Small Cap Value Report (Tue 7 August 2018) - PEB, HVN, PDG, CTO, DOM | Graham Neary

7th Aug '18 by Graham Neary

39 comments 11724 reads

Good morning!

Things I've been looking at:

Pebble Beach Systems (LON:PEB) - trading update
Harvey Nash (LON:HVN) - takeover offer
Pendragon (LON:PDG) - half year report
T Clarke (LON:CTO) - half year report
Domino's Pizza (LON:DOM) - interim results

Pebble Beach Systems (LON:PEB)

Share price: 3.7p (-1%)
No. of shares: 125 million
Market cap: £5 million

Trading Update

We used to cover this when it was known as Vislink (VLK), so I'm curious to see how the story will end.

It now claims to be a world leader in broadcasting software.

I see that it issued final results for the year ending 31 December 2017 on 25 June this year - terrible.

H1 revenues this year are lower than last year (£3.9 million vs. £4.6 million). The backlog and pipeline will hopefully lead to an improved H2. There is no reference to performance versus expectations.

When I saw the wheels come off at Vislink, I assumed that it was going to go bust. Miraculously, it has avoided that outcome (through disposals) and even managed to avoid diluting shareholders. The share count has barely increased in recent years.

But that doesn't mean the existing equity is worth terribly much. Net debt of £10 million was recorded at December 2017 (twice the current market cap) .

I don't consider this investible at present but I'll keep an eye on it, to see if any signs of life will emerge now that it has been restructured.

Harvey Nash (LON:HVN)

Share price: 130.5p (+17%)
No. of shares: 73.5 million
Market cap: £96 million

Recommended Cash Offer

A takeover offer for this international recruiter from Dbay Advisors, its largest shareholder.

Note that Dbay appointed a Director to the board of Harvey Nash last year, so he is not independent when it comes to this proposal.

The offer is at 130p plus an interim dividend of 1.75p that would have been paid in November anyway.

To go ahead, the shares not already owned by Dbay will have to vote in favour of the deal, with a majority of at…

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MrContrarian

7th Aug '18

My morning smallcap tweet: Beachy heads down

Harvey Nash (LON:HVN), Pebble Beach Systems (LON:PEB), Proactis Holdings (LON:PHD)

Harvey Nash Group (HVN) 130p recommended offer, 17% premium. Holders also get 1.75p div.
Pebble Beach Systems (PEB) H1 trading. Rev £3.9m (£4.6m) "despite unsettled market conditions during this period of technology and commercial transition, coupled with delayed timing of order intake in H1 2018." Confident of H2, with an increased backlog of £4.7m. Guides FY rev marginally below FY17 and improved profitability. Looks a big miss on F/C rev £13.9m but they don't say so.
PROACTIS Holdings (PHD) FY trading. Rev £52m and adj EBITDA ~£17m. Looks a miss against F/C rev £57m but they don't say so.

PeterW

Hi Graham,
I think the Harvey Nash takeover offer looks a little mean. be great to hear you thoughts. The buyers already own 26%.
Thanks,
Peter

Graham Neary

Hi Peter, yes it's on the list now, cheers. G

ridavies

Interesting report from Proactis Holdings (LON:PHD) this morning. I note your comment about a miss on revenue. Hope this acquisition more perfect than the last Perfect one! Am perplexed by issuing more shares at 1.65 when SP is nearer 1.00. Any thoughts?

rmillaree

£ZTE comments request Please

I am a holder here, results seems reasonably ok. I do have slight niggles about the capital investment needed for this type of business, the lumpy nature of its sales and the potential fickleness of customers (can something cheaper that does the job come along?). So its a leap of faith that all the current investment will pay of long term - management seem confident enough for me to continue to hold despite the 20% shareprice appreciation since i bought 6 months ago. Anything but a value play based on the current numbers.

Interserve (LON:IRV) - still looks like a basket case investing wise due to the debt and lack of bouncebackability profits wise, although hopefully the company has turned the corner enough to ensure it keeps going and keeps all their employees in work. This was a reasonably sound business before they lost the plot with reckless risk taking contracts wise.

