Small Cap Value Report (Wed 30 Jan 2019) - CAS, SAL, AUK, CALL, BEG, YU., BOTB, TAP/RTHM, STAF

In reply to post #441988

Staffline (LON:STAF) now suspended pending an announcement. Rumours were they were mulling over a takeover of the Cordant Group, but I think this seems a bit more sinister.

Hi Graham,

Just wanted to commend you on an excellent report today. There are so many great nuggets in here to help people invest, such as don’t buy professional services firms; even if a company looks great if the spread is huge and free float small then it’s akin to pushing a piano uphill; and even dogs may have their day, best to cash out when they do and not hold on for the inevitable reckoning.

It just reminds me the road to investment success is not always to chase the latest hot sector or tipped stock, but to also avoid losses...

In reply to post #442138

Staffline (LON:STAF) RNS of suspension at 15.50 tends not to be the harbinger of good news, would only be worse if issued on a Friday before Bank Holiday. Now out but thanks for the heads up.

Just looked back and see Paul's comments 3 weeks ago:

https://www.stockopedia.com/co...

In reply to post #442123

Hi - Interesting idea, I see what you mean.We'll have to see if it applies to BOTB.

A shame that there weren't many good companies reporting today, but it can't be helped.

That's true, Graham, some of the companies you reviewed today are perhaps not investible but you have brought out a number of interesting lessons and asked some interesting questions. Finding out why some companies are or could become basket-cases helps us all learn to avoid them. Thanks for another really useful report today!

Staffline (LON:STAF)
Frankly todays turn of events is beyond ridiculous , i know nothing about etiquette but surely the only sensible course of action was to suspend the shares then tell us the bad news when ready. You can't fan the flame - watch the building burn and stand by all day doing nothing can you - oh yes you can.

If there was no bad reason for the shares to be down that much - i presume they would have had a release advising we know of no reason why the shares are down - if there is nowt up here the lack of them saying that is almost as ridiculous as the first statement fanning the flames.

Perhaps things don't work that quick in real life , but its almost as if everyone was down the pub spending the last bit of cash the company has (well last bit of their available overdraft) enjoying the champers will the trainee as to make a decision what to do.

woe is the company with large debtors book and large debt , large writeoffs and large acquisitions - could be anything that has gone wrong. Or are the bods that have put their money on the news being not good got it wrong? hmmmmm - interesting

Thanks for your Taptica International (LON:TAP) / RhythmOne (LON:RTHM) thoughts Graham. Much appreciated.

Jo

In reply to post #441768

Hi Paul, just wondering whether you had chance to speak to management. I normally email on results day but saw a few on here were contacting them directly so thought I wouldn't bombard them.

Re Taptica International (LON:TAP) and RhythmOne (LON:RTHM)

It takes all views to make a market. I bought Taptica International (LON:TAP) in last couple of weeks around the 140-144p range as to my eyes an operationally successful company was being given away by the market.

I had looked at RhythmOne sometime H2 2018 but didn't progress any as did not have enough insight to judge the tangibility of their turnaround from a product perspective and the potential to grow that. From a cash flow perspective it looks real although earnings held back by various non cash costs. Deprec and amortisation the greater part of if and in H1 2018 totalled $15m with Taptica also having $5.5m of the same. Both cos have been acquirers/consolidators.

There was great coverage on the Blinkx scandal in FTalphaville back in the day. Look it up. RhythmOne is no longer that business. So best to lay that stink to rest.

There's a fair amount of intangible on both balance sheets from acquisitions and past investment. Operationally Taptica has proved this out into positive earnings and cash whereas the jury is out on RhythmOne but the recent inflexion is encouraging with it looks like positive cash is in progress to positive earnings too. Obviously both companies will face a non cash earnings headwind for a while buy hey that's okay and decently conservative accounting. The valuation of Taptica on seen earnings accommodates some write down in intangibles. I'm not forecasting it but it could obviously happen. RhythmOne would does not have the same operating momentum fat to protect it from a write down so that a risk to me as a Taptica holder.

