Small Cap Value Report (Wed 5 Dec 2018) - WATR, WYG, VNET, JOUL

Wednesday, Dec 05 2018 by

Good morning, it's Paul here!

Apologies, I conked out after getting back home yesterday, so nothing more got done for the day. Pangs of guilt got me out of bed early today, so let's start with a few snippets of news left over from yesterday: 

Water Intelligence (LON:WATR) - the share price rose 7% to 308p (mkt cap of £47m) on a

Positive trading update.

  • The company mainly operates in USA, fixing water leaks, partly through franchisees.
  • Sales for YTD (9 months to 30 Sep 2018) up an impressive 40%, to $18.5m.
  • Profits also doing well;
Underlying profits before tax comfortably in-line with expectations, despite significant reinvestment expenses

There's lots more detail in the RNS - I'd say it's worth taking a look.

My opinion - The valuation looks high, at 35 times this year's forecast earnings, dropping to 28 times 2019 forecast, but I suppose bulls must be hoping these figures can be beaten. This looks quite an interesting growth company.

WYG (LON:WYG) - an "international project management and technical consultancy"

  • In line with expectations interim results.
  • Full year guidance unchanged
  • Order books stable
  • Expecting a stronger H2, as usual seasonality
  • Divi maintained (yield is quite good, at 4.3%)

I'm not keen on the balance sheet, with a lot of working capital tied up in work-in-progress and receivables. NTAV is under £2m. Doesn't interest me.

Vianet (LON:VNET) - this group owns the "Brulines" beer flow monitoring business, and several vending machine telematics businesses.

  • Interim results look OK, if unexciting - which sums up this share actually
  • Revenue up a little
  • Adjusted operating profit up 6% to £1.8m in H1
  • Net debt of £1.0m (worse than net cash of £2.7m a year earlier)
  • Interim divi held at 1.7p

Outlook - I can't find anything relating to market expectations for the full year.

My opinion - the PER of 10, and yield of 5.4% look about right to me.

New products seem to take years to develop commercially, and then only on a small scale. Meanwhile the Brulines business faces a continuous headwind of pub closures. So it's difficult to get excited about this share.

Now onto today's results/trading updates;

Joules (LON:JOUL)

Share price: 207p (pre market open)

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Water Intelligence plc, formerly Qonnectis plc, provides leak detection and remediation services. The Company offers a range of solutions (including products) for residential, commercial and municipal customers. The Company's segments include Royalties from franchisees, Corporate-operated Stores and Other activities, including product and equipment sales. Its geographical segments include US and International. The Company mainly operates in the United States, with operations in the United Kingdom and certain other countries. The Company's subsidiaries include Qonnectis Group Limited (holding company of ALD International Limited), ALD International Limited, American Leak Detection Holding Corp. (holding company of ALD Inc.) and American Leak Detection, Inc. (ALD). ALD International Limited and ALD provides leak detection product and services. more »

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WYG plc is a global project management and technical consultancy. The Company is engaged in creating and managing strategic assets by engaging with clients in the early stages of a project, and continuing to advise them throughout its lifecycle. The Company's segments are UK; EAA (Europe, Africa and Asia), and MENA (Middle East & North Africa, including Turkey). The Company offers an array of services, including aquatic ecology, brownfield regeneration, climate change adaptation, development management, energy management, flood risk assessment, health and safety management, intelligent transport systems, landscape planning, management training, nuclear decommissioning and asset care, outsourcing, planning applications, rural and agricultural development, and social and civil society development. It serves sectors, such as defense and justice, energy and waste, environment, mining and metals, transport, social development and infrastructure, and urban and commercial development. more »

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Joules Group PLC is engaged in the design and sale of lifestyle clothing, related accessories and a homeware range, through the multi-channel business structure embracing retail stores, e-commerce, county shows and events and wholesale. The Company has three segments: Retail, Wholesale and Other. The Retail segment includes sales and costs relevant to Stores, E-commerce, Shows and Franchises. The Wholesale segment includes sales and costs relevant to the sale of products to other retail businesses or distributors for onward sale to their customer. The Other segment includes income from licensing. The Company's products include womenswear, menswear, Little Joule, Baby Joule, Wellies and homeware. The Company operates 97 the United Kingdom and Republic of Ireland stores (including five concessions) and three franchise stores. Joules branded products are sold through selected wholesale partners, primarily in the United Kingdom, North America and Germany. more »

