Small Cap Value Report (Wed 26 June 2019) - Discussion at IG, CRL, DPEU, RM2

Good morning!

Huge thanks to Paul for covering for me yesterday, after I suffered severe travel delays.

Speaking of yesterday's report, Paul added a further six sections in the evening, so it's now an omnibus report. Here's the link.

Some stories I'm covering today (list evolving):

• DP Eurasia NV (LON:DPEU) - "value realisation" (sale) by major holder 
• RM2 Update
• Creightons (LON:CRL) - results
• Zoo Digital (LON:ZOO) - results

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One of my activities on Monday was a recorded discussion at the offices of IG Group (LON:IGG).

Chris Boxall and I pondered the merits of H & T (LON:HAT), Ramsdens Holdings (LON:RFX), AdEPT Technology (LON:ADT), Pressure Technologies (LON:PRES), Duke Royalty (LON:DUKE), Park (LON:PARK), Quartix Holdings (LON:QTX), Rosenblatt (LON:RBGP) and PCF (LON:PCF). (I am long IGG, HAT, DUKE, PARK, PCF).

We were encouraged to disagree with each other, for the sake of good television! Here's the link.

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Before getting into Wednesday's news, there was an announcement at Creightons (LON:CRL) yesterday:

Creightons (LON:CRL)

• Share price: 35p (+6% on Tuesday)
• No. of shares: 62.5 million
• Market cap: £22 million

Acquisition of Balance Active Formula

(Please note that I have a long position in CRL.)

By the time you read this, Creightons is likely to have published its results for FY March 2019.

In advance of that, the company has released some details on a small acquisition. The purchase price isn't given.

What has it bought?

Creightons now owns "the brand equity, customer list and existing stock" of Balance Active Formula (BAF). 

This is a skincare specialist whose products include Snake Venom Wrinkle-Freeze Serum and Dragon's Blood Instant Eyelift Balm.

The announcement says that BAF could add £1.2 million in future revenues to the group, plus some additional growth opportunities. Most of BAF's manufacturing requirements will move to Creightons in Peterborough.

Comment by the Global Marketing Director:

We are excited by this acquisition which builds on our existing portfolio of brands in the beauty and well-being sectors.  It gives us the ability to extend our offering to existing customers and the opportunity to extend our customer base, particularly in export markets. It also offers us even more effective utilisation of our existing sales and manufacturing resources."

My view

In line with the market's response, I am enthused by this development. I'd love to see Creightons make more progress as a brand owner, and the BAF products look very cool.

And I've remarked previously on the manufacturing efficiency at Creightons. If they can refine their processes and sweat their assets even more, by also manufacturing the BAF products, that's great news.

There's a webinar this afternoon for the earnings release. I'll be listening in.

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DP Eurasia NV (LON:DPEU)

• Share price: 81p (-6%)
• No. of shares: 145 million
• Market cap: £118 million

Value Realisation for Stake in DP Eurasia

We've had positive results at Creightons today, but let's admit that this is one where I got it wrong (so far!). I'm down by well over 50% on my initial entry price.

Fortunately, I kept my position size very low, due to the extraordinary risks:

• New IPO
• Turkish and Russian operations
• Growth plans, limited historical track record.

This share now represents less than 1% of my portfolio. Perhaps I should just get rid of it? Perhaps, but I'm stubborn and its actual results haven't been so bad.

Though I do admit that recent news has been disappointing. At the end of last month, the General Manager of Russian operations resigned and left the company very abruptly. The tone of the announcement was positive, despite the setback:

Domino's Pizza Russia is the market leader in Moscow and the third-largest pizza chain in Russia. We intend to continue our rapid growth in the coming years to build the largest pizza chain in the country.

Today, we learn that the private equity company which brought DPEU to market is looking to offload more shares. It owns 33% of the company, and is thinking about selling nearly all of that.

It's not earth-shattering news. This is what private equity companies do: after a while, they sell their stakes. This sale would have been on the cards for a while. I suppose that choosing to sell with the valuation at current levels is the disappointing element. If they have some discretion over timing, they must not believe that results are going to boost the valuation for this stock in the short-term.

My mistake was in backing DPEU too soon. If I had waited a bit longer, and still liked the story, I could have bought into it now at a much cheaper level. I made an exception to my rule about not backing new IPOs, and I've been stung. It's only one data point, but it hasn't helped my wariness when it comes to newly-listed shares! I'm going to have to be even more careful in future.

According to the official forecasts, DPEU is supposed to make EPS next year of 5p+. It's right to be sceptical about this company hitting forecasts, especially when considering the situation at DP Poland (LON:DPP), but I'm willing to give it some more time. There is a long runway of potential growth if it turns good.

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RM2

• Share price: 6.5p (-76%)
• No. of shares: 40 million
• Market cap: £3 million

Accounts publication timetable and trading update

This one may finally be approaching the end.

I first called out RM2" as a "selling opportunity" (to be sold short or simply avoided) back in H1 2017.

As I said at the time, it was trying to solve a problem that didn't need solving: providing the world with a high-tech pallet.

Pallets just need to be flat and sturdy, to enable them to transport things. Wood and plastic are sufficient. Tracking devices, composite materials and "internet of things" technology are extraneous.

At least, that's what I thought and it seems like RM2's potential customers have mostly agreed with me.

When I covered it originally, it was a cash-burning mess and Neil Woodford's company owned 28% of it. This was one of the early signs for me that Woodford was doing some strange things in his portfolios.

Not much has changed in the last couple of years except that Woodford now owns 63.5% of it, after throwing good money after bad. RM2 is still a cash-burning mess.

Today, the company says that it has been unable to borrow any money. Cash at the end of May was $3.3 million, and normal monthly cash burn is $2.3 million.

Without funding, RM2 can't publish finalised accounts for FY December 2018. So there is a "strong likelihood" that the June 30th deadline will be missed, and the shares will be suspended.

Previously when it ran out of money, it simply got a bailout from Woodford. Since Mr Woodford's company is not exactly flush with liquidity at the moment, that does not appear to be an option.

The shares remain worthless, in my view. I would sell them for any non-zero price.

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I'm afraid that I'm feeling run down, and will have to leave it there for now. If my energy picks up later, I'll continue with a look at Zoo Digital (LON:ZOO) and Creightons (LON:CRL).

Thanks

Graham