Taptica have produced value from acquisitions. Now, maybe they are raving loons and its just been luck or there's some heavy duty accounting manipulation going on. The evidence doesn't point that way but would be delighted if someone can show me it and save me some of my cash before its too late! Focused negativity welcomed with open arms. Like everyone else I feel uncomfortable with this given some historic factors...

But if a company has some stink yet has good franchise and ongoing operating momentum its usually good to overlook the stink. It creates volatility and maybe some costs but it doesn't sink a good company. I was introduced to this style of investing by a famous short seller, one of the notorious Feshbach brothers - the late Joe (I also met his brother Matt a couple of times). After giving up the hard school of short selling Joe ran a super concentrated fund of 5 or 6 stocks purely investing in stocks that had some form of trauma but he believed it was short term noise on a good franchise. Among his favourite cues to get involves was discovered fraud or regulatory investigation. Since meeting this guy a couple of times I've looked for the occasional opportunity that roughly fits his vibe as I found his rationale compelling that this is an area of true "market ineffciency".

IMO Taptica fitted the bill. I wrote here about some views I have around the fraud cause against CEO Tal - https://www.stockopedia.com/content/taptica-true-contrarian-or-potential-disaster-438583/ . There's some great comment from others. I don't dismiss the wrongdoing of Tal but I think it requires perspective and noted that it doesn't have anything direct to do with Taptica.

I'm not a fan of foreign stocks listed on AIM so I felt caution re Israeli listing. However, I do like Isreali companies and individuals based on experience in the venture space. Hardcore. Rough as hell too so not for fainthearted.

There's future business risk that I can't really assess in this dynamic space. So far Taptica appear really astute in navigating it. Makes me feel that these guys are real entrepreneurs...like sharks they keep moving and eating. RhythmOne is the next thing to eat....and RhythmOne seems to want to dress itself on a plate for them. That could suggest that there's something wrong with RhythmOne and it just wants to do itself in by passing over responsibility to Taptica. Could be and that might catch me out. My hunch and risk is that both parties see a great logic in tying up and that RhythmOne recognise the better reach, commercial chops and, I guess, ongoing technology adaptation/innovation from Taptica. It's a tough area and very dynamic so no time to stand still and think you have a safe cash cow. Got to keep feeding....

High receivables for RhythmOne and Taptica through the acquisition of Tremor Video late 2017 are a negative. In the case of Tremor it seems that Taptica did a great deal and bought something cheap from management that had an idea but not the commercial skills. Note, that the seller of Tremor has changed their name to Telaria (from Tremor) after the Taptica acquisition. They are seeking to use the cash from Taptica to grow the much smaller rump (Taptica took most of it). They couldn't handle the tech and commercial factors on the bit sold to Taptica. In 2018 results Taptica showed they managed down some of the receivables. A bit of google search on employees of Tremor show they felt the bite from new management kicking their backsides. I'd be happier if Taptica gave more details on receivables quality and ageing...but this is AIM accounting...and the valuation provides protection that some goes bad.

The departure of Tal from Taptica is a negative. Reading the history it seems clear the guy had good ability and leadership. Will Taptica have the chops without him?

Conclusion: I'm nervous but greedy here. I feel that there's a lack of evidence that something fraud or immediate operation is wrong. It's a tough and dynamic business so they could just die on themselves. I did not want Taptica to pay out their cash if they have a growth opp to pay for. In this space that makes sense...keep moving for now.

Give me your negative details!

Re Crusader Resources (LON:CAS) "Is this a record in terms of speed to failure?"

I think there was a company called Madagascar Oil (??) that lasted about TWO WEEKS.

Job well done.

Staffline (LON:STAF) Graham, have you managed to slide that into Paul's in tray for the morning?

I had a 10-minute recorded chat with the CEO of Best Of The Best (LON:BOTB) today - got some useful clarity on the tender offer. Here it is:

http://qualitysmallcaps.co.uk/...

Staffline:

"Further to this morning's announcement, the Company can confirm that this morning concerns were brought to the attention of the Board relating to invoicing and payroll practices within the Recruitment division".

