Small Cap Value Report (Wed 13 Feb 2019) - SOS, CWD, MLVN, SDI, OPTI, CER

Good evening/afternoon, and indeed morning, it's Paul here!  (that sounds like a 1970s TV programme introduction, I like it, let's use that again!)

Tuesday was busy, as I had to interview management of Sosandar (LON:SOS) (which is my largest personal shareholding). As usual, questions were crowd-sourced from readers here - many thanks for lots of interesting questions, and sorry we didn't manage to cover all of them.

Here is the finished article;

Link to Sosandar audio interview

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ZANE

I'm getting ready for an important mission to do some charity work, next week.

As some of my friends here might know, I've become an increasing admirer of a tiny charity called ZANE which achieves a lot of good things, with very little money, helping people who might otherwise die, without medical help, in Zimbabwe.

Many of you already know about it, but if you don't then please do check it out.

To cut a long story short, I have been invited to join ZANE in a trip to Zimbabwe for a fortnight, from next week. The purpose is to experience first-hand what ZANE is doing on the ground, to help people there in desperate circumstances. On my return, I hope to help raise money for the people there, through ZANE.

I will be paying for my own flights, etc., and am already a monthly donor to ZANE, personally. Plus it's nice to bung the occasional £500 to them too, when something goes well on the markets.

Anyway, my feeling is that many readers are already incredibly generous with your own charity projects. So this is very far from virtue signalling. Going to Zimbabwe just seemed a once-in-a-lifetime opportunity, and hopefully when I get back, I might be able to do some good. And maybe appreciate my own, comfortable life, a bit more? (instead of complaining all the time about things that don't really matter).

Let's see how it goes. Graham will be looking after you here, and I'll chip in as I can over the next 2 or 3 weeks. Should be interesting!

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Countrywide (LON:CWD)

Share price: 10.15p (up 3.7% today, at 10:34)
No. shares: 1,638m
Market cap: £166.3m

Trading statement

This is a chain of estate agents, which was run into the ground by incompetent management. New management were forced to repair its ropey balance sheet with a rescue fundraising at a deep discount. Hence the low share price & large number of shares in issue. The crux is whether the share might be a recovery situation.

Today it reports on trading for the year ended 31 Dec 2018.

Key points;

• Revenues of £627m, down nearly 7% on last year. Stockopedia is showing consensus revenue forecast of £632.5m, so the actual is slightly below
• Management describe this as a "resilient performace" in a tough market
• Underlying trading (seems to be EBITDA) in line with the board's expectations, at £35m
• Net debt of £70m still looks higher than I would like, about 2x EBITDA

Outlook - no surprises here;

We are encouraged by the progress we have made in our Strategy and Turnaround plan and in the growth in the register and the pipeline in the UK.  Nevertheless, we remain cautious about the market outlook for 2019 and continue to closely monitor market conditions for any potential impact arising from the wider political and economic environment.

 We will be in a position to provide further guidance for 2019 with the release of our Preliminary results on 7 March 2019.

My opinion - estate agents are suffering at the moment, as Brexit uncertainty is bound to make some house buyers hold back. On the other hand, there are some astonishingly good mortgage deals out there at the moment. One mortgage broker told me that they have deals of 2.5% p.a. interest rate, fixed for 5 years. That's so good, that i think it must be tempting some people to just press ahead regardless, and buy.

Estate agents also have income from rentals, which is resilient in all market conditions, because people need to rent housing irrespective of what the economy is doing.

It's tempting to consider buying shares in this sector, ahead of any possible return of confidence. I would need to look at the figures in more detail first, so will report on this here, on 7 March 2019.

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Malvern International (LON:MLVN)

Share price: 4.4p (unchanged today, at 11:13)
No. shares: 243.4m
Market cap: £10.7m

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

Trading statement

Malvern International plc (AIM: MLVN), the global learning and skills development partner, is pleased to provide a trading update for the year ended 31 December 2018.