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  Is LON:WATR fundamentally strong or weak? Find out More »

46 Comments on this Article show/hide all

Gromley 5th Dec '18 27 of 46

Hi Paul,

Thanks for given your views on Vianet (LON:VNET) , I had a ramble through in the comments on yesterday's SCVR  (#64). I managed to get a bit more excited than yourself, but agree that it's difficult (or at least hard work).

Anyway I just wanted to note in terms of outlook, I did draw out the phrase “the overall prospects for the second half look increasingly assured” , I couldn't find that in the code book, but I took it to  be equivalent to "comfortably in line" or thereabouts - first thing this morning the consensus eps seemed to be  up c. 5%, which I though reinforced my view, but it seems to be marked back down again to 9.0p now so perhaps that reflects the ambiguity?

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Howard Adams 5th Dec '18 28 of 46

In reply to post #424853

Hi mmarkkj777

Thanks for that input.

I'm continuing to dig and re-reading Effortlessly Cool's postings and responses which are offering quite extensive insights and are indeed why I picked up on Water Intelligence (LON:WATR) in the first instance.

Howard A

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chillyhill1 5th Dec '18 29 of 46

I thought it was interesting to see how much Joules had dropped from its 52w high and I recall Mark Minervini saying that when a market leader puts in a major top, there is a 80% chance it will drop 50% and and a 50% chance it will drop 80%. So I had a quick look at some recent high performers and quite a few are getting or hitting the 50% mark.

Share Drop from 52w High
IQE 56%
Xpediator 54%
Frontier Dev 53%
Learning Technologies 51%
Blue Prism 51%

And some other previous market leaders
Fevertree 41%
Keywords Studio 41%

So are these Black Friday bargain? Or is there worse to come.

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paraic84 5th Dec '18 30 of 46

In reply to post #424868

It does seem like an overreaction given the PBT is still in line - as Tricorn (LON:TCN) said in October although they did not warn about flat revenue for H1 so we'd already been guided that revenue growth was flat.

The attraction with this share remains dramatically improved profits and eventually falling debt I hope. I was happy to hold still this morning although the timing of my buy last month at 25p was terrible!

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peterthegreat 5th Dec '18 31 of 46

In reply to post #424908

Thanks for your comments about Water Intelligence Effortless Cool. I would add that the two businesses on which the Water Intelligence is based (American Leak Detection and Qonnectis) were founded in 1974 and 1998 respectively which perhaps demonstrates a degree of resilience. I think the relationships with Thames Water and other utility companies also suggests a degree of credibility as these companies would presumably have done some due diligence on Water Intelligence. Others have suggested the company's performance looks too good to be true but I think you have explained that this is not the case. I must admit I have always thought that Fevertree's performance looked a bit too good to be true but I am glad I bought it a few years ago. I don't think it is a good idea to deliberately ignore the very best companies by linking good performance with risk of fraud - perhaps this amounts to jumping at shadows. However, I would agree that all companies, good or bad, are in trouble if the most senior staff are dishonest.

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Nick Ray 5th Dec '18 32 of 46

In reply to post #424928

I thought it was interesting to see how much Joules had dropped from its 52w high and I recall Mark Minervini saying that when a market leader puts in a major top, there is a 80% chance it will drop 50% and and a 50% chance it will drop 80%. So I had a quick look at some recent high performers and quite a few are getting or hitting the 50% mark.

Share Drop from 52w High
IQE 56%
Xpediator 54%
Frontier Dev 53%
Learning Technologies 51%
Blue Prism 51%

And some other previous market leaders
Fevertree 41%
Keywords Studio 41%

You can also use the one-year volatility as a guide. There is about a 50% chance of a fall equal to the one-year volatility from a 52-week high in any given year. (The flip side is that they can be up by a similar amount from their 52-week low when things are going well of course.)