In reply to post #442218

So if everyone takes up their basic entitlement, will there be no premium to the market price?

In reply to post #442233

No they can still sell at 420p, but only 7% of their holding.

In reply to post #442228

First it was cake and now staffline! Is this the start of a trend of false accounting? It’s really concerning

Graham - to take a slightly more contrarian view on Taptica International (LON:TAP) and RhythmOne (LON:RTHM)....

Mathematically if you put two companies together currently trading on a PE of 4 you have one larger company trading on a PE of 4. If they achieve the same levels of revenue and profitability as before then the same benefits will accrue as if you owned both individually. The cash will be pooled and thus they can do the same buy back just slightly later. There is no economic downside. If on the other hand one was buying the other on a PE of 20 from a PE of 4 then I would agree that would not be sensible.

Assuming that scale is of genuine importance and that synergies are material enough to matter (I make no judgement either way on management rational) then putting the two together now and then doing the buyback subsequently does make corporate and economic sense given the similar ratings.

On RhythmOne (LON:RTHM) I am actually encouraged that the FD is fairly new as he has a good reputation to protect. He will cast a fresh set of eyes on the numbers and is much more unlikely to go along with anything dodgy imo. This gives me some comfort that trading/accounting is as being told. There is no long term incumbent so the risk of fraud goes down.

On Taptica International (LON:TAP) I am more circumspect given the situation with the previous CEO. However, the potential issue was flagged in the admission doc, the CEO resigned immediately the case went against him and the board didn't protect him but accepted the resignation and appointed a new CEO, which was the right thing to do.

Any merger both companies will need to do extensive DD on each other. Their corporate lawyers will check and double check things like stated cash balances. There will be extensive warranty covenants, personal liabilities and disclosures. Thus if the deal went ahead this would give me some comfort that the stated trading positions are materially as disclosed and can be believed.
Obviously, as we have all found recently even the most robust looking business can have undetected accounting fraud, so one should also cast a sceptical eye and avoid rose tinted spectacles if at all possible but I can't help wonder why you think the bad smell around Taptica International (LON:TAP) is getting worse, other than maybe a natural negative bias (we all have them). If they are prepared to pull their trousers down to RhythmOne (LON:RTHM) and bare all, which they now must do under DD (I have been through it - it's intrusive!) they must be reasonably confident in their position?

It's definitely an interesting situation to see how it plays out.

In reply to post #442433

Frayed emotions...but no smoking gun.

Valuation plus proven operating momentum of Taptica accommodates some losses on large acquired receivables or intangibles on prior acquisitions. Less fat on RhythmOne as the valuation is only good assuming significant pick up in operating momentum (which is being evidenced by cash return that doesn't translate into reported earnings as due to non cash subtractions that appear benign).

So as Taptica holder I have deal risk that could undermine the stonking value my shares currently represent. However, Taptica have proven ability at this in that they picked up Tremor Video in a worse state than RhythmOne (the cash was deteriorating as well as negative earnings) and they have bullied it into positive contribution quite rapidly. It suggests they have commercial ability aligned with their tech capability.

DYOR but IMO Taptica International (LON:TAP) is a market giveaway due to angsty emotions on its news and the general market angst that the news ran into. If the Taptica team believe that RhythmOne (LON:RTHM) turnaround is real and worth paying for with their 4x proven earnings for RhythmOne's 4x forecast earnings thro turnaround then I have some decent reasons based on written history to believe they are making a decent judgement....and at 4x for the combo that seems as if it has relatively high growth and okay (probably improvable) margins then there is quite a bit of fat to accommodate some lumps (receivables? push out bad clients? etc) too.

Feels edgy of course so shower me with embarrassment if I'm a dolt :)

In reply to post #442468

Oh no, I see have incurred the wrath of the mysterious cult of red thumb. I will perform sacrifices to settle the gods.

In reply to post #442168

Cheers Splode - avoiding basket-cases is a great way to improve one's investing results!