This is an interesting little educational group (language schools, etc). I picked up some stock a while ago in the 4p placing. As with all micro caps, it's all about backing management. In this case, the group has disappointed in the past, but brought in a much more dynamic CEO, whose plans seem to be starting to work.

I'll keep comments brief, as this share is very illiquid.

Key points;

• Trading in 2018 was in line with market expectations
• Revenues (continuing ops) up almost 100% to >£8m (helped by an acquisition)
• Net debt £790k
• Confident outlook

My opinion - the educational sector has very good operational gearing. Therefore more dynamic management should (hopefully) be able to push more revenues through a largely fixed cost base.

There are lots of initiatives underway (see previous RNSs) to grow this group, and improve performance. The new CEO struck me as capable, and has a very good track record of building a successful education business before, in New Zealand.

Let's see what happens in 2019.

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Scientific Digital Imaging (LON:SDI) - a quick note that this company used Primary Bid in a placing, results announced today.

It was only £100k through Primary Bid, of a £2.6m total placing, so looks like the company wanted to test the water with Primary Bid. It was successful, and was over-subscribed.

In my view, Primary Bid is an excellent concept, and I hope it succeeds. Opening up placings to private investors, and not just institutions is not only fairer, but also improves liquidity in small caps.

A lot of previous Primary Bid fundraisings looked very poor quality companies. However, SDI is a nice little group, it's profitable, and performing well.

With institutions facing redemptions, I'm told many are drawing in their horns. Therefore private investors are becoming much more important for micro cap fundraisings, which is good news. In the boom in 2017, and before, I got the feeling that most of the placings I was offered were the dregs that nobody in the city wanted to buy! That's changing now,  with better quality placings coming through to PIs.

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OptiBiotix Health (LON:OPTI) - I would describe this as a blue sky story stock, with a market cap of c.£75m.

It has RNS'd loads of interesting-sounding deals, but the grand total revenues for 2018 was a paltry £541k. Although revenue growth is expected in 2019, as more deals come through.

I'm very sceptical about the health benefits claimed for its products. I tried its weight loss shakes a while back, and found they didn't suppress my appetite at all. So any weight loss from using this product comes entirely from a shake having fewer calories than a regular meal.

Furthermore, I googled some of the companies which have done deals with OPTI, and was surprised at how small they were.

My other concern is that OPTI spends so little on product development. The CEO seemed to suggest (in a video) that products were developed in Spain, by students who were paid £30k p.a. salaries. As one audience member asked, "Where are your laboratories, your research staff, etc.? I don't see them".

I tend to agree with that - this company looks pretty unconvincing to me. Still, people like to buy into exciting-sounding stories. Very occasionally, a story stock will actually deliver on its promises. Maybe OPTI could be one of those very rare, successful, exceptions? The vast majority don't. So why take the risk?

The other thing to consider, is that stock market conditions have radically deteriorated in the last 6 months especially. Many people (including me) have had our fingers burned, from sharp falls in our shares. Therefore this has made investors far more risk-averse than we were in 2017. Therefore, the onus is on story stocks to actually deliver. Promises of (unquantified value) contract wins, great potential, etc, just doesn't cut the mustard any more. Especially at a £75m market cap, with negligible revenues.

So this one is definitely not for me. 

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Cerillion (LON:CER) - this is an interesting little software company. Graham wrote some interesting stuff about it a while ago. There's a pretty hefty contract win announced today. 

The company says this contract win, "supports existing market forecasts", but I imagine it could tip the odds more towards increased forecasts in due course.

The valuation looks attractive. I did hold this share for a little while, some time ago, but got bored and moved on. It can be very tricky to deal in, due to very poor market liquidity. So only of interest to small, and patient investors!

As we've seen with £SPE  when software companies get on a roll, with snowballing licence wins (almost pure profit), then the operational gearing can be very good.

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Right gotta dash, I have a company meeting this afternoon in London to travel up to.

Best wishes, Paul.