Small Cap Value Report (Wed 29 May 2019) - Red Ink, SPSY, XLM, NET, ESYS, Trainline

Wednesday, May 29 2019 by

Good morning!

The RNS feed today is uninspiring, frankly.

To add to the gloom, the market is awash with red ink and is down by 1.3% as I write this.

In particular, I have a holding in British American Tobacco (LON:BATS), which is lower on news that cigarette consumption is reducing at a faster-than-expected rate, mostly because people are switching to alternatives more quickly than anticipated.

But the tobacco sector doesn't explain why the market as a whole is weaker. Mainstream media tries to help us understand the wider malaise:

The blue-chip index took a tumble after the opening bell on Wednesday, falling 0.7 per cent as traders struggled to find anything other than the US-China trade war to focus on.  

That doesn't help us much, I'm afraid. Oftentimes, it's not clear why the market is doing what it is doing - the only ones who know are the ones doing the big buying and selling on that day.

Whatever the reason, I've taken advantage of the improved pricing this morning to increase my FTSE exposure, via put options. I haven't got my buying boots on properly yet but I would if we saw the index back around 6500-6600. Might be waiting a while for that!

Here's my latest portfolio breakdown, including cash and the funds in my derivatives account:

  • Equities 85%
  • Fixed Income 8%
  • Cash 4%
  • Derivative account 3%

This doesn't tell the whole story, however, as my derivatives trades are leveraged to a significant degree. If I take into account the use of leverage and the underlying exposures, the breakdown looks like this:

  • Equities 73%
  • Fixed Income 7%
  • Cash 3%
  • Derivative exposure 17%

Quite a big difference, I think you'll agree!

If you have a spread betting or CFD account, I can't emphasis enough how important it is to understand the notional amount you are betting on. I'm sure most of you already do this, but if anyone out there doesn't do it as a matter of routine, you really should start doing it!

To emphasise the point: if you wouldn't spend £100k on a short-term trade with real money, then it might not be a good idea to do it with borrowed money, either. The losses won't be much smaller for doing it with borrowed money, but they might be a lot quicker.

I'm probably preaching to the converted here, but I just thought…

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All my own views. I am not regulated by the FSA. No advice.

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Spectra Systems Corporation provides technology-based security solutions. The Company operates in three segments: Authentication Systems Group, which captures the hardware, software and materials related to banknote, tax stamp and other high value goods; Secure Software Transactions Group, which provides an internal control system (ICS) software offering to the lottery and gaming industries, and Banknote Cleaning Group, which captures the technology related to cleaning soiled banknotes. ICS provides tools for fraud detection, money laundering, match fixing and statistical analysis. The Company develops and sells integrated optical systems across a spectrum of markets, including currency manufacturing and cleaning, branded products, industrial logistics and other highly sensitive documents. The Company's solutions include engineered materials, sensors and quality control equipment. The Company's materials are available in several forms, including particles, threads, inks and coatings. more »

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XLMedia PLC is the United Kingdom-based online performance marketing company. The Company focuses on paying users from multiple online and mobile channels and directs them to online businesses who, in turn, convert such traffic into paying customers. The Company's segments include Publishing, Media and Partners Network. The Company owns over 2,000 informational Websites in approximately 20 languages. Its Media division acquires online and mobile advertising targeted at online traffic with the objective of directing it to its customers. It buys advertising space on search engines, Websites, mobile and social networks and places advertisement referring users to its customers Websites or to its own Websites. It manages marketing partners, whose role is to direct online traffic to its customers. Its partner program enables affiliates to have a single point of contact for directing traffic. more »

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Netcall PLC is a United Kingdom-based company, which designs, develops and markets communication, workforce management and business process management (BPM) software and services to the healthcare, public and private sectors. The Company provides corporate solutions, health solutions and public solutions. The Company's corporate solutions include multichannel contact center, workforce optimization, customer self-service and proactive outbound applications. The Company's health solutions include patient self-service, appointment management cycle, and resource management and work optimization. The Company's public solutions include case, record and document management, and customer service. The Company offers platforms, such as corporate liberty platform, public liberty platform and health liberty platform. The Company also provides deployment services, including on premise, cloud and hybrid; professional services, including training, and support services, including SolutionCare. more »

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26 Comments on this Article show/hide all

Zipmanpeter 29th May 7 of 26

Re Proposed Non-Standard Finance (LON:NSF) takeover of Provident Financial (LON:PFG) - Matter finally goes into formal CMA Stage 1 40-day review today. Key issue is whether the proposed post takeover remedy of the the Loans@Home subsidiary demerger is a 'clear cut remedy' in the Home Credit market, given Provident's strength in this highly regulated sector.  

