had decent retained earnings, and it had passed a dividend to its holding company in excess of its after operating profits. This dividend was recorded as both revenue and 100% profit in the holding company.

So what gets consolidated, the holding company's profit or the trading company's profit?

In this case the excess wasn't material to the total Group's profit, but could potentially be bit of fillip because most of the other subsids had underperformed comparatively. Struck me as a bit of a potential accounting wheeze which reading the consolidated accounts you may never know.

Retired Bear

Thanks Paul for your analysis of Utilitywise it was a lot to take in when I read the results and my fear was the future and how all the book restatements affected the companies security, what I didn't expect from you and Gus is the debt position and that worries me, I have sold anyway but that is not the point. I am very careful to ensure that net debt is below 40% and no more than 3xnet profits so where did I go wrong if as you say Gus the company has spiralling debt and how did they manage to hide 19million of debt. I have a 13 point fundamental financial check list and it passed with flying colours. My post "A fool and his money" was written a little with tongue in cheek but this situation with hidden debt both from the Stockopedia and Sharepad Screens is worrying and more than a lesson in jumping early. Perhaps, and I know you are busy, you could do a separate piece on such practices and how to spot them.
Regards
Ken.

Me again I have just re read your analysis Paul and I think what you are saying is the events created the future debt and so nothing was hidden it was in effect bad business practice where recurrent income and future profits were accrued in advance, and now this practice is stopping, so the Piper must be paid. I recognise this activity as it was prevalent in my business, I didn't participate for obvious reasons In many respects it is a problem in the fund management industry where recurrent income based upon stock market value collapses rapidly in a bear market, both as a result of withdrawals and the reduction in asset value.

Camtab

Paul
I wondered if you would help me, I am looking into Nature Group which announced back in Jan this year they have sold their Ports Services business for £4m of which £1m is held in arrears. Not being an accountant I can see we therefore credit the cash element of the B/S. But as I trawl through the accounts I cannot see where the reduction of liabilities will be? Clearly it is the business itself which was losing money. Obviously that means the profit and loss account will benefit so I guess I would have to go back over the periods taking out the effect of the business on the P&L to get the true effect? Sorry if this is a bit basic.
Best

rhomboid1

I think my issue with Styles and Wood (LON:STY) is that it shows mgt in a slightly shifty light , i.e. perhaps attempting overly aggressive revenue recognition that came unraveled at year end either pre auditor involvement or worse post their involvement . Given that the business nearly went bust once and the newish CEO is the guy responsible for refocusing and rescuing the business trust is key issue imho . I used to hold but will not revisit until they can discover the art of writing a clear & unambiguous RNS's

FReng - Re. Styles and Wood (LON:STY) It's a fair question and I looked up my log of activities to give you a fair reply.

First the background. I am a great fan of Minervini (however not a blind follower) and there are a few hard rules that I just no longer question. My investment horizon is approx 9 mths. So if a stock has the potential to increase by at least 20% in that period (and it passes all other tests) then I buy.

If subsequently the sp falls below 10%, I sell. No ifs, no buts. If the sp rises and continues to rise then I just enjoy the ride and watch it grow.

In the case of STY, I went long in August last per my post at that time. In November, the sp dropped below my 10% red line and I sold.

Looking at the sp chart today, it did recover to above my buy price. In the past, I used to kick and swear at myself but not any more. For every one such stock that looked as if I goofed, there are more which the 10% rule saved me from a major loss.

So my investment framework today is far removed from the long term hold-forever, PE-is-king, GARP model. I do admire people like Lord Lee, but that requires a temperament that I do not possess.

One last comment about today's RNS. When management's credibility comes into question, I used to give them the benefit of the doubt first time round. Not any more. The probability that they disappoint again is a lot higher than thought - based on my experience.

Hope it helps, Ram

brownrigg

Comment on the recent results from SPRP would be much appreciated.

johnrosier

Hi Paul,

Re Adept Telecom: I think you are being a little harsh on AdEPT, a long term favourite of mine and a very successful investment.

Net debt of £15.8m is a bit (£1.3m) better than forecast.

(Cash flow is very strong which has allowed it to pay down acquisition costs quickly, invest in the business and increase the dividend)

Divis are up 19% Y-on-Y to 7.75p, but that's only a 2.2% yield, hardly worthy of dusting down the bunting, and getting out the stepladder.

(From when it started paying dividends in year ending March 2012 it has been increased by 200% in March 13, 100% in March 14, 58% in March 15, 37% in March 16 and now 19%. Given the prodigious free cash flow I anticipate further strong dividend growth going forward)

My opinion - I'm not keen on this type of telecoms/IT company. The tech is moving so fast, that you can suddenly see existing business models become defunct, or at least withering away. Hence the valuations are not particularly high, for good reason.

(I think your point about technology moving fast is misplaced with AdEPT Telecom. It provides all the communications networks such as high speed broadband, wifi, telephone etc on long term contracts to local authorities and universities though framework agreements. I think it is much more technology agnostic than you think)

For now Adept seems to be doing well, but how sustainable is that, longer term, I wonder? It's not for me.

(I think anyone who has met the management at ShareSoc events in Richmond will know how good the management are. Totally focused on share holder value. After all, founder, Ian Fishwick and family are big holders. Acquisitions have been strategically well thought out, bought at sensible prices and value enhancing. Fishwick is building AdEPT into a valuable company which I think will be an attractive takeover proposition, when management are ready. Anyway, that's the end game that I anticipate.)

