Small Cap Value Report (Wed 17 Jan 2018) - BEG, GATC, NAH, UTW, CPC, TST, MYX

Tuesday, Jan 16 2018 by

Good morning, it's Paul here!

Please see the header above for the companies I shall be writing about today.

Carillion & trade credit insurance

The demise of Carillion on Monday this week is clearly still a very big issue at the moment. Watching the TV news last night, I hadn't realised just how extensive the company's reach is - managing so many areas of public services, e.g. prisons, school meals, etc. I found the TV news reporting alarmist, irresponsibly so. Employees should have been reassured by the media that most jobs would almost certainly continue, under new contracts. Instead, tens of thousands of people are now (probably unnecessarily) fearing for their livelihoods.

Quite a mess. The knock-on effect for suppliers who are now facing bad debts, is likely to be serious too. Indeed it could push some smaller, and/or financially weak suppliers, and subcontractors, into insolvency too.

A keyword search produces this list of listed companies which have issued RNSs concerning their exposure to Carillion. There will be more to come, no doubt. The longer it takes a company to comment, then I'd assume the bigger the potential problem.

This is a timely reminder that sales on credit are a gift, until the cash has been paid by the customer. Hence why it's so important for investors to check (as best we can) the quality of the receivables (also known as debtors) on the balance sheet, within the current assets section.

  •  Are those debtors actually collectable in full?
  • Is a company overly dependent on one or two big customers?
  • How solvent are its biggest companies?
  • Does the company insure its trade receivables? (they should do, where there is any doubt over customer solvency).
  • Is debtor days reasonable (anything over 60 days is an amber flag to me, over 90 days is a red flag). For UK companies, remember to adjust for VAT - i.e. revenues excludes VAT, whereas debtors includes VAT. So I would first divide debtors by 1.2 to take it from gross to net of VAT, and then calculate debtor days (there's a link above showing how to calculate debtor days).
  • Has trade credit insurance ever been withdrawn & caused disruption?

These are good questions to ask companies when we meet management. This can be an area of considerable risk, which many investors overlook. I like to hear an FD answering confidently, and in detail, when asked…

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Begbies Traynor Group plc is a business recovery and property services consultancy. The Company's segments include insolvency and restructuring, and property. It provides services from a network of the United Kingdom locations through two operating divisions: Begbies Traynor and Eddisons. Begbies Traynor is an independent business recovery practice that handles corporate appointments, serving the mid-market and smaller companies. It provides insolvency, restructuring and consultancy services to businesses, their professional advisors and financial institutions. Eddisons is a national firm of chartered surveyors, delivering transactional and advisory services to owners and occupiers of commercial property, investors and financial institutions. It provides professional services, such as business rescue options, advisory options, forensic accounting and investigations, corporate and commercial finance, personal insolvency solutions and services to banking, legal and accounting sectors. more »

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Gattaca plc, formerly Matchtech Group plc, is a human capital resources business dealing with contract and permanent recruitment in the private and public sectors. The Company operates through two segments: Engineering and Technology. The Engineering segment comprises Barclay Meade and Alderwood recruitment consultancy brands. The Technology segment includes the Connectus recruitment consultancy brand. The Company is a provider of specialist recruitment services to the engineering and technology industries, both in the United Kingdom and internationally. The Company offers three core solutions: Contingent Workforce Solutions, Permanent Recruitment Process Outsourcing (RPO) and Total Workforce Solutions. more »

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NAHL Group plc is a United Kingdom-based company, which is engaged in consumer marketing business focusing on the United Kingdom legal services market. The Company's operating segments include Personal Injury, which is engaged in the provision of enquiries to the panel law firms, based on a cost plus margin model, plus commissions received from providers for the sale of additional products by them to the panel law firms; Conveyancing, which is engaged in the provision of online marketing services to target home buyers and sellers in England and Wales offering lead generation services to panel law firms and surveyors in the conveyancing sector and the provision of conveyancing searches for solicitors and licensed conveyancers; Critical Care, which is engaged in the provision of witness reports and case management support within the medico-legal framework for multi-track cases, and Other segments, which include activities related to the share-based payments. more »

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55 Comments on this Article show/hide all

martin576 17th Jan '18 36 of 55

Paul - what a brilliant report and dissection of finances on LSE:NAH. That one piece of work today is worth the Stockopedia subscription !