As an NSF holder, I believe in the deal takeover from a a commercial perspective since I think that the combination of PFG's Vanquis Bank with EveryDay Loans branch network would be very powerful and TrustTwo/George Banco would provide a very effective competitor to Amigo in Guaranteed loans.

Sadly, this 'industrial logic' is being lost in a hugely expensive and personal Boardroom battle in which strategy is playing second fiddle to egos. However, if Woodford/Invesco/Marathon, who own over 50% of Provident Financial (LON:PFG) keep their nerve the deal will certainly pass shareholders. However, now a risk if the CMA or other regulatory body get involved.

So far the value of BOTH NSF and PFG has gone down sharply since the bid was made. Just like Brexit, this just needs sorting one way or the other!

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AlanJenkins2 29th May 8 of 26

A view on Netcall,please ?

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Camtab 29th May 9 of 26

Thank you for your comments Graham. I tend to avoid gearing altogether, so i don't get the excitement of huge gains but i do get to sleep at night. That said i tend to run a concentrated portfolio with some fairly big bets. I was always influenced by Jim Rogers who said in an interview if you want to make money you have to take risk. It really depends how you define that risk and your appetite for it.

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grb 29th May 10 of 26

Hi Graham. I think it's arguable that if you're using leverage the percentages in your portfolio should add up to more than 100% - i.e. you're effectively investing more money than you've got.

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Graham Neary 29th May 11 of 26

In reply to post #479186

Yep, that's another way of looking at it. Fair point.

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JamesrWilson1989 29th May 12 of 26

off-topic as such but is anyone having issues logging into HL this morning?

Keep getting errors when trying - 'no_security_credentials' ?

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Camtab 29th May 13 of 26

Can anyone explain to me the following. I was in conversation with an actuary who claimed by using spread betting he could trade ftse 100 to yield the dividends at no risk. That seems like something for nothing and therefore unbelievable. Anyone got any thoughts on it? Unfortunately a brief conversation which i have been unable to follow up on.

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davidjhill 29th May 14 of 26

In reply to post #479211

There is no such thing as risk free :)

In spread betting the divi is paid on ex-date (no waiting from ex date to settlement) but the share price opens at a reduced price and by a corresponding amount so there can be no arbitrage there.

I can see how he might sell out of the money call options whilst holding a long spread bet position, known as a covered call. This would enhance the yield, though financing costs would need to be considered. None of this is without risk.

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Graham Neary 29th May 15 of 26

In reply to post #479151

Hi Alan, I've taken a brief look at Netcall (LON:NET). G

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bobsandy12 29th May 16 of 26

Thanks for the useful intro remarks Graham ..... brightens up a rather dull day.....then off to Kew Gardens for a brilliant exhibition of a Chihuly which might make a good element of an alternative !

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JamesrWilson1989 29th May 17 of 26

Volvere (LON:VLE) offering shareholders 1290 a share - spending £16.6M in the process of buying 40% of the co.

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ken mitchell 29th May 18 of 26

Graham. Hope you don't mind me questioning your positive views about XLM buybacks.

You say "Credit where it's due ..... with XLM doing the right thing by continuing to buyback at these levels."

And later you wrote "It would be a red flag for me if the buybacks were cancelled or reduced."

Checking out their buybacks since starting the $10 million buyback programme last December, shows that they were then buying back sometimes 100,00 shares a day around 80p and by February 7th at 86p. But that figure and the buyback prices have since steadily reduced, and yesterday with the share at just 49p only 12000 shares were bought back.

Presumably the purpose of these buybacks was to provide support for the share price. Yet since those big early buybacks the share price has fallen by around 30%. And most of their buybacks were NOT at these levels but much higher.

So I find it very hard to be convinced by the argument that their buybacks have been a good thing when most were done way higher than current share price.

Wouldn't shareholders have been better rewarded with a one off special dividend where, unlike with buybacks, they actually GET the money?

And why would ending or reducing their buybacks be a red flag? And if there is a strong case to back up that opinion then the red flag would already be there as buybacks HAVE already reduced.

And why would another acquisition be such a bad idea? Yes if it is a lousy buy, but is it if a quality acquisition at a bargain price?

I've bought the shares today as they look so cheap and unless bad news surely limited downside with their progressive dividend policy?

Current yield is almost 10% and one definite plus for the buybacks is that there are now fewer shares to pay out the dividend.

Another plus is the Stockopedia value (92) and quality (95) marks.

Happy to be corrected if anyone can provide convincing evidence to show that what I've posted here on XLM  buybacks is a load of nonsense!