If we look at the volatility of these stocks we see they are very high (and they were fairly high even before the recent falls)

Stock1y Volatility %Volatility (2018-01-01)
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Paul Scott 5th Dec '18 33 of 46

In reply to post #424753

Hi Tristan,

Joules (LON:JOUL) looks attractive on an earnings basis but historically it has generated little cash. 

That's not right. As you can see from the abbreviated cashflow statements below, JOUL generated strong operating cashflow in both the last 2 years. It then chose to spend that on expansion capex (i.e. opening new stores).

So it's a cash generative business in expansionary mode, not a business that generates little cash. That's a key difference!

It's an interesting point that your raise about the amount the company is spending on a new HQ as looking excessive. Mind you, I think Laura Ashley Holdings (LON:ALY) won the accolade for bonkers HQ spending some time ago, when they bought a (since sold) big office block in Singapore.

Regards, Paul.


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Laughton 5th Dec '18 34 of 46

In reply to post #424948

"these companies would presumably have done some due diligence on Water Intelligence"

A very dangerous phrase - as I've found to my cost more than once.

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Howard Marx 5th Dec '18 35 of 46

In reply to post #424948


"The two businesses on which the Water Intelligence is based... were founded in 1974 and 1998 respectively which perhaps demonstrates a degree of resilience."

Patisserie Holdings (LON:CAKE) was founded in 1926. But the management team that brought it crashing down joined a lot later. So for me it's as much a question of current management rather than the business per se.

Patrick DeSouza became Exec Chairman of Water Intelligence (LON:WATR) in 2010. The key question that shareholders must surely answer is "Is Mr DeSouza running this company for all shareholders or mainly himself & his Related Parties?". The Report & Accounts maybe suggest the latter.

"I think the relationships with Thames Water and other utility companies also suggests a degree of credibility as these companies would presumably have done some due diligence on Water Intelligence."

Small companies with 'blue chip' client bases often get into trouble, not least because the latter can dictate contractural terms. For example, the AA, Saint Gobain, EON, Iceland, Shell, Scottish Power, Direct Line Group are all clients of Trakm8 Holdings (LON:TRAK) , which has suffered a never-ending spiral of profit warnings in the last couple of years.

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hawkipa 5th Dec '18 36 of 46

In reply to post #424823

Hi, Paul Jourdan is the Amati guy. He comes across as considered and is well regarded in the VCT world I think, but I don't really know if his record reflects those statements!

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dgold 5th Dec '18 37 of 46

Revolution Bars (LON:RBG) now down 6p at 101p, this price is half of last year's takeover offer at 203p. Consensus pe for 2019 of less than 8. Does anyone have an explanation?

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Howard Marx 5th Dec '18 38 of 46

In reply to post #424983

Revolution Bars (LON:RBG) was trading at the 105-110p level in the Summer of 2017.

In the last 12 months since Stonegate walked away:

  • the FTSE Mid-250 has fallen 12% y-t-d
  • earnings forecasts for Revolution Bars (LON:RBG) have been persistently downgraded, cumulatively 25% lower
  • Stonegate acquired cocktail chain Be At One 

If Stonegate hadn't bid last year the Revolution Bars (LON:RBG) would likely be trading nearer to 70p/share. It remains to be seen if Stonegate have any acquisitional firepower left to bid again.

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dgold 5th Dec '18 39 of 46

In reply to post #424988

At 70p it would be on a forward pe of 5.2 and a yield of 7.5%. Why should it be on such a low valuation?

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Cisk 5th Dec '18 40 of 46

In reply to post #424808

I don’t know Water Intelligence (LON:WATR) at all, but the fact that one of the board’s salary is nearly half of PBT would put me off immediately.

I’ve found through many years (of often costly!) trial and errors in investing that no matter how good a ‘story’ looks on paper, it’s often the small details that are often over looked, that come back to bite you.

