Small Cap Value Report (Wed 6 Dec 2017) - Bitcoin, IGE, EZH PLA, RHL, NUM, MAI

Tuesday, Dec 05 2017 by

Good morning! It's Paul here.

I have to complete this report much earlier than usual today, because I'm heading up to London for a lunchtime meeting with the Directors of Vianet (LON:VNET)

Please note that I finished yesterday's report in the evening, so it now covers: Vianet, FreeAgent, Character, Fulcrum Utility Services, and PCI-PAL. Here is the link to yesterday's completed report.


Firstly, as it's a quiet day for interesting news, I have to comment on Bitcoin - surely the hottest topic in the financial world at the moment. People ask me if it's a currency, or a speculative bubble? Actually, I think it's both!

Currency? - as a friend pointed out to me recently, literally anything can become a currency if enough people decide to use it as a currency. If enough of us decide to use seashells as a currency, then seashells become a currency!

Bitcoin does seem to be gaining traction as an acceptable currency, although it's still very much on the margins as a niche thing. Also, I think a lot of the press articles about so and so accepting bitcoin, look like publicity stunts.

Why would anyone use Bitcoin? Possibly for experimental reasons, but mainly I think it seems to be a mechanism to by-pass the conventional financial system. Hence it is apparently the currency of choice for criminals, drug dealers, etc, seeking to launder their money. It may be the case that many, even most bitcoin transactions are legitimate. However, just using common sense suggests that a main motivating factor to use bitcoin is to bypass laws & regulations. Apparently it's popular in China as a way of hiving off money overseas, thus avoiding exchange controls.

This to me seems the obvious catalyst for bitcoin's eventual, inevitable collapse - that Governments are likely to ban, or regulate its use. It seems almost ridiculous to expect Governments to sit back and do nothing, whilst their control over the financial system slips away.

Only last week the UK Government announced that it was intending to regulate use of bitcoin. The UK might be insignificant overall to bitcoin, but it can only be a matter of time before big Asian economies like China and Japan also introduce regulation or outright bans on the use of bitcoin. The Chinese shut down a bitcoin…

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68 Comments on this Article show/hide all

shauniekent 6th Dec '17 48 of 68

I’m very bullish bitcoin. That said – I currently own none. It seems that many sensible and successful investors simply don’t understand the bull case. This isn’t a blanket argument against criticism of bitcoin – it’s simply stating that many of the arguments against bitcoin I see seem to be from people who don’t understand it. By all means criticise the current mania, but please argue from a point of understanding first.

Couple of quick rebuttals to Paul's points:

Currency - Euros, dollars and pounds are all used by criminals, bitcoin is no different.
Governments can try and ban but how would that work – I can’t see a global agreement between all major countries of the world to work in unison to ban. Also, imagine the outcry if governments tried to ban say, gold? But regulation…that is a good thing. Regulation means growing use, awareness and adoption of a technology – in this case Bitcoin. It’s no longer confined to the geeks – its moving closer to mainstream.

The point that’s missed here is actually that people are using and buying bitcoin as it’s better at being money, then traditional money. Think about that. It’s money taken to the next step improved using technology.

Blockchain technology – Bitcoin is the first ever inimitable digital asset. Think about this – the first ever digital asset that cannot be copied or duplicated. That’s why some people call it digital gold. Think about this as a useful and inherently trustworthy unit of exchange. I’d argue this has enormous intrinsic value.

The price of Bitcoin in Zimbabwe was at a premium to the prevailing rest of world price recently too – people couldn’t get enough Bitcoin. I agree people do switch to US Dollars in a crisis -but they haven’t always. What would people have sought beyond the last 100 years of human history? Did I mention bitcoin fulfils the properties of money better than US dollars

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shauniekent 6th Dec '17 49 of 68

In reply to post #250268

(part 2 of my comment)
Volatility – bitcoin has been volatile but that’s looking in the rear mirror. Can we imagine a price in the future which the market decides is fair value and volatility reduces?

Proliferation – Bitcoin in terms of development effort, computing power and community is so far ahead of any other crypto currency. It is a little like comparing Google to….. I don’t know ‘Ask Jeeves’. I’m sure they both did well in the dot com boom, but only one was ever worth owning.

Speculation – I agree Bitcoin has all the hallmarks of a bubble.

In summary, I totally understand people’s scepticism. It looks and feels like a bubble. But I really believe there is a bright future for Bitcoin as the first and best cryptocurrency in existence. It has a huge first mover and network advantage. It fulfils the ‘properties’ of money brilliantly.
It may crash from these prices, it may not, but I am a strong believer that Bitcoin is here to stay, it will only grow in adoption and awareness which ultimately is positive for a higher price. Don’t forget those people who quite earnestly and honestly argued in the 1980’s that the internet was of no use and wouldn’t amount to anything. For what it’s worth, I think Bitcoin and certainly the surviving crypto currencies are here to stay.

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Carey Blunt 6th Dec '17 50 of 68

In reply to post #250273

Great post, the point about Bitcoin being better at being money than existing currency is is a really important point. Thats why we don't use Seashells.

We are still making Simoan grumpy though by not posting in the seperate thread, feel free to repeat your post there if you can be bothered to!

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simoan 6th Dec '17 51 of 68

In reply to post #250223

Which is why we moved it to another thread.... 

Great, thanks. You can all fill your boots on that thread safe in the knowledge I will not be reading! 

On Numis (LON:NUM). I guess it is one of lifes great ironies that a £327m market cap brokerage firm does not have any broker forecasts... Is that for real?

