Small Cap Value Report (Tue 5 Feb 2019) - WATR, AMO, RM., OTMP, CPR, EKT, SSTY, GMAA

Tuesday, Feb 05 2019 by

Morning all! Paul here.

Sosandar interview

Just to say, my interview with Sosandar (LON:SOS) management (in which I hold a long position) has been delayed until next week, due to delays from my side collating all the questions & planning the thing. Sorry about that. So there's a window for any late questions from you - please add any additional questions into the comments section below. Thanks.

Buying opportunities?

I've been mentioning for a while, how the recent market sell-off seems to have been fairly indiscriminate in nature. This has created (selectively) some smashing buying opportunities. Indeed, we're seeing strong rebounds in some shares recently, on reporting good news.

Some people like to imagine that the chart tells us everything about the company. Sometimes it does (e.g. if insiders are selling, due to a poor outlook), but sometimes it really doesn't, especially with small caps. All the chart is actually telling us, is a gauge of the current balance of investor sentiment. In a small cap that can be the actions of just a handful of people transacting in the marketplace. Everyone else is doing nothing - as the bulk of the shareholder base will not be transacting at all, most of the time. Institutions generally don't buy in the market for small caps, because there's inadequate liquidity. Buyers & sellers could be backed up, unable to trade in the size they want.

Put this together, and it means that, at times of high investor anxiety over macro factors, small cap prices can deviate considerably from what is logical. Therein lies our opportunity.

Here's a great example of what I'm talking about;

Water Intelligence (LON:WATR)

Share price: 396p (up 10.0% today, at 08:19)
No. shares: 15.23m
Market cap: £60.3m

January corporate transactions & technology update

Water Intelligence plc (AIM: WATR.L), a leading multinational provider of precision, minimally-invasive leak detection and remediation solutions for both potable and non-potable water is pleased to announce a series of corporate transactions that reinforce its growth trajectory for 2019 and beyond.

Several actions re franchises are mentioned. I like the bit I've bolded below;

These transactions underscore that American Leak Detection ("ALD") and UK-based Water Intelligence International ("WII") business lines are complementary and growth is accelerating.

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Water Intelligence plc, formerly Qonnectis plc, provides leak detection and remediation services. The Company offers a range of solutions (including products) for residential, commercial and municipal customers. The Company's segments include Royalties from franchisees, Corporate-operated Stores and Other activities, including product and equipment sales. Its geographical segments include US and International. The Company mainly operates in the United States, with operations in the United Kingdom and certain other countries. The Company's subsidiaries include Qonnectis Group Limited (holding company of ALD International Limited), ALD International Limited, American Leak Detection Holding Corp. (holding company of ALD Inc.) and American Leak Detection, Inc. (ALD). ALD International Limited and ALD provides leak detection product and services. more »

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Amino Technologies Plc is engaged in providing Internet protocol (IP)/Cloud video software and device solutions. The Company develops a range of products and solutions designed to help broadband network operators deliver entertainment and associated connected home services to the consumer. It operates through the development and sale of broadband network software and systems segment. The Company and its subsidiaries specialize in Internet protocol television (IPTV) software technologies and hardware platforms that enable delivery of digital programming and interactivity over IP networks. It is also engaged in the sale of IPTV set-top boxes and associated customer support services. Amino Communications is a wholly-owned subsidiary of Amino Technologies PLC. Its other subsidiaries include Amino Holdings Limited, Amino Communications LLC and Amino Technologies (US) LLC. more »

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RM plc is engaged in supplying products, services and solutions to the United Kingdom and international education markets. The Company operates in three segments: RM Resources, RM Results and RM Education. The RM Resources segment consists of TTS Group Limited (TTS), which provides resources used in schools mainly through a direct marketing business model with goods supplied from centralized distribution centers. The RM Results segment provides information technology (IT) software and services to exam boards and professional awarding bodies to allow e-assessment through the use of on-screen exam marking (e-marking) and on-screen testing (e-testing). The RM Education segment is a United Kingdom-focused business supplying IT software and services to schools and colleges. The Company's products include RM Integris, the Company's cloud-based school management system, as well as offerings include RM Unify, RM Easimaths and RM Easiteach. more »

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

38 Comments on this Article show/hide all

Chipspa 5th Feb 19 of 38

Re Amino,  trying to understand the decline in sales and whether this is permanent, I picked out (my bold and italics) the following from the RNS.

