Small Cap Value Report (Wed 14 Feb 2018) - WATR, HSS, HSP, OTMP

Wednesday, Feb 14 2018 by

Good morning, it's Paul here.

My apologies that yesterday's article, a car dealerships special, was anything but special - actually it blew its head gasket immediately after leaving the showroom. Sorry about that, I got writer's block & there was nothing forthcoming unfortunately. So some time today has been allocated for me to go back & finish it.

Firstly I'll rattle through the handful of trading updates today from small caps.

Water Intelligence (LON:WATR)

Share price: 200p (up 11.4% at 08:10)
No. shares: 12.07m
Market cap: £24.1m

Q4 trading update & corporate development

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 provide a trading statement for the year ended 31 December 2017.

We are also including an update on our corporate development as we expand our offerings to become a "one-stop" platform with a variety of cross-selling opportunities....

My first job is to look up "potable" in the dictionary! For anyone else who hasn't heard that term before, it means drinkable.

Key points;

  • Strong revenue growth - up 45% to $17.7m (note that this is a mainly USA business - 88% of H1 revenues came from USA)
  • Growth mainly came from corporate (i.e. own-operated), rather than franchisees.
  • Insurance channel looks an interesting growth area - revenues rising from $0.66m in 2016, to $2.5m in 2017;
Insurance channel momentum: first national account implemented; second account signed and in process of implementation; pipeline developing

  • Adjusted PBT rose 21% to $1.7m
  • Tax cuts - in USA should increase PAT in 2018 & beyond
  • Water loss is an increasingly important issue, globally (e.g. forest fires, Cape Town apparently close to running out of water)
  • Net debt $1.2m

Outlook - rather long-winded, but this is the key bit;

Global market demand for our solutions is increasing given climate issues and natural resource constraints. The wind is at our back, and we hope to make a difference. We believe that 2018 will bring significant additional revenue growth, both organically and through selected re-acquisition of our franchises.

Profits should also be further enhanced by recent tax legislation in the US, which is expected to materially reduce the Company's tax rate during 2018 and beyond.

Broker update - these days (post the…

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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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HSS Hire Group plc provides tool and equipment hire and related services in the United Kingdom and Ireland through a network of over 300 locations across the nation. The Company's business focuses on supplying equipment and services to the fit-out, maintain and operate sectors of the market, with its businesses also supplying construction contractors. Its segments include HSS Core, which is engaged in the provision of tool and equipment hire and related services, and HSS Specialist segment, which is engaged in the provision of generator, climate control, powered access and cleaning hire equipment and the provision of cleaning maintenance services, under specialist brands. Its businesses include HSS hire, HSS One Call, HSS Training, ABird Power Solutions, Apex Power Solutions, Reintec cleaning equipment services and TecServ equipment maintenance. It caters to the customer base ranging from retailers and airports to facilities management companies and infrastructure developers. more »

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Hargreaves Services plc is engaged in sourcing, producing, processing, handling and transporting carbon-based and other bulk materials throughout the United Kingdom and Europe. The Company's principal activities are the provision of haulage services, waste transportation, mineral import, mining and processing, together with specialist earthworks and related activities. Its segments include Coal Distribution, Industrial Services, Logistics and Specialist Earthworks. The Coal Distribution segment provides coal, coke, minerals, smokeless fuel and biomass products to a range of industrial, wholesale and public sector energy consumers. The Industrial Services segment provides contract management services to clients in materials handling and a range of other industrial sectors. The Logistics segment provides bulk logistics to customers across the United Kingdom. The Specialist Earthworks segment provides earth moving, civil engineering and infrastructure services across the United Kingdom. more »

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

32 Comments on this Article show/hide all

gus 1065 14th Feb '18 13 of 32

In reply to post #315293

Although reading through the Galliford Try (LON:GFRD) releases this morning, here is another example of a company doing the apparently irrational by launching a fully underwritten £150m equity fundraising while confirming it will pay out approximately £24m in dividends in April. What do you reckon - at say a 2% u/w fee on £24m, that's about £500,000 of shareholder value given away. Go figure ...