In January 2014, when it was 132p, I concluded: "it looks cheap on a prospective PE (according to its broker’s forecast) of 10.9x the year ending 31st March 2014 and a prospective dividend yield of 1.9%." I admit to selling 20% of my holding recently for risk reasons but it is still my second largest position after Fidelity Asian Values IT.

To me it has good (owner, occupier) management, focused on building share holder value, in a sector it knows well. It generates oodles of cash and generates a decent mid-teens return on capital and equity. I don't believe it is at risk of a sudden change in technology. It moves with technological changes. Happy Holder, as they say at JIC!

Ram,

Thanks for the detailed reply, which I found very helpful. Gradually, I'm becoming more successful as an investor and, in great part, it is from understanding what other investors have found through experience. Thanks very much for sharing yours her so generously.

Regards

Freng

Paul Scott

Hi FREng,

No, I've never shorted Koovs, and am not planning on doing so.

It's too small & valuation too erratic, for me to want to risk shorting it.

Regards, Paul.

Hi, Paul

My apologies. I misremembered the tweet - it was Asos you said you had shorted. It's hard to tell one disaster share from another ....:)

FREng

7th Apr '17

Hi brownrigg,

I did 10 companies in one day, that's all I can manage, sorry! ;-)

As regards SPRP - to me, it's too problematic. I know the company well, as I bought some shares in it when they were about 90p and on ISDX. Everything looked great, for several years, it moved to AIM, but more recently the performance has been ridiculously erratic, due to issues about large one-off orders driven by legislation, then odd distribution contracts with suppliers.

I just decided a while back that it's not for me. Too complicated, and opaque.

Looking at the most recent results, briefly, my concerns were confirmed - I don't like companies which can swing so much in profitability. Nobody was saying that the profits would collapse. Everyone was happy when it was 300p per share.

So, a rather peculiar share, I'm uncomfortable about it, so it goes on my list of weird shares that I don't need to bother myself with!

There are simpler, and easier to do shares out there.

Has it really got amazing IP? I don't know, but probably not. The collapse in margins suggests to me that end customers are probably sourcing simple tech from cheaper Chinese companies, after this company made a one-off massive profit from being in the right place & right time.

This thing probably had a good run, but I'm not sure it has any prolonged pricing power. So I'd just sell up & move on. It doesn't pay to FALL IN LOVE with shares which do well for a while. Believe me, I've done that. I made £5m from falling in love with Indigovision, and I lost the lot on the way down. Don't make the same mistake I did!

Regards, Paul.

VMT Paul. It's because the accounts seem so difficult to unravel that I asked your opinion. I'm a long term holder in an ISA from the ISDX days and just get more confused each year. Figures too opaque and too many obfuscations so, as you say, probably time to quit while still ahead. Cheers. Brownrigg

purpleski

Hi dgold

Thanks for the input.

I am still confused :-). I get the difference between maintenance CAPEX and CAPEX (the actual cost of fitting out the bar in the first place). For example tables and chairs will have been purchased initially to open the bar and from time a customer breaks a chair it needs to be replaced

But for me at some point everything in the bar will have to be replaced because it is out of date/tired etc. The original fit out might be good for 20 or 30 years (or even longer) but as some point it will be shut and completely refitted. If I was the owner I would rather that that fit out was carried out from a depreciation reserve and there for me when calculating any cash that the business is throwing off after opening I would always deduct an amount for the eventual refurbishment of the business.

I think that this is quite a good explanation

http://www.valuewalk.com/2016/11/warren-buffett-not-believe-ebitda/

And this as well

http://www.charleswarner.us/articles/WarrenBuffett_EBITDA.doc

Howard Marx

Purpleski

In Accounting terms, all expenditure is either expensed immediately else capitalised as a Fixed Asset, & subsequetly depreciated.

For Revolution Bars (LON:RBG), the two principal Fixed Assets are:

short term leasehold premises / improvements : these are depreciated over the life of the lease
fixtures & fittings in licensed premises : these are depreciated over a 5-10 year period

So the annual depreciation charge will give an indication as to the likely level of maintenance capex.

https://www.revolutionbarsgroup.com/files/3414/775...

roque22x

Hi Paul,

I have read extensively your quality assessments, but there are some anomalies which puzzle me. You have a long investment in Treatt for good reason, as it is fair to say it is a classic Minnervini stock. I would argue that Keywords Studios is another classic Minnervini type stock. Yet you mention that the stock is pretty expensive now, but so is Treatt on the same type of analysis. The point I am making is that it is probably fair to argue that a stock is either cheap or expensive on which strategy you are utilising. I.e. Expensive, on a classic value strategy, but good value for its earnings growth if you are using a Minnervini picking style. You stated:

"As Minervini points out, his historical analysis shows that most multibagger shares are actually on a PER of 30 or more before the big move upwards starts. So if you screen out anything with a high PER, you are excluding the biggest future potential winners from your portfolio - which sounds a pretty dumb thing to do"

So I am quite surprised that you seem luke warm about the stock. It has a healthy quality and momentum stock rank, rising revenue, improving profits, and low net debt. The company has already seen upwards EPS revisions and based on the company outlook could see future earnings upgrades.

Regards,

Roque22x

Small Cap Value Report (Tue 4 Apr 2017) - FUL, KWS, UTW, NFC, KOOV, ADT, UNG, FLO, TPT, NANO

Fulham Shore (LON:FUL)

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Paul Scott

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