"In North America (56% of group revenue) approximately two thirds of sales are made via distribution to smaller Tier 3 and 4 operators. Sales to these operators, fulfilled via our distribution channel, were broadly flat in 2018 compared to 2017. However, overall our revenue into North America declined by 18% as our distributors reduced stocking levels compared to the previous year. This reflects the impact of planned trade tariffs in the US, which have not impacted Amino's products directly, but have created confusion and concern among our customers, which has translated into delayed buying decisions."

This surprised me. My presumption would be that, if this really is the case, once tariffs are no longer a threat, the distributors would simply need to restock - after all the sales to the operators (end users?) were broadly flat for the year.  This would therefore create higher sales next year 

Additionally from the RNS:

"In EMEA (32% of group revenue) sales increased by 25% after a period of decline."

This seemed very positive to me. 

So overall, I am not feeling so negative about this stock as I was when I first scanned the RNS.  However, I take on board that they talk about headwinds and transforming the business, which does make me concerned there may be another profit warning in the near future. 

I would appreciate any one else comments, as to whether I am misreading this.

Thanks in advance


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Gromley 5th Feb 20 of 38

In reply to post #444193

It seems a bit harsh to have given 11 red thumbs (at the time of writing) and to have reported a post when the poster merely pointed out a company has been tipped by SCSW and shared a personal opinion that SCSW is a good "tipsheet".

Like many here, I don't have much time for tipsheets, but as it goes their medium term record (albeit not updated recently) is pretty good.

What I have seen, though, is their tips are often marked up sharply on the morning following publication, so subscribers cannot buy near the quoted tip price. The share price often falls back over the few weeks following publication.

Indeed this was pretty much the pattern that played out with Water Intelligence (LON:WATR) back in November.

For this reason I am always interested (as a potentially negative short term indicator) to know what SCSW has tipped, but equally I can see that others might want to understand and perhaps follow their tips. 

The number of down-votes for this post therefore I feel is totally OTT.

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OsullivanB 5th Feb 21 of 38

I simply observe that there is never any objection to references (sometimes approving) to Simon Thompson's tips in the IC. I subscribe to several "tipsheets" not because I value them as tipsters but because I find them a useful source/summary of information which is often difficult/cumbersome to come by elsewhere.

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gsbmba99 5th Feb 22 of 38

A couple of observations on Elektron Technology (LON:EKT) . I saw them present last year.

They covered a bit of the history. Several years ago they decided to move production from China to Morocco. When the equipment arrived in Morocco, the insides had been stripped of the electricals. Somebody sabotaged all the equipment. It took a long time to recover from that. The business has also been reshaped in the intervening period.

It's important to bear in mind this is currently a collection of businesses on an aggregate high teens P/E. EET makes eye checking equipment; makes about £0.1m contribution to EBITA; and is being sold. Bulgin produces £9.0m of 1/19 EBITA and Checkit about -£4.5m 1/19 EBITA. These are Equity Development estimates for period ending 1/19.

Bulgin is a very good business with very high returns. It makes electrical and other connectors for harsh environments. Watch some of the videos here - They sell through distributors but have agreements to receive end-user order data. Average order value is about £250. They said that about 66% of the revenue comes from their product having been designed in to the drawings. They believe their customers are not particularly price sensitive. If you have to hire a ship and a diving robot to replace a connector in a deep sea cable, an extra fiver on the cost of the connector is the least or your worries.

Checkit does electronic checklist keeping/updating mostly (at the moment) for restaurants and foodservice. There are new regulations that will drive demand here. The example they gave was that of checking the temperature of the chilled foods in a restaurant. At the moment there's a piece of paper taped to the walk in where the employee writes down the temp every few hours. Apparently these are mandatory. The Checkit solution is to combine a temp sensor in the walk in and software to measure it continuously. Added features like an alert to the restaurant manager's phone if the temp goes above a limit (better call the repair person). They see lots of opportunity to create customised checklists that can be kept/updated on phones that could be combined to create management dashboards and/or supporting documentation in regulated industries (did you clean the rods in the reactor, Homer?). It's a SaaS business so creates nice subscription revenues.