For example:
- complex inter group transactions
- related party transactions
- being domiciled outside of the UK, I’m thinking places like the Caymans etc here
- large salaries of board members
- tiny board shareholdings in companies
- loud mouth CEOs, who often believe they can walk on water...

Not an exhaustive list by any means, and it’s not to say that companies who have any of the above are bad investments at some period in time, it’s just that ultimately I find that they unravel. So of course if you’re trading the share, it probably matters less, but if you like to buy and hold then it matters greatly, as one day you might find that you can only exit at a price that causes much indigestion to your wallet!

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Howard Marx 5th Dec '18 41 of 46

In reply to post #424993

Re Revolution Bars (LON:RBG)

Earnings per share fell in 2016, 2017 & 2018

The current  FY1 forecasts suggests 47% growth in 2019. Does this seem likely in the current economic environment?

Analysts of Revolution Bars (LON:RBG) have no credibility. As mentioned in the previous post, they have already had to cut forecasts by 25% in the past twelve months.

Hence the current FY1 p/e (& hence dividend yield) will likely both prove to be illusory.

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Effortless Cool 5th Dec '18 42 of 46

In reply to post #424998

To be frank, I would say that ruling out investments based on the ratio of board salaries to profits is a clumsy and inefficient method for filtering potential winners. It effectively rules out any early stage opportunities.

A $450k salary is not excessive for the CEI of a quoted company, especially for a US business, and he has conceived what seems to be a winning strategy, and is executing successfully.

As my wife is fond of telling me: “you get what you pay for”.

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sharw 5th Dec '18 43 of 46

In reply to post #425013

"The current  FY1 forecasts suggests 47% growth in 2019. Does this seem likely in the current economic environment?"

This is where I fall out with Stocko because the % change figure they give does not compare like with like. The prior year figure is adjusted by Stocko according to its own rules but the brokers' forecasts tend to use the rules used by the company for its own 'adjusted' or 'headline' results.  In this case Revolution Bars (LON:RBG) results give:

Adjusted*** Earnings per share 13.0p

*** Adjusted performance measures exclude exceptional items, bar pre-opening costs and share based payment (credits)/charges.

 So if you look at somewhere like WebFG you will find forward eps 12.81 -1%.

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Tristan_Treacy 5th Dec '18 44 of 46

In reply to post #424958

Hi Paul,

Re Joules (LON:JOUL) cash flow. Yes they generated operating cash flow of £15m but they then spent £8.4m on fixtures and fittings and £4.2m on IT. As they don't break out growth capex and ongoing maintenance it is hard to know how cash generative the business really is. Depreciation and Amortisation was £7.8m so it is fair to assume that over half of operating cash flow is needed to maintain the business - before crazy head office expenditure!


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abtan 5th Dec '18 45 of 46

In reply to post #425023

Not sure I agree with this.

Early stage opportunities should be when salaries for management are low, with upside contained in share options/bonuses if targets are reached/exceeded (in my opinion).

Taking things to the extreme (though to be honest I would expect any small cap company where one person received 50% of all profits as already quite extreme) would you still invest if the MD took 100% of all the profits as a salary, simply because the top line was growing exceedingly fast?

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dscollard 5th Dec '18 46 of 46

Beware the Bear!
It might be of some cold comfort to know that as of today, AIM 100 has dropped over 20% from 2018 highs so is technically in bear territory.  Probably a statement of the obvious given some of the savage price action of late.

AIM All-Share is down 18%.

FTSE 100 and 350 are more resilient down around 12%. That said only 80 of the 350 shares are above their 200 day moving averages . In the AIM  All-Share  only 164 of the 818 AIM shares are above 200MAs .

As is often the case, outperformers  in 2018 are outperforming in this correction. The temptation to buy shares that have dropped the most  is difficult to resist  but the perception of value can often be the result of an anchoring bias.  Shares that have remained resilient may offer better upside (avoiding defensives and very low liquidity non-movers that is)

The US scare-mongering over yield curve inversion seems to have added to the angst.

Much oversold and overdone in my book but price is truth. Well overdue some relief...where's that Santa man??? Failing a man in red then a man in orange with fat thumb might help


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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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