FREng

I don't know what to make of the Ubisense (LON:UBI) trading update. Orders up, cash up, total revenue down ...

AMD55

I would welcome views on T Clarke please. Results look good to me but I may be easily impressed! StockRank looks encouraging too. Director purchase some time ago underpinned confidence but share price movement seems muted. Perhaps a reflection of current market sentiment? Bad news is seen as excuse to hammer shares while good news is met with limited response.

Tristan_Treacy

Pendragon (LON:PDG) looks very interesting at a first glance Graham. Their leasing business in particular looks to have gained real traction and could be a significant contributor to profits going forwards, and recycling vehicles coming off their leases into their second hand sales is a neat idea. It is not a sector I have any experience of so hard for me to assess the commercial viability of the plan but in theory it looks good and the numbers from the leasing business look very impressive. Would be interested in your views if you have time today.

Howard Marx

Proactis Holdings (LON:PHD) presented two months ago https://www.research-tree.com/... and guided to full year revenue 'between £50 and £55m'.

Any analyst(s) forecasting £57m hence clearly asleep!

Oops £ZTE is made up in post 5
That should have been Zotefoams (LON:ZTF)

Trident

Re Proactis Holdings (LON:PHD) issuing shares as consideration of £1.65 looks odd. The trading statement notes seem to suggest that the initial consideration in shares has effectively dropped in value at the announcement date, but the actual situation is hard to determine. They may have pinned a £1.65 share value to the deferred convertible loan as a reference point, in which case this would appeared to have benefitted them form the initial consideration, though perhaps they don't want to trumpet this?

It is arguable the purpose of stating EBITDA was to peer through the non-cash adjustments such as depreciation and amortisation at the underlying cash related profitability of the business.

However, we know that some companies then add complications by capitalising development, taking out exceptional expenses etc (which can be surprising frequent). so the picture gets more opaque.

For businesses regularly acquiring other businesses, the amortisation of acquired assets makes this strip out from the p&l for EBITDA, a bigger element of deduction.

Basically in these circumstances you are just about left with cash generation as some kind of thermometer test of business health.

Proactis Holdings (LON:PHD) don't reference cash generation directly.

drvodkaquickstep

Hi Graham. Another vote for T Clarke (LON:CTO) if you have time Sir!

letap73

Graham,
Not strictly a small cap - so I understand if you cannot afford the time to make comment, but I am going to suggest Griffin Mining (LON:GFM).
The stockopedia metrics have loved this ever since I joined. I am sure a lot of investors in Griffin mining are from the stockopedia community. As a relative novice my analytical skills with regards to judging company performance is poor. I have steadily learned from your posts so any comments from your perspective would be useful.

Gromley

I knew what you meant rmillaree. ( Zotefoams (LON:ZTF) )

My thoughts :

The capital intensive nature of the business is a given, and in fact there is a case to say that the high level of recent capex indicates significant confidence for the future. I also believe that their IP is strong, so I don’t see that there is any more reason to worry about new competition than other companies.

It also though seems to be a given that nobody (at least amongst the PI community) cares – there’s virtually no comment on these results even in the noisier corners of the internet.

(As an antidote to that I attempted to summarise what Zotefoams are about a few months ago here )

The half year results are actually a bit of a mixed bag imho :

Revenues up 12% (17% at constant currency)

The lower margin Polyolefins division was up 4%, constrained by conversion of some UK capacity to higher margin HPP (good) but also by what sounds like delays in bringing the new US capacity on line (bad – especially as this new capacity was already delayed)

As a result profit margin from Olefins was down from 19% to 16%.

Revenues from the higher margin HPP segment were much better than I expected up 82%, however the operating margin fell from 24% last full year to 19% (last years H1 was only 13), in part due to some earlier stage products that have yet to reach profitability. (Longer run I’m hoping profitability in this segment will be north of 30%)

Sales for MEL (the licensing business) grew by 20% excluding a single large order from last years H1. Licencing and Royalties (where the profit should be) were also up 20%. MEL continued to deliver a loss (91% of segment revenue). I’m still puzzled that this has been allowed to go on so long, but am encouraged by

A recent review has resulted in a more focused organisational structure with clarity on the required engineering and support staff to deliver to the potential of the technology.