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pippasfan 14th Feb '18 14 of 32

Paul, writers block, proves you are human after all. Do you find glaring at the stock market some days, you should find something to trade, everyone else is, but you can’t ruddy find anything, and it’s depressing?

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Chrisfarrell21 14th Feb '18 15 of 32

Hi Paul,

As you've got it in the header, I'd appreciate your view on Hargreaves Services (LON:HSP) . The operating performance (revenue and profit) is usually a tad underwhelming, but this is primarily about the net asset value of the energy and profit portfolio, and the ability of management to realise it.

It rests a lot on (i) the ability of (and faith shareholders have in) the management, and (ii) patience. For my part, I think management have done admirably so far in taking what was a fast declining industrial business focused around coal, and turned it into property and energy project development company, partly funded by strict cash management of the 'old' business. They seem realistic and patient.

In today's interim results, NAV has reportedly gone up to 423p per share, which compares favourably with the share price of c.350p, and it also pays a dividend. It won't happen quickly, but I think there's some old fashioned value in them thar hills.



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Dean Tonna 14th Feb '18 16 of 32

 Hi Paul, 

Could you have a look at Bilby (LON:BILB) please, I know its not currently your favourite sector but it looks a great little company and a very stable looking Board.


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Paul Scott 14th Feb '18 17 of 32

In reply to post #315333

Hi Dean,

Could you have a look at Bilby (LON:BILB) please, I know its not currently your favourite sector but it looks a great little company and a very stable looking Board.

There doesn't seem to be any news out today from Bilby, so there's nothing for me to cover.

These reports are driven by each day's trading updates & results statements, not by random requests from readers!!!

Regards, Paul.

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peterg 14th Feb '18 18 of 32

In reply to post #315303

Fundraising to pay dividends is crazy, as at Galliford Try (LON:GFRD). But it suits the city in many ways - those who earn commissions from the raise, the income based funds that want steady income (and some of whom will sell if the div is cancelled), any board members and families with large holdings who may be more interested in cash now and who don't worry about the fund raise costs.

It won't stop unless someone can work out a way to stop or restrict it, or there's a big change in city culture to take a wider view on total return.

I'm doubtful we'll see either!


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smatthews1 14th Feb '18 19 of 32

Excellent report on HSS, good insight to those with limited knowledge on the structure of bonds within a stock.

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davidjhill 14th Feb '18 20 of 32

In reply to post #315203

To give some context on Plus500 (LON:PLUS)

I sold a couple of months ago around the 1200p mark following a similarly upbeat trading statement. I have done very well out of the share having first bought at circa 400p so I am inclined to think nicely of the company. However, my rationale for selling at the time was 3 fold - and I think this holds after this set of results too....

(1) this share has never traded on rich valuation multiples due to both domicile & reg risk - think debacle around KYC and account opening a couple of years back
(2) Although I love the free cashflow I worry slightly about ACPU (acquisition cost per user) which has fallen dramatically (circa 2/3's) - basically marketing. I wonder if this will have a forward knock on impact to future earnings growth
(3) Any negative rulings/restrictions on the industry following ESMAs consultation will likely have a sharp initial impact on the share price despite what the company says about the possible impact. Especially so given that investors are likely to interpolate that ruling across to most other jurisdictions.

The share has exhibited lots of volatility in the past and as a consequence I am currently sitting on the sidelines awaiting ESMA as I suspect the run up to that will give a cheaper re-entry point.
(I note stock has not been able to hold onto early gains of 100p+ either and is now flat/slightly down)

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alpha2 14th Feb '18 21 of 32

Hi Paul, I happened to have to go to my local HSS this morning to hire a heavy duty drill. It has never been impressive but today I was the only customer, just a few bits of very tired looking kit on display. I know it is a sample of one but this unit is in St John's Wood on a busy junction and could be something of a showpiece. It has not changed in 15 years. Staff seemed ok but it felt like a business from 15 years ago. With the debt they are carrying and an out of date model it looks like a zombie company to me.