Management have very high hopes for the Checkit business but it's not due to be breakeven until year ending 1/23 and there's lots that can happen in the meantime.

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treen 6th Feb 23 of 38

Re Sosander:

My wife asks why so few dresses with sleeves!

Good luck with the interview.

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iwright7 6th Feb 24 of 38

In reply to post #444333

Very interesting Elektron Technology (LON:EKT) comment:

They said that about 66% of the (Bulgin) revenue comes from their product having been designed in to the drawings. They believe their customers are not particularly price sensitive. If you have to hire a ship and a diving robot to replace a connector in a deep sea cable, an extra fiver on the cost of the connector is the least or your worries.

The excellent Elektron group return numbers (ROCE 25%/ROE 20%) lead me to believe that they must (somewhere) have an Economic Moat - Now I see where and why it is. Having a reputation for high reliability and such a high proportion future Bulgin division sales specified by project designers is a tremendous advantage. 

If the the breakeven Eye division is to be sold and new Temp monitoring division is loss making,  their impact will be diluting average group return numbers, so the Bulgin component return numbers must be tremendous.  

The Elektron Technology (LON:EKT) group may turn out to conform to one of Buffett's cliches; I try to buy stock in a business that are so wonderful that an idiot can run them. Because sooner or later one will.   I hold.   Ian

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eyeofhorus 6th Feb This post is under review

In reply to post #444268

down-votes seem to be getting more common on the SCVR: there is a cadre of devout followers and a cult of personality at play. Woe betide those who speak ill for upon them shall be cast down votes 'til they and their wayward thinking be smote and group think is restored.

The post is "under review" no doubt  for heresy

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fwyburd 6th Feb 26 of 38

In reply to post #444388

Re: Downvotes

I think your post is disingenuous. You make it sound like there is some sort of weird cult culture here. I think the reasons JLHammo got so many downvotes are more prosaic.

Firstly, he didn't put the £sign before the stock name he/she was commenting upon which is annoying to all readers here
Secondly, he makes no other observation about the Water Intelligence (LON:WATR), so no one learnt anything more other than it had been tipped
Thirdly, the enthusiasm he/she showed for Small Company Share Watch seemed to me to be the point of the post. And no one likes people ramping things here.

That's why I voted him down anyway



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gsbmba99 6th Feb 27 of 38

In reply to post #444368

I checked my notes from the Elektron Technology (LON:EKT) meeting. The designed in element of sales was said to be 55-60% which I inadvertently overstated. The ROCE on Bulgin was said to be 160% aided by the fact they had 1,500 fully depreciated moulds.

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iwright7 6th Feb 28 of 38

In reply to post #444483

Re Eleckron - Thanks for the clarification, but >50% of the Bulgin division sales as project specification is still remarkable. The 160% ROCE number is outstanding. A little gem! Ian

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kfmb67 6th Feb 29 of 38

RE: Sosander
Pau, given the current media pressure on fast fashion and its environmental impact, can you ask their approach and strategy regarding this please

Thanks Karl

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abtan 6th Feb 30 of 38

In reply to post #444353

Re Sosandar (LON:SOS) my missus noticed the same thing
"why so few dresses with sleeves!"

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WDWombat 6th Feb 31 of 38

Firstly, I used to own Amino AMO but felt the share had gone up too much and the earnings were too uneven. I was just reading yesterday's release as a matter of interest when it struck me that so many of the younger generation seem to be watching TV on smartphones and tablets. Doesn't this mean that the day of the set-top box (or similar) is shortening, or does the emergence of Amazon TV etc bode well? I simply don't know and whilst the comments on the trading seemed to suggest that Amino was at the front of the technology pack I would like to hear from a real expert in the area to see whether their offering remains l-t releveant.
Secondly a very good point on the release of net cash data within the comments on Water Intelligence. I simply take the end period figure released and base ratios on it. Silly, really. Very sensible comments - but how do we get them actioned?

