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

5th Feb '19 by Paul Scott

41 comments 16682 reads

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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Howard Adams

5th Feb '19

Hi

Anyone interested in Water Intelligence (LON:WATR). Up 10% as I type.

Extract from RNS very interesting.

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.

Highlights

· Acquisition of Ontario (Niagara), Canada franchise, expanding corporate presence into Canada and Upstate New York

· Sale of a new franchise territory for Youngstown, Ohio (US)

· Financial support to an Idaho (US) franchise accelerating expansion into municipal offerings

· Formal launch of ORCA municipal sewer product into the United States following trials at a UK water utility

Full RNS here https://www.investegate.co.uk/water-intelligence--watr-/rns/corporate-transactions-and-technology-update/201902050700030416P/

I added to my small holding this morning.

Regards
Howard

Albertos

RM (LON:RM.)

Results look good. Seems to have beaten revised forecasts following its December TU.

Still looks good value with a high SR.

Phil

I hold

Effortless Cool

An encouraging update from Water Intelligence (LON:WATR) this morning, and to add a bit more comment to Howard's post above.
1.Buy-back of the Ontario franchise, adding $400k+ to 2019 revenue and establishing first presence in Canada.
2.Expansion of the franchise network with the sale of franchise territory in Youngstown, Ohio. Step in a strategy of expanding into greenfield locations to make the business more attractive to insurance partners with national coverage.
3.Financial support to the Idaho franchisee to accelerate addition of leak repair and municipal capabilities, beyond simple leak detection. The one-stop-shop solution again being attractive to insurance partners.
4.UK-developed diagnostic sewer technology being rolled out to the US franchise network.

The announcement also hints at a favourable 2018 q4 update, which is expected some time in the next few weeks.

MrContrarian

My morning smallcap tweet: Amino anemia in '19

MaxCyte Inc (LON:MXCT), Numis (LON:NUM), Elektron Technology (LON:EKT), Amino Technologies (LON:AMO)

MaxCyte (MXCT) placing to raise £10m min at 170, an 8% discount.
Numis Corporation (NUM) downbeat AGM stmt. "Average deal fees remain in line with the prior year, however, transaction volumes are significantly lower across the market and, as a consequence, we have completed approximately 25% fewer deals compared to the first four months of the prior year. Equities has been similarly impacted, Institutional income is approximately 25% lower than the comparative period reflecting depressed market activity levels, and our trading book is marginally loss making for the period."
Elektron Technology (EKT) FY trading in line. Received an unsolicited indicative offer for Bulgin at a 'substantial' premium to EKT's current market capitalisation. Buyer changed mind 'for its own strategic reasons'. Puts Elektron Eye Technology up for sale "due to the growth opportunities presented by both Checkit and Bulgin, EET is not core to the Group's future plans."
Amino Technologies (AMO) FY in line. $5m annualised reduction in cost base identified. "To support a higher quality of earnings and de-risk the business, we are accelerating our strategy to improve growth in recurring revenues from software and services, reinforce our focus on value-add hardware, and remove our exposure to low margin hardware activities." Will hit FGY19 rev by c.20%, and adjusted operating profit by 10%.

jonno

A further vote for RM (LON:RM.) impressive results and remains conservatively priced on a number of metrics.

DaviStoVest

One more vote for RM (LON:RM.). This was one of the first small caps that I bought into based largely on Stocko ratings.

mojomogoz

....and another RM (LON:RM.) request...any more for anymore?...

It's a really dull company in a tough sector that's been doing really well executing a multi year repositioning into higher margin business and exiting lower quality revenue. Its anti-zeitgeist in many respects...but isn't that what works prospectively when the investing winds change?

The Phoenix

Any thoughts on Numis (LON:NUM) Paul not much in the way of figures from this mornings statement other than income from institutions off 25% and challenging current conditions we have also had the recent demise of Daniel Stewart, but Stocko still rates it with a high overall stock rank.