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david brander 14th Feb '18 22 of 32

Hi Paul ,just to point out the front page of city am that pension fund deficits,when revalued have benn drastically reduced give the 10 yr gilt yield etc,David

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phoenixnight 14th Feb '18 23 of 32


Re Water Intelligence (LON:WATR), I know that you have commented in the past about the dangers of owning highly illiquid shares. Things are great on the way up, but as you say can be almost impossible to dispose of on the way down. Your own personal experience, and honesty, about the problems this caused you in the financial crash is a lesson for us all, and I think we are all grateful for you sharing these experiences.

Water Intelligence (LON:WATR) is a share that I've held for approximately 2 years, so I am really interested in the following paragraph:

Another key point is that I'm trying to avoid opening new positions in very small, illiquid shares. If there's another (maybe worse?) market sell-off, then I generally want to at least have the option of being able to sell, which is often not the case with things this small. So buyers of tiny company shares like this need to remind yourselves that selling could be impossible in another market downturn. That's not a problem if you're only buying a small scrap of shares, or are happy to ride out market sell-offs, but for larger positions, we can be left high & dry in a market sell-off. 

Could I ask please, is there a rule of thumb as to what constitutes a "larger position"? Is it:

  1. By reference to the size of one's own portfolio?
  2. By reference to the free float (disclosed on the Stockopedia stock report)?
  3. By reference to the normal market size (NMS), also disclosed on the stock report?
  4. A combination of all of the above or other factors?

With regard to Water Intelligence (LON:WATR), I am aware of the risks, but the company seems to be executing its strategy quite well, and I believe the issue of water conservation is only likely to grow. As such, I believe it t be a long term hold. Years ago (perhaps it was the long hot summer of '76) I have a vague memory of a prediction that in the future countries could wage war over water rather than oil. Let's hope not, but the problem of population growth in Cape Town and California has thrown the issue of the importance of water into sharp focus.



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peterthegreat 14th Feb '18 24 of 32

In reply to post #315233

Re: Water Intelligence. Response to Housemartin2
No, it is certainly not just you who is irritated by the language of the company's announcements. On 9th August I made the following post on another board about Water Intelligence:
"Is it just me or does anyone else think these results are badly written? For example the Chairman's statement starts "Our Interim Results support our priority of accelerating corporate development to gain visibility in the market as a multinational growth company that provides end-to-end solutions for the worldwide problem of water loss through leakage." That sentence is much too long and very awkwardly phrased. Water Intelligence, please get someone who can write press releases in a concise and easy to understand way. Wading through all the unecessary guff, it actually looks as though the company is doing OK which I guess is the main thing! "

Disregarding the poorly written communications, one reason I invested in this company some time ago was that the company's size was very small compared to the size of the markets it was addressing and it looks as though it is continuing to make progress in these markets. It also has some intellectual property which may help to provide competitive advantage.

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Effortless Cool 14th Feb '18 25 of 32


You correctly highlight the risks involved in investing in small, illiquid companies. For me, however, this is one of the attractions of Water Intelligence (LON:WATR).
- Its smallness means that there is potential for it to 10-bag yet still be a small-cap.
- Illiquidity will benefit holders if and when the market notices the growth story here and rerates accordingly.

The annuity-like contribution from the franchise business leaves me confident that the business will survive any economic downturn. With only surplus funds invested, I feel able to ride out any adverse consequences of illiquidity, in the strong belief that the underlying value of the shares will persist even if the price, for a period, does not.

(The same comment is made on the Water Intelligence (LON:WATR) thread, so apologies for spoofing both boards)

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davidjhill 14th Feb '18 26 of 32

In reply to post #315303

It's all about has been marking Galliford Try (LON:GFRD) down for a while based on Carillon type exposure worries so....
1) Shore up the balance sheet and put those concerns to bed.
2) A cancel of the dividend would however,be perceived even more poorly so rebase it at 2* cover as that will put a bit of a floor under the share price.
3) post summer 2018 when project is finished and cash comes back recycle into house building business at 15-20% margin.