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davidjhill 17th Jan '18 37 of 55

Paul - If Gattaca (LON:GATC) were going to warn on profits then they have an obligation to do so immediately, not wait for a trading statement. If, as you point out, you are comfortable the Directors play a very straight bat then I would expect an in-line statement and no more/less. That was my view and as a consequence took advantage of the spike down yesterday but sold this morning when they retraced back to 265p. If the trading statement did warn on profits outside of any disclosed Carillon impact it would be a big red flag for me, particularly as this RNS was designed to provide investors with comfort, so I would view it as duplicitous.

A director selling 4% of his overall holding doesn't concern me in the slightest. £35k worth of sales is irrelevant and could be for many reasons (a tax bill for example given time of year). If this was a higher % or a regular occurrence I would probably be more concerned.

All of that said if you believe the macro environment makes for a poor read across to this type of recruitment firm and that profits will be under pressure, as opposed to the Directors slightly more bullish assessment of future growth, then I agree with the other chap who said you probably shouldn't be holding.

Disclosure : I am also long a core holding. Like you I like the dividend but view it as broadly maintainable. I don't expect them to set the world on fire growth wise but don't view them as expensive either. I can see a total long term return in excess of 10%+ which is acceptable. Hopefully, I'm not too far wrong :)

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Reacher 17th Jan '18 38 of 55

In relation to Paul's comments on Utilitywise (LON:UTW) and its accounting issues it is worth mentioning the accounting standard IFRS 15 "Revenue Recognition" came into force on 1 Jan 2018. It is more prescriptive and requires detailed analysis of contracts. This is likely to impact Utilitywise (LON:UTW) and perhaps cause issues in its 2018 reporting. I'm sure it will impact construction and service companies that have long term contracts also.

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Paul Scott 17th Jan '18 39 of 55

In reply to post #299993

Hi martin576,

Wow, thanks!!! Your comment made my day :-)

With NAHL (LON:NAH) , I thought it would be useful to walk readers through my process of analysing a company that's new to me. So it's good to hear that you found it useful.

Regards, Paul.

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HornBlower 17th Jan '18 40 of 55

anyone got any idea why Telit is up so much today?

| Link | Share 17th Jan '18 41 of 55

NAHL: Paul's report says
"these figures look really good, although I note that the company seems to have flat revenues & profits. So is it cheap because it's ex-growth, I wonder?

THere is a specific reason why the 2018 Forecast Sales and Profit is lower than 2017, before resuming growth in 2019.  In simple terms, NAH have changed a part of their model to something called an "ABS Structure", in response to the Regulatory Changes first flagged by the Ministry of Justice in 2015.

Before 2017, the NAH Model was to earn a small % Fee for passing on an enquiry into their Helpline onto a firm of Solicitors to deal with. The new ABS structure was put into place during 2017 with two Large Legal Groups, and is effectively a "joint venture" where NAHL will earn a larger % of the total Fee earned. Some enquiries will be passed through the new ABS structure, and some through the traditional route.   Given that an average case takes 18 months between inception and final settlement, the revenue which passes through the ABS Structure for NAHL  will be recognised later than before, albeit a (hopefully) bigger amount.   2018 is effectively a "hiatus", and monies recieved through the 2 ABS structures will not start to accrue until the second half of 2018.  The Arden Forecast for 2019 shows the position starting to normalilse, with a PBT increase of over 20% compared to 2018. I would presume the numbers will not be fully normalised until 2020...given that the second ABS only started towards the end of the 2017 year.

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Norman23 17th Jan '18 42 of 55

In reply to post #300018

Hi Paul and re NAH;

As you may recall I run a company that provides funding to law firms to run their cases and as such I was interested in your thoughts on NAH. Your summary seems fair and re your question about not knowing the reason as to why their investment in cases will go up, I have an opinion.

I believe this probably centres around that current CMC (Claims management Companies), such as NAH generally 'pile high' new leads and sell the lead to the law firm (along with profits from associated introductions such as insurance etc).

The case then has to be validated by the law firm to see if it is viable and there is a claim. This has historically been carried out by the law firm but it takes time, money and, of course, the are acquiring a large number of cases which they pay for which are then reduced as cases are abandoned although the CMC has already been paid! Whilst 'bad' cases are sometimes replaced by the CMC, this just extends the timescales for the law firm and doubles their work load in vetting the new cases before they can start being a lawyer.

However, the market is changing and the sectors are widening and instead of just supplying a name of a lead to the law firm they, the law firms are now tending to now look for pre vetting and verification of the claim before they acquire the case.

This will mean it takes longer from NAH getting a lead, then through the verification process which is likely to lead to a number of deals falling by the wayside. Only then, when all the info is gathered and it is likely the case is realistic, will the law firm buy the case. This of course takes time and money and would suggest this is what was meant by the comment you highlighted.