Thanks

Picking up on Paul's 'directorspeak' comment on Water Intelligence (LON:WATR), it has to be acknowledged that Patrick DeSouza is always upbeat in his pronouncements on the company. So far, however, he has always delivered on his optimism.

doublelutz

Paul - with regard to your opening comments share prices in the long run are obviously ultimately driven by fundamentals. Looking at your Water Intelligence chart had I been so lucky to have been a holder from 150 to almost 450 I would have been well aware of the accelerating upward trend and I would have been on warning during the first downward candle and certainly during the following downward candle which finished somewhere near 350. I would definitely have been out by 375. When it went down to the 250 region I would have been very relieved and to me the chart would have done its job. A time to buy again may have been around 325 on the way back up but I often have a reluctance to revisiting a share so cannot say that I would have done so. Also, as you say, the spread may have made reinvestment unattractive. By using charts in this way I have avoided numerous substantial losses although at the same time I have undoubtedly missed possibly significant gains. How it all balances out I don't know but it has certainly saved me some anguish!

It is interesting that 2 persons have already voted down my honest observations on how I frequently use charts. It would be even more interesting if they could provide their own experiences.. Of course, I don't always observe the chart as I described because I suspect like many people I sometimes become emotionally too attached to a share and hold for far too long. Having said that I have loved charts since I first became acquainted with David Fuller's Chart Analysis in around 1968. David advised private investors and institutions throughout the world.
He died last month and I am indebted to him. I am glad I learned about charts and his subject of behavioural technical analysis.

AndyCDC

Any views on Safestay (SSTY) shares showing a mini recovery this morning based on improved revenues and profits. Share price around 50% below its summer peak

abtan

A few questions for the team at Sosandar (LON:SOS) if you can please Paul. I hope they're not too direct:

1) They claim that they target an untapped market, but I don't really buy this as there are so many similar brands out there (at least to my very untrained male eye). One simply needs to check out some of the Sosandar-tagged posts on Instagram - like this one - to see that the influencers they are targeting wear loads of different brands.

So my question is, are they really unique, or are they just one of many players in a very fast growing market, and their "uniqueness" is actually having the contacts to get celebrities to try their clothes on in the first place?

2) Is the growth in Instagram/Facebook followers purely organic, or do they spend a lot on advertising? The reason I ask is because many brands spend a lot on advertising and attract lots of new users, many of whom are often disguised as click farms (I say this from wider reading and some personal experience) and then have no further engagement with the brand. This then dilutes the impact of any future posts. So whilst the brand looks like it's growing its social channels, underlying growth might in fact be minimal.

3) Do they have long term worries about the rise of ethical fashion? I personally have seen worries crop up from several sources recently (though all the below are interlinked):

influencers changing their habits and saying so to their audience. It's worth watching from 1:00 from this youtuber
this short clip from a BBC3 documentary
this article in the BBC

So I'm curious if any fashion firms are taking note (might be a more pertinent question for £BOO)

Thanks!

Paul Scott

Great questions, thanks Abtan!

I will definitely include those in the things I ask Sosandar (LON:SOS) management.

Tortoise investor

Good comments abtan. The issue of ethical fashion is growing. There's just been a Parliamentary inquiry into the wastefulness of fast fashion: https://www.parliament.uk/business/committees/committees-a-z/commons-select/environmental-audit-committee/inquiries/parliament-2017/sustainability-of-the-fashion-industry-17-19/

So there's a question about whether this sector will be affected by regulatory change at some point. I am not really clear what that might look like that - some kind of tax maybe.

Also agree with you about rival brands. Sezane is pretty popular and aimed at the same age group(ish) although they may be targeting a richer demographic than Sosandar.

Chrisfarrell21

Elektron Technology (LON:EKT) has a hint of Avesco about it. It has a few trading divisions, one is storming ahead of the others (Bulgin/Creative Technology), non-core divisions are being turned profitable and/or then sold (Elektron Eye/Presteigne), and talk of a trade sale is being talked up (the approach on Bulgin/the purchase of Avesco group).

It's difficult to know how much to read in to the "unsolicited indicative offer for the Bulgin business at a substantial premium to the Group's current market capitalisation", and the subsequent decision by the prospective buyer not to proceed. Was that a one-off, never to be repeated, or the start of a sale process?

The good news is that if you buy into this now, hoping for some sort of windfall from a sale of the whole group, or just Bulgin, then you also buy into a decent quality company that appears to be on a roll.

I don't currently hold but I'm very tempted.

Chris

JLHAMMO

This comment is under review

Chipspa

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

Gromley

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.

OsullivanB

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.

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

Sosandar interview

Buying opportunities?

Water Intelligence (LON:WATR)

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Paul Scott

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