May not be the most efficient use of cash but given market irrationality around yield I can see why they've done it - largely to avoid an even bigger fall in share price that would prove more dilutive on a capital raise.

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Reacher 14th Feb '18 27 of 32

In reply to post #315208

Hi Matylda - Keystone Law (LON:KEYS) certainly did issue a positive trading update and I had another look at the IPO document to get an understanding of the business and the risks.It talks about being a challenger law firm and "disrupting the traditional law firms".

My understanding of the business is that it uses the services of 250 lawyers to perform legal work across many different industry sectors (but specifically excluding personal injury and property conveyancing). These lawyers are effectively self-employed and they will bill KEYS through their personal service companies. The rates typically are between 60 - 75% of the total fee. KEYS will pay the lawyers once it receives the money from the client. Therefore, from a working capital cash perspective, it does not require to fund payment upfront. There are certain advantages that the IPO goes into; work life balance, earn more fees than being employed by a firm, cross-referring work, and flexibility.

However, there is a significant risk here: it's based on a tax advantage. If the lawyer bills through a limited company and then declares dividends, there is less tax being paid. In addition, for KEYS it does not need to maintain a payroll and pay over PAYE & NIC to HMRC or have holiday and sick pay entitlement. If the lawyer predominantly works 30+ hours a week doing work for KEYS then is being self-employed justified? Could GPs employ the same model, as they traditionally operate a partnership agreement? Sorry, but I do find the whole set up being labelled as disruptive slightly disingenuous.

Also, it's not clear who brings the work in or the client. Is it the lawyer or is the work provided by KEYS? If it is the lawyer, then why does the lawyer require to go through KEYS and also is giving away > 30% of revenue justified for central support?

Finally, a lot of KEYS growth is predicated on increasing lawyer numbers.

I think you are essentially backing the management team here who certainly have relevant experience in the field.

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pgs501 14th Feb '18 28 of 32

In reply to post #315363

Fully agree. I really appreciate it Paul when you go through why balance sheets matter and can make a company simply uninvestable. HSS Hire (LON:HSS) seems a perfect example and showing how this will almost certainly cause an equity dilution shows me something extra to look out for. As you say why go anywhere near it beforehand?

A good example of how these reports make me a better investor. Keep up the good work!

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JohnEustace 14th Feb '18 29 of 32

In reply to post #315428

I've opened a starter position in Keystone Law (LON:KEYS). I think the attraction for the solicitors is the increased freedom of operating in a "dispersed law firm". The model has similarities to franchising which can be a very attractive type of business to own.
I'm not sure it's all about the PAYE and NIC elements. The notional tax credit on dividends has already been abolished so the savings are not what they were anyway. Anyone going this route now would be prudent in my view to budget that they will pay themselves via normal PAYE as that's the way things are headed with IR35.
But I don't think that will stop Keystone's ability to recruit. I think it's more about the attraction of the operating model and a lifestyle decision.
The costs of overheads like professional indemnity insurance and online access to legal databases are high so some central administration and purchasing makes sense. And most employed solicitors don't earn anything like 60% of their billings.

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sharmvr 14th Feb '18 30 of 32

Hi Paul,

As a property wantrepreneur, I am not sure Rightmove (LON:RMV) is impacted by on the market.
Specifically, agents I have dealt with using OTM (2016) used OTM and Rightmove. They dropped Zoopla because OTM wanted exclusivity and agents needed rmv.
Don't know OTM, don't like agents, although recently I have been impressed with one (not listed)! I hope to be long rmv and zpg one day when valuation is more palatable mainly because Google could if they choose rip them (and many in many industries) to shreds!
Long Google voting shares and everything :)

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Dean Tonna 14th Feb '18 31 of 32

In reply to post #315338

ok thanks Paul, I get it now !

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matylda 15th Feb '18 32 of 32

In reply to post #315428

Well gajri - Thank you for that detail on Keystone Law (LON:KEYS).

That's a dubious model it seems, I will be waiting on those actual results.

Thanks again to you and others for comment.

Blog: Briefed Up
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 Are LON:WATR's fundamentals sound as an investment? Find out More »

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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