That have to fix it or ditch it in my view, as it reduces group profit by nearly 20%.

Overall then operating profit was down c. 2% - disappointing, but perhaps excusable given where they are on the HPP growth trajectory.

With favourable currency movements adjusted PBT was up 20% (unadjusted 64% as there was a negative exception last H1)

So overall on existing business Zotefoams (LON:ZTF) continues to look expensive, but my view remains that with the capacity investments kicking in over the next two years there is a strong future here and they appear to have good visibility of where the demand is.

They also remain confident of the near term prospects for the divisions.

In our AZOTE® Polyolefin Foams business the additional capacity from our Kentucky facility will allow us to deliver against a strong order book through to the end of 2018.
In HPP we anticipate sales to increase further with demand for all product lines expected to be higher than first half shipments.
In MEL we expect sales to be higher than in the first half as there is a normal seasonality in this business and underlying growth, although with both MEL and T-FIT® there is a higher than normal timing risk to revenue linked to customer project completions.

Overall I’m largely unmoved by today’s results and continue to hold.

RichardK

T Clarke (LON:CTO) results look good, int div up 10%, but lower order book. The latter may be offset by increasing margins, up from 2.0% to 2.6% (still very low), and order book quality may be improving.

I hold and interested in others' views.

Richard

Interesting RNS today from a micro-cap that we have discussed from time to time. Image Scan Holdings (LON:IGE)

The Board of Directors of Image Scan announce that the General Meeting of shareholders scheduled for today has been adjourned for 28 days to Tuesday 4 September 2018 following receipt of a proxy against the resolutions by its largest shareholder, Rise Step International Development Ltd ("Rise Step"). Rise Step have indicated broad support of the Company's acquisition strategy, but are concerned regarding the dilutive effect of the Placing. The Company is seeking a meeting with Rise Step to address the concerns raised.

The background is that Image Scan Holdings (LON:IGE) announced a few weeks ago a proposed acquisition, which included issuing 31m new shares (around 22% increase in shares in issue) via placing and subscription at 4p ( a near 30% discount).

It now turns out that their biggest shareholder (Rise Step with about 22%) object and would have voted it down at today's AGM.

All a bit shambolic - you would have thought they would have asked them before the event.

I'll probably be striking this off my watchlist.

My main worry with Proactis Holdings (LON:PHD) is if takes on the characteristics of K3 Business Technology (LON:KBT).

In my view K3 Business Technology (LON:KBT) started out as a profitable and cash generative businesses, but got the acquisition bug, and this served to increase topline revenues whilst at the bottomline improvements got increasingly thin, unless adjustments were made. Its cash generative characteristics saw it through from annual recurring revenues, but software development costs grew, as well as overheads and the generation of cash of businesses acquired on small profits made for increased borrowing costs.

This made it vulnerable to business cycle changes.

Arguably Proactis Holdings (LON:PHD) is a purer software play in the IT sector than K3 Business Technology (LON:KBT), and the incumbent CFO is hopefully less inured to the grow at all costs mentality. Problem is if you when you have a CEO who finds acquiring easier than growing or managing the underlying business.

Beginner

For what it is worth the T Clarke (LON:CTO) order book is probably down because the company has stopped bidding on very low margin work. This has pushed up margins and profits. A good strategy I think,laying a sounder foundation. Nephew is a former employee and really rates this company. T Clarke (LON:CTO) get work because they do a proper job,not a cheap one.

john stone

Griffin Mining would be really appreciated £gfm

Small Cap Value Report (Tue 7 August 2018) - PEB, HVN, PDG, CTO, DOM

Pebble Beach Systems (LON:PEB)

Harvey Nash (LON:HVN)

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Graham Neary

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