This will lead to a greater level of funding being required by the CMC (investment in cases and back room analysis) to get through the process and it may be that the number of cases could reduce due to the vetting process and being thrown out but they will be able to charge more for this added service.

Please note this will not be across all the cases they source/sell but certain sectors that do require verification of the claim such as holiday sickness, housing, financial mis selling.

Please note this is my personal opinion and I cannot be absolutely sure this is their particular business case adopted by NAH, I am just forming an answer to your query based on an understanding of the market and the way it seems to be changing across the different sectors.

I hope this makes sense Paul and happy to chat through if you want to give me a call.


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Damian Cannon 17th Jan '18 43 of 55

In reply to post #299923

Yes my heart sank when I read that statement! But then I read on further and realised that profits are actually going to be above expectations.

So I don't quite know what to make of this revaluation. It sounds bad but without any numbers it's impossible to know what sort of miss we're talking about. Also if, for example, they'd been expecting £75m to grow to £100m but it only got valued at £90m then that's still not bad. However if, instead, it got valued at £70m then that would be terrible.

Not a great statement then in giving us guidance but maybe all will become clear with the results.

Blog: Ambling Randomly
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Bezhe 17th Jan '18 44 of 55

The text on red flags relating to debtors is better value than paying for a two-day debt collection course. It is insightful of Paul to highlight the significance of having an unqualified FD. I'm sure the note is not autobiographical.

I have personal experience of this. I took over as FC from an unqualified guy many years ago. The company had recently been acquired by a PLC and there had been an earnout target in place for the year of acquisition. The selling owner was still CEO of the company and he pulled every scam available (none legit) to maximise the profit for that year. His unfortunate unqual guy did all that was asked of him (no instructions on paper). However, some of the methods used were crude and easily identified during the audit. Some were not - how do you spot that raw materials supplied to the company were paid for by another party? Or that sales invoices paid by a customer during the did not involve the supply of the goods stated? Mr CEO paid for both items personally. Cost £1X, benefit £8X, gain £7X - and X was big. No-one was ever investigated criminally - indeed Mr CEO became a member of the PLC board as a result of the shares issued to him on acquisition!

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JonBirdy 17th Jan '18 45 of 55

In reply to post #300018

Hi Paul

I found your £NAHL walk-through invaluable too. Really interesting. Thanks very much.

I recall other subsribers suggesting a Stockopedia balance sheets pdf guide. If ever there were the resources to produce one, that would be great. (I might then become aware of my many unknown unknowns ;)

Regards, Jon

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simoan 17th Jan '18 46 of 55

In reply to post #299578

To address simoan's points: I get the impression from this agency, others I have invested in, and ones I have used in the past that it is very difficult to grow organically or even hold on to business beyond a certain size. It is a people business and there is a pattern of individual recruiters leaving to form their own companies or joining their ex-colleagues smaller companies. To grow or even stand still it is necessary to then buy these companies from time to time, despite the knowledge that some of the recruiters working there will quickly leave. So IMHO recruiters will always look like bad businesses with bad management. It is just a matter of price. 


So you are saying these type of people businesses make bad investments as Graham wrote recently, and I agreed with him. If you need to buy companies and run up debt to stand still, that sounds like a pretty lousy business to invest in!! Of course, none of this is an excuse for the way the management of Gattaca (LON:GATC) have run the company in the past 5 years. I speak as someone who can remember when it was called Matchtech (the change of name is a red flag in itself) and the share price was 500-600p. Of course, it is now half that. 

You only need to spend 5 minutes looking at the Stock Report to see that despite several acquisitions, including the large one of Networkers International, whilst revenue has increased as you would hope and expect, profit has not, EPS has not, ROCE has plummeted, a low operating margin has decreased even further, and the only thing that has increased (quadrupled in fact) is net debt. And they are not even managing to reduce the debt effectively whilst maintaining a huge dividend. 

To me this just smacks of poor management that has done nothing to add shareholder  value through a time when employment has been buoyant at best and benign at worst and recruiters should be doing well. If you compare the share price over the last few years with other smaller recruiters (e.g. Harvey Nash, Robert Walters) it tells you everything you need to know.

All the best, Si

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tony akram 17th Jan '18 47 of 55

In reply to post #300178

I could not agree more with Si (well said) I remember Matchtec as well I had GATC shares sold last year (at a 10% loss) name changes in general do make me uncomfortable however what bright spark came of with name Gattaca !! I should have just fled then.

