Small Cap Value Report (Wed 30 May 2018) - PHTM, OMG, PRES

Tuesday, May 29 2018 by

Good morning, it's Paul here.

Italy again

Italy is being much more widely covered in the UK media now. Certainly it's the main topic that I'm reading up on, and thinking about. - in terms of how it may affect my portfolio. The political aspect of it all is only of passing interest. I'm more focused on how it could decimate my portfolio, and what action I can take to protect myself. So just to clarify, Twitter is the place to rant about the political stuff. Stockopedia is the place to have sensible debate about the markets & financial impact of various scenarios which might play out re Italy. It's all guesswork at this stage.

The more I think & read about Italy, the more I feel that the so-called populist parties are making promises they can't deliver on. They want to stimulate the Italian economy by dramatically increasing the budget deficit (more spending, and tax cuts), which would breach Eurozone rules.

Italy knew what it was signing up for, when it joined the Euro. Plus, if Germany allows Italy to breach spending rules, then other countries may well follow suit.

There's a fascinating account from Varoufakis in "Adults in the Room" of a (recorded) meeting of the Euro Group. He said that France, Portugal, Spain, Slovakia, etc, were so terrified of sanctions being imposed on them, that they made a great show of support and loyalty towards Wolfgang Schaeuble - who comes across as a monstrous bully in the book - but I suppose that is inevitable given that the author was the one being crushed.

What's even more interesting, is that both the Euro Group, and the IMF, knew full well, and openly admitted to Varoufakis, that they knew the Greek bail outs would not work. The agenda wasn't about helping Greece though, it was about saving the French & German banks which owned a lot of the Greek debt.

We already know from the Greek experience, that the main decisions are made in the Euro Group, and the ECB. Both are completely dominated by Germany. Their standard approach is to withdraw support for any recalcitrant member. The nuclear option, if the rebel state still won't fall into line, is to close their banks by switching off their liquidity. This is combined with aggressive briefing against individual opponents (and pushing for their removal/replacement) to undermine strong…

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Photo-Me International plc is engaged in the operation of sale and servicing of a range of instant-service equipment. The Company operates coin-operated automatic photobooths for identification and fun purposes, and a range of vending equipment, including digital photo kiosks, amusement machines, business service equipment and laundry machines. The Company reports its segments on a geographical basis, such as Asia; Continental Europe, and United Kingdom and Ireland. Its products include digital prints, photobooks, posters and collage posters, calendars and photo-cards. It offers children's rides, such as carousels, generic rides, character licensed rides, simulators and interactive rides. It operates approximately 27,000 photobooths, over 6,000 children's rides and approximately 4,700 digital kiosks in areas, such as shopping centers, supermarkets and rail stations. Its subsidiaries include Fowler UK.Com Limited, Prontophot Austria G.m.b.H. and Photomatico (Singapore) Pte Limited. more »

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Oxford Metrics plc, formerly OMG plc, is the United Kingdom-based international software company. The Company develops and markets analytics software for motion measurement and infrastructure asset management to clients in over 70 countries worldwide. The Company helps highways authorities manage and maintain their road networks, hospitals and clinicians decide therapeutic strategies and Hollywood studios create visual effects. The Company operates through Vicon subsidiary. Vicon is engaged in motion measurement analysis. The Company provides software for the government, life sciences, entertainment and engineering sectors. more »

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Pressure Technologies plc is a holding company. The Company's segments include Cylinders, which is engaged in the design, manufacture and reconditioning of seamless high pressure gas cylinders, and consists of Chesterfield Special Cylinders Limited and approximately 40% stake in Kelley GTM, LLC; Precision Machined Components, which is engaged in the manufacture of specialized, precision engineered valve wear parts used in the oil and gas industries, and includes Al-Met Limited and Roota Engineering Limited; Engineered Products, which is engaged in the manufacture of precision engineered products, air operated high pressure hydraulic pumps, gas boosters, power packs, hydraulic control panels and test rigs, and consists of Hydratron Limited and Hydratron Inc, and Alternative Energy, which is engaged in the marketing, selling and manufacture of biogas upgrading equipment to produce high purity biomethane, and includes Greenlane Biogas UK Limited and Greenlane Biogas Europe Limited. more »

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39 Comments on this Article show/hide all

underscored 30th May '18 20 of 39

In reply to post #368284

A hedge is insurance against catastrophic event. Insurance is a cost.

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Warranstar 30th May '18 21 of 39

Hi Paul Scott. That was a very interesting SCVR. I find it rather worrying that you have sold ALL your large cap shares. I have read in numerous places on various occasions that one should never attempt to time the market. I generally follow this advice. However, it seems that you do NOT follow it. I am not saying that you are wrong. I certainly wouldn't bet against you! On the other hand, I don't know if you are right!
On balance I conclude that your intelligence, training, experience, contacts etc would enable you to time the market far better than most people. Maybe it is reasonable for professionals to attempt to time the market but unwise for amateurs?