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doublelutz 29th May 19 of 26

In reply to post #479311

XLM - Obviously, rather than buying back at 80p plus they would have been better off waiting until it fell further. Presumably they didn't expect the price to fall to 50p. Clearly, the main man Ory didn't as he has been buying himself all the way down! Whether he will finish up buying at 30p is anyone's guess!

I probably have a preference for buy backs rather than a special dividend. When I invest in a company, assuming it is something I hope to hold for some time, then the last thing I want is a partial return of cash. I want the company to use the money. If that involves buying back shares off other people who no longer want to hold that to me is good. It may increase my dividends in the future. That is just the way I I look at it anyway. I don't hold XLM. I got out a long time ago. I don't think it is as easy a business as they may have thought at one time.

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ken mitchell 29th May 20 of 26

Thanks for the reply doublelutz.

Surely the people who no longer wanted to hold and who sold their shares at 90p and others who sold ahead of the big share price falls were the ones rewarded by the XLM buybacks and NOT the loyal shareholders who are now down over 30%?

Or am I missing something?

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doublelutz 29th May 21 of 26

In reply to post #479326

True, but as I say I guess they didn't expect it to fall to 50p. They probably thought it may be 120p by now. Ory obviously did. They were wrong but had the price gone up it may have looked a good move.

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ken mitchell 29th May 22 of 26

I’m sure they didn’t expect the share to fall to 50p and presumably they also thought buying back would make that unlikely.

I’m not convinced by your wanting XLM to “use the money.”

Surely they didn’t “use the money,” but (admittedly with benefit of hindsight) they wasted it.

That happens so often with buybacks. Hence my bemusement at Graham’s great enthusiasm for them.

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Gromley 29th May 23 of 26

In reply to post #479336

Buybacks are tricky things. Companies that do them are implicitly taking the view that the share price is below 'intrinsic value' and therefore there is a strong temptation to execute the buyback swiftly whilst the anomaly lasts.

All too often though, this does not work out for the best and the largest buybacks seem to be at the highest prices (that's just a perception from the cases I have been involved in).

I don't think the XLMedia (LON:XLM) buybacks have been too bad on this count.

In the two and a bit months prior to the 26th Feb "Profit Warning" they bought back 3.87m shares at probably c. 80p (*), in the subsequent two and a smaller bit months they have bought back 7.86m shares at probably around 56p. So overall they have probably averaged around 63.5p so far.

* - I haven't the level of interest to go through the individual purchases so have based this on the monthly volumes and opening and closing prices (but splitting Feb into before and after)

Obviously the company is not allowed to 'trade' their shares and have to give arms length instructions to their broker, but did they amend that instruction post the profits warning to accelerate purchases (as they would be entitled to do)? Or had they given an algorithm that explicitly bought more at lower prices?

I think the figure of 12k shares bought yesterday as quoted by Ken M is not representative, it is clear that they have bought more at lower prices than they did at higher.

This is not a company that has previously tempted me to research in any detail, but it will be interesting to see if the buybacks accelerate after the AGM; although I should note that they 'only' passed the right to buyback 10% of the shares (same as in the prior year's AGM) which is actually slightly less than their current run-rate of buybacks.

I'm tempted now to do more research here, given that the P:B ratio of 0.81x suggests their could be legs in the buyback continuing (although the P:TB  is a less impressive 3.2x.

The potential value of buybacks allowed before the next AGM is barely above 20% of the current cash balance which looks frankly ridiculous, but at the same time makes me highly suspicious of why they are carrying nearly 50% of their market cap in cash (I'm sure if I did a modicum of research this would become obvious).

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xcity 29th May 24 of 26

The theory for buybacks is fine. The 'cancelled' shares, automatically increase the value of all the other shares. But only so long as no value was placed on the cash in the bank.
And it ignores the share price.
As it is, it can be a distortion of the market (and a distortion of the growth rate of EPS). And can be done with that distortion in mind.
With a rising price it magnifies shareholder gain, but with a falling share price it overpays those who have sold.

Personally, I'm not keen. My own experience has been that it handed excess prices to selling shareholders and the company often needed the money down the line.
I'm not keen on upping the dividend either. I believe that should be related to earnings and cash flow: anything else is a distortion.
My preference would be a straightforward distribution. A reverse rights issue would be fine too.

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jonesj 29th May 25 of 26

In reply to post #479271

Volvere (LON:VLE) appears to be a clear case of management doing the right thing and buying back shares below fair value.

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pgs501 30th May 26 of 26

Loving your comment on Essensys Graham that you suspect their timing will turn out to be impeccable, that one actually made me laugh out loud.

Thanks for your general market and company updates as always, always appreciated.


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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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