All the best Tony

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cholertonandrew 17th Jan '18 48 of 55

That’s a brilliant report Paul, thanks for all the hard work. Regards, Andrew

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LeoInvestorUK 17th Jan '18 49 of 55

In reply to post #300178


Re: Gattaca (LON:GATC). Yes I am agreeing that people businesses are bad businesses, but where they are consistently profitable (Begbies Traynor (LON:BEG) being another example), they can make good investments at the right price. Borrowing to cover debtors, especially when they are insured, and especially when the debt is very cheap seems perfectly reasonable to me. This working capital would be freed up in a downturn.

I did look at Harvey Nash (LON:HVN) 's performance over a 5 year period and it seemed to be just as bad, and perhaps worse taking into account dividends. I didn't look at Robert Walters (LON:RWA) before now. Yes, the share price has nearly doubled in 5 years, but dividends have been only around 1% pa so that will be partly down to higher internal investment and may be due to P/E expansion over the period - certainly the P/E is now very high for a recruiter, though the EV/E slightly less so.

Blog: LeoInvestorUK
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clarea 17th Jan '18 50 of 55

In reply to post #300018

Paul on the subject of lack of liquidity and EMS that market makers will deal in at the bid being older and wiser these days post Indigo and gearing what is the max percentage of your portfolio you would put into any one share even high conviction stuff ?


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jonthetourist 17th Jan '18 51 of 55

In reply to post #300118

Good story. I remember when our privately held co. was selling to a huge corporation our FD brought a gnome into his office. When I asked why he said it symbolises the seven dwarves, to remind us directors that this year, everything costs seven times the price we pay. It was a very effective reminder to be abstemious, although we didn't bend the rules, much.


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wildshot 18th Jan '18 52 of 55

Morning Graham/Paul, since there is no placeholder can I place a request of announcements today for consideration for your report. I'm interested in the updates from Air Partner (LON:AIR), Headlam (LON:HEAD) and Newriver Reit (LON:NRR). Of particular interest in Newriver Reit (LON:NRR) due to it's association with the high street. Today was most interesting with particular reference to the lower rent per square foot compared to last year however the increase in footfall. Also what appears to be their strategic decision to not be involved with department stores.

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simoan 18th Jan '18 53 of 55

In reply to post #300213

I did look at Harvey Nash (LON:HVN) 's performance over a 5 year period and it seemed to be just as bad, and perhaps worse taking into account dividends. I didn't look at Robert Walters (LON:RWA) before now. Yes, the share price has nearly doubled in 5 years, but dividends have been only around 1% pa so that will be partly down to higher internal investment and may be due to P/E expansion over the period - certainly the P/E is now very high for a recruiter, though the EV/E slightly less so.

Hi leo,

I don't want to belabour the point I'm making but I don't know why you chose 5 years? I said "a few years" as that takes in the period post the large acquisition of Networkers which completed in April 2015 and that added £30m in debt to a fairly debt-free balance sheet. Try a three year chart and see what you think. Add in any other recruitment company you can think of and you will see Gattaca (LON:GATC) has underperformed pretty much all of them quite badly in share price terms.

If you can explain how the Networkers acquisition has added any shareholder value whatsoever, I'm all ears. Of course, the cheeky buggers even awarded themselves loads of shares in a "Value Creation Plan" a few months post completion in recognition of their superb performance. For the avoidance of doubt, I used to hold Gattaca (LON:GATC) so I have followed it quite closely over the last 5 years but I have no axe to grind other than the poor management. I wish you well with your investment in Gattaca (LON:GATC).

All the best, Si

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autonomatt 19th Jan '18 54 of 55

Hi Paul,

As I understand it, NAHL are issuing more shares. Interested to hear your thoughts on that. The stock certainly looks good on the StockReport. However, I've made a decent profit on this holding and with the company still being under investigation and now raising more money via shares I've cashed in and taken profit on this holding.

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TangoDoc 31st Jan '18 55 of 55

As a holder of Gattaca (LON:GATC) I note another drop in price today with no evident news but alongside continuing rumbling about Carillion (LON:CLLN) on the Radio 4. I assume the two are linked, despite the rapid response from Gattaca (LON:GATC) 's CEO in an attempt to unhitch the two companies. Interesting to see the sharper fall on fear of a link than the grudging recovery that the almost rebuttal produced. I suspect I may have to bite this bullet before long.
My use of the £ sign has been as required but, unless something magical happens as soon as I click on "submit", I fear they will stay as £.

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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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