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abtan 30th May '18 22 of 39

Photo-Me International (LON:PHTM) - did anyone else notice that H2 (£15m) laundry revenues were actually down vs H1 (£17.3m)?
It seems the wrong way around given the April Y/E (surely more usage over winter?).

Oxford Metrics (LON:OMG) - just to re-iterate something I've posted before - there are intra-group sales within Oxford Metrics (LON:OMG) so top line revenue growth is difficult to measure unless explicitly stated (which I don't believe it is today, though I only glanced at the results). I only recall seeing mention of intra-group sales a couple of times in the past and had to email the company to find out what they were. Enough of an omission to put me off sadly.

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simoan 30th May '18 23 of 39

Adjusted profit before tax in H1 fell, from £1.6m last time to £1.5m this time. I'm a little confused as to why this was "in line with our expectations"? I would have thought the 5-year plan to double profits (we're now in year 2) would require profit to rise in each reporting period.


If you look at the breakdown between the Yotta and Vicon businesses you'll see the main cause is the Yotta business due to late timing of recurring  revenue and transition to a SaaS model. Yotta PBT fell from (£0.2m) to (£0.8m) however the larger Vicon business increased PBT from £1.4m to £2.0m. Also worth noting post period end they sold part of Yotta for net £1.3m in cash. 

I like these situations. as you've mentioned before yourself, where there is a growing highly profitable business clouded by a less profitable one, albeit the latter with growing high quality revenues. I assume that if Yotta does not meet the management targets as part of the 5 year plan it could be offloaded leaving a very profitable Vicon business.

I found the results pretty underwhelming tbh but the balance sheet is very solid with another £1.3m in cash on the way. Let's see how they use that cash...

All the best, Si

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MarkOR 30th May '18 24 of 39

Oxford Metrics (LON: IMG). The asset management software looks quite interesting as a workflow management system but I am a bit put off by the lack of any investor information on the addressable market sizes for their two divisions and the slight lack of ambition. The motion capture products looks like it could be quite niche (there are only so many Star Wars films made every year, and so many recuperating sportsman who need their movements monitored), but the asset management product though looks like it could be a very large, recurring revenue global market. But this company as a whole - particularly to warrant it's 19x fwd pe rating - should be aiming for 5x its current profits by 2021, not 2x. Just a view.

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Lazzer 30th May '18 25 of 39

Hi Paul,
I enjoyed your comments on Italy. I do not know enough to know how to hedge, I tried some spread bets a few years ago which was a mistake! So I have enough cash to live on for 2 years and have been moving money to the USA. Thinking that with Europe in turmoil that is where the money will go, which could not only push markets higher but also the Dollar
All the best

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john2 30th May '18 26 of 39

There is substantial coverage of the Italian situation on the FT's Alphaville blog .

The gist of it seems to be conveyed by statements such as,

'While Italy poses risks, the domestic growth outlook for the eurozone is still healthy'

'Should financial instability in Italy, in other words, generate more instability in other eurozone economies, the economic fall-out should be quite small'

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dscollard 30th May '18 27 of 39

Re Trading vs Investing: that Old Chestnut

Timing merits a different discussion about trading versus investing: the objectives, strategies, processes tend to differ. I suspect Paul invests in some elements of his portfolio and trades in others. High liquidity shares have tight spreads and with low transaction costs means one can move in and out of positions quickly taking profits on capitals gains rather than compounding divis and reinvesting over time. High cap shares are rarely "multi-baggers" except over relatively long timescales where the divis returned only partially offset the opportunity costs from better using the capital elsewhere in generating quicker returns (a trader's perspective)

Less liquid, higher-risk small caps have much higher transactional costs and can be difficult to liquidate quickly: they are often less reactive to prevailing (short-term) market forces and do offer much higher potential returns (the multi baggers) . If market do really tank then they can be crippling owing to their low liquidity and high spreads so their risk profile is very different to large caps but then so are the rewards.

As such it is not contradictory to be a trader in big caps and an investor in small caps: the former is income generating while the latter is wealth generating.

It does require different skill sets and the ability to compartmentalise as well as a good grasp and synchronicity with the markets and their shifting correlations

For most PIs the adage,TIME IN the market beats TIMING the market is probably a good one

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sbotting 30th May '18 28 of 39

Hi Paul,

Although in the past I've been confused as to why you included commentary about Bitcoin in SCVR as, to my mind, it has little impact on share prices or the economy as a whole.

In contrast, I think your commentary on the situation in Italy is extremely relevant and interesting in the context of how an investor should think about and weather a large macro event.

Thank you for sharing

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pka 30th May '18 29 of 39

Hi Paul,

Personally, I've found all of your comments in the SCVR about the general market situation very interesting and useful, especially the ones on Bitcoin which persuaded me not to 'invest' in any crypto-currencies! So please continue to discuss anything you fancy in the SCVR.

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prem14 30th May '18 30 of 39

In reply to post #368289

Hmm, insurance is a cost when you don't take the risk into account. Would you rather be uninsured in a car crash?