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ezlifeme 6th Feb 32 of 38

In reply to post #444568

Re Sosandar (LON:SOS)
It might be my age but I notice that the more mature women like sleeves
I believe it's that they start to worry about "Bingo Wings" (Look it up)

Seriously - Lots of "no sleeves" will alienate a section of the market
Once that is their view of the brand they won't browse it again
Perhaps they are not the target!

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hayashi22 6th Feb 33 of 38

Re Sosandar (LON:SOS) I note that the models seem to be young and attractive. Not sure the average buyer is in the same league. Is the company selling an idealised reality product?

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mojomogoz 6th Feb 34 of 38

Sosandar (LON:SOS) questions

1) Customer footprint is still very small. How much is the current business development focused on satisfying the preferences of a fairly narrow customer base rather than a broader spectrum of 25-55 yr olds?

2) Is the customer base more affluent than expected at launch?

3) If 1 and/or 2 above are correct then what is the implication for growth trajectory? How has it changed your future plans? Stay niche and higher margin with lower complexity in terms of design, manufacture, distribution and marketing? Or expand into a broader catalogue, customer base and lower margin 'faster' fashions? The trade off will be between faster but lower profit growth and slower but more profitable.

4) Sosandar seems as if it has a UK centric sensibility that may not internationalise easily. Is there an international plan and if yes what do you need to do to adapt?

5) The Sosandar image seems to sit somewhere in a fashion and lifestyle context. Do you see commercial value in developing the lifestyle element further or will it always be merely part of marketing? What kind of offerings could you envisage as part of a Sosandar lifestyle offering? For example, non clothing products, experiences, etc. With the high street and associated brands being decimated there is a space emerging for replacement brands....anything that Sosandar can monetise?

Thank you

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Paul Scott 10th Feb 35 of 38

In reply to post #444353

Hi treen,

Nearly all  Sosandar's dresses  DO have sleeves!

Regards, Paul.

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wilkonz 16th Feb 36 of 38

Many thanks Paul. I was tempted by Elektron Technology (LON:EKT) until I remembered a word of advice - can't remember from where but I think an article on Hargreaves Lansdown - that one should never buy an AIM share that doesn't pay a dividend. You mentioned the lack of dividend in your report and for. that reason I'm no longer tempted.
Best wishes, William

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Howard Marx 16th Feb 37 of 38

In reply to post #444693

Not sure this answers question #1, but Sosandar (LON:SOS) currently achieve 49% of their sales from age groups outside of their core 35-54 demographic:


As for market opportunity, there's a consistently high spend across all demographics 15-74:


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jwebster Tue 6:06pm 38 of 38

Looking at Amino Technologies (LON:AMO) due to huge dividend 9% market cap of £59m yet holding £20m in cash

Last few days since reporting revenue reduction on 5-Feb in their final results, we can see a very high level of share transactions. AMO has a free float of 72m shares yet around 7m changed hands, which is quite the distribution.
Management have committed to pay this level of dividend through 2020. Is it a value trap or bargain ?

AMO provide set top boxes and software to mid/small pay-TV companies. From the results, of their $88.9m 2018 revenue $79.6m came from 'Devices including integrated software' and the rest from Software and Services. Now the problem is, as their commentary alluded to, hardware is a bad business to be in, so they want to pivot to software and services. Good thinking, but can they do it, given the vast majority of their income has come from devices? It will depend if they can successfully unbundle the OS software in the devices, let clients buy their own hardware but licence their OS into the third party hardware.

It's possible, but I can't see how to confirm this, other than 'wait and see'

The other negative of course, is in the long term these smaller content providers will all have to move to major platforms, like Android TV or be wiped out - no-one will pay for niche content or set top boxes once the big players control device streaming. AMO recognise this, as they discuss their premium wrapper service for Android TV to support their clients moving to this new platform.

So the bull case is AMO management seem to see the winds of change and are talking the right ideas. The bear case is the majority of their revenue is at risk if they don't make the pivot to software successfully, or, Android TV becomes so good, their clients just move to that and don't need AMO any more.

Me, I think they might get away with paying the dividend next two years, they have the cash, but after that some media platform, e.g. Android TV could kill them off as the smart TV manufacturers pick it up. Otherwise if the market remains fragmented, they have a business supporting the various content vendors.

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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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