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JonBirdy 30th May '18 31 of 39

In reply to post #368254

Handy to hear your thoughts Si.


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simoan 30th May '18 32 of 39

In reply to post #368379

Hi Jon,

Interesting to see the share price recover gradually throughout the day with some chunky trades and over 4m  traded in total. It will be interesting to see what the second half holds for Yotta because any turnaround with continued revenue growth in Vicon, plus the usual second half weighting could see a big jump in PBT. 

The whole turnaround at Oxford Metrics (LON:OMG) is an interesting one. As I mentioned it's only a small, lowish conviction holding at this point and I was looking for something more solid from these results to increase my position. Alas,  that did not transpire today but let's give it another 6 months...

All the best, Si

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tightfist 30th May '18 33 of 39

In reply to post #368284

An interesting topic David, and one I have been wrestling with because I just didn't/don't buy (ie believe in the underlying economics and prospects) the rise in FTSE from mid-March to mid-May.

I noted that my portfolio had not been following FTSE through to mid-March and recognised that it had a weighted Sharescope Beta of around 0.22 invested in FTSE250, SmallCap and AIM shares - plus ORB Bonds. I then went on to look at weighted correlation over different timescales and came up with a recent r^2 of 0.16. This was (in retrospect!) eliminated with only about 3% of capital invested in the highly geared SocGen MF69. Unfortunately that was "Knocked out" (mandatory stop-loss) on 9th May and my portfolio loss on MF69 alone was 2.3%. However still a good profit overall on the hedged portfolio.

I am now in SocGen MF70 with a small entry position and less gearing - a token hedge of around 5% with 0.7% of my capital invested. The question is whether to refocus my portfolio towards greater hedging? And what instrument to use?

If you have any thoughts or sample calculations to reference then great!

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Ajay_Gajree 31st May '18 34 of 39

"Italy knew what it was signing up for, when it joined the Euro. Plus, if Germany allows Italy to breach spending rules, then other countries may well follow suit."

Just for balance I would point out that Germany has consistently breached the 6% surplus cap during the existence of the Euro So is in no position to be preaching to Italy.

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underscored 31st May '18 35 of 39

In reply to post #368354

That was my point! I have seen people describe hedging as a source of extra performance.

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Lennart 31st May '18 36 of 39

In reply to post #368299

The brokers and other professionals will always say that you should not attempt to time the market because it is not in their interest to see customers go away. I certainly agree with Paul and consider the market to be very high risk at the moment and has bought short dated retail bonds which I intend to hold to maturity.

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davidjhill 31st May '18 37 of 39

In reply to post #368404

Hmmm - hadn't considered a geared ETF type index product. That's an interesting idea as the highly geared ones behave like put options I guess and thus expire worthless if market is up/flat but provide great profits if market tanks. I need to consider that as I tend to short the market using IG/CityIndex when I think it gets toppy or there is a macro event brewing or will sometimes take the put option if vol has been low. That works ok but has its limitations and I also notice I find myself trading it - which is rather less "insurance"related and rather more performance enhancing. Fine in a broadly upwardly trending market where everyone is buying the dips, but not a great strategy for a swift large move down/panic scenario.

I am definitely less precise than you in correlation terms but I am only trying to give myself some drawdown portfolio protection. Sounds like you've put a lot of effort into the beta calc and correlations. Certainly far more than I have. Do you find Sharescope worth the extra cost out of interest? Not many services provide a good beta portfolio calc.

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Warranstar 31st May '18 38 of 39

In reply to post #368664

Hi Lennart & thank you for your reply.
Please can you tell us how you make a living? This would provide us with some context.

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tightfist 5th Jun '18 39 of 39

In reply to post #368674

Hi david,

Apologies for my delay in responding, didn't notice your reply. I noted that my portfolio was outperforming FTSE (for most months until April 2018) and that finally resulted in my hedging interest/action.

To answer your query, I still subscribe to ShareScope GOLD because I have many portfolios within it and hundreds of charts with observed Resistance/Support levels, Channels, etc. One day I will transfer to Stocko. but... GOLD only supports the life-long Beta calc. which seems a pretty blunt weapon to me. I was curious about the shorter/defined term (I used 22 months, 12 months, 6 months) for my correlation study and IIRC had an r^2 of 0.16 - 0.20 across those time periods.

So far, so good. But now I wanted to "right-size" the hedging position with the SocGen Infinite Turbo - I decided to invest about 3% of my portfolio at a gearing of around 28-40:1. In the event it "knocked-out" (mandatory Stop Loss) on the rise on 6th May and I took a loss of 64% and this hedging depressed my portfolio performance YTD by about (2.1)% - c'est la vie!

Now we have had the FTSE100 top-out (at least for the time being) on 22nd May and I have opened a small short/Put position in SocGen MF70. But MF70 is only geared at 7.8:1 so more serious thinking is required to right-size a new position.

Any approaches welcome - analytical or otherwise! Cheers, tightfist

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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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