All the best, Si

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JamesrWilson1989 6th Dec '17 52 of 68

In reply to post #250288

Doesn't strike me as odd:

- I'll assume they can't be a broker for themselves.
- The other brokers are their competitors - If they use another firm - arent they giving that company free advertising for their customers?

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simoan 6th Dec '17 53 of 68

In reply to post #250303

Doesn't strike me as odd:

Sorry, I thought I said it's ironic, not necessarily odd.  

Talking of odd things I see Walker Greenbank (LON:WGB) have had another mishap:  I bet their insurance broker are getting  fed up receiving claims forms from them!

All the best, Si

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fwyburd 6th Dec '17 54 of 68

In reply to post #250093

I think it's alarming that one of their customers has sourced wafers from a different supplier because IGE didn't have enough capacity. This indicates that they might not be as unique as they suggest doesn't it?

Perhaps that's why the shorters increased again two days ago?

(I was long)

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tomps3 6th Dec '17 55 of 68

1pm (LON:OPM) gave a trading update today, here's an interview with Ian Smith CEO embellishing the RNS.

c. 8mins

What can we expect with the interim results? – 00:21
Based on broker forecasts it looks like results are H2 weighted, is that the case? – 01:17
Can you explain the exceptional items – 01:48
Can you tell us more about the organic growth? – 02:23
How’s the integration of the acquisitions going? – 03:32
Are any of the divisions out performing? – 04:38
Are you concerned about interest rate rises? – 05:18
The new funding facility – 05:50
Can you tell us more about the use of FinTech – 06:36
What’s the outlook for 1pm going forward – 07:37

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Wimbledonsprinter 6th Dec '17 56 of 68

In reply to post #250288

Simoan. Another irony, as you mention in another post, you need to have a view on the equity issuance market for 2018 and beyond to invest in Numis (LON:NUM). But in its outlook statement, even Numis says “we cannot predict the direction of the market or the health of th equity issuance environment”. If they can’t who can? And I bet they don’t say that to their clients.

On a more serious point, while the future may be murky, the income statement etc numbers are super clean. No “adjusted” income lines. (i hold).

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Gromley 6th Dec '17 57 of 68

In reply to post #250348

I think it's alarming that one of their customers [Lumentum] has sourced wafers from a different supplier [Epistar] because IGE didn't have enough capacity. This indicates that they might not be as unique as they suggest doesn't it?


First off there is some debate about whether the story is actually true (Analysts at Stifel cast doubt on it  Quoted on Alphaville (scroll down to 11:57)

Bryce Elder at FT fanned the flames of this last week by citing "concerns" IQE may  lose the whole Apple deal - he cannot name anyone that actually had those concerns, but credit to him for somewhat correcting the situation by publishing the fuller Stifel response in the link above.

IQE had stated previously (November) that there were going to outsource some VCSEL wafer production to Epistar and that is most likely (imho) what this somewhat dubious story is actually about.

Even if the story has some veracity, then the backdrop is essentially  that demand for these wafers is so high that even running at full (current) capacity cannot keep up with current demand (and this is one customer - Apple - and one application).

I don't think that anyone believed that IQE are the only company capable of making these wafers ever, but (although I don't have the industry knowledge to test the view) there is a view that IQE are significantly ahead of the game in terms of quality & efficiency (and therefore cost).

My own discomfort comes from not being able to personally verify the extent of their market leadership (although I suspect with enough research maybe I could), but for me at the moment I am content to rely on the secondary evidence given what I see as the risk:reward balance.

There is a trading statement due from IQE in the next 3 weeks (potentially as early as next Tuesday) and I'd expect IQE will probably address some of the questions in that.

As to the slightly more medium term concern raised by pbiom1 of course, if you are a supplier to Apple (even one step removed as IQE are) there is a risk that they may "in-house" your activity at some point (  £IMG  is no doubt front and centre of people's minds) but I have three major thoughts on this :

1. The article pbiom1links to is not talking about the component that IQE support.

2. IQE provide the base component that another supplier use to provide components to Apple, how far do Apple's in-housing ambitions actually spread? Is now the time to short Silicon miners?

3. Apple are a big beast, no doubt, but there are other applications for IQE's product (going beyond obvious competitors to Apple) and whilst Apple is likely to be the IQE story for the next year or so, there is  a pretty decent chance that other significant stories will overtake this.

So personally I am not "alarmed" at all by the possible story of Epistar etc. but I do understand why it makes / made people nervous.

And in fact the "good news" (for me as I'm playing with some short term "sentiment trades" and possibly for you as someone who "was long") is that if you unravel the reason for the recent price fall in this way (and of course believe what I have written) then there is another opportunity to buy at "bargain prices". I know that sounds rampy, hence the quotes.

I don't wish to steer anyone in either direction on what could be a risky trade, but it does seem pretty clear to me that the last few days price action are a classic case of how the market can respond to "fake news".

Of course on the other hand you have to consider whether the massive rise in shareprice of IQE over the last couple of years is just a BIGGER fake news story.

As they say : you pays your money you takes your choice - I've done that, but with precautions.

Disclaimer : Long IQE (no really!!) in fact now my 3rd largest position.

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FREng 6th Dec '17 58 of 68

There's a free lecture on "Will Bitcoin and the Blockchain change the way we live and work" at Gresham College (Museum of London, 6pm on 9 Jan, no booking required). Details here: It will also be live streamed on the Gresham College Facebook page.

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Paul Scott 6th Dec '17 59 of 68

In reply to post #250348

I think it's alarming that one of their customers has sourced wafers from a different supplier because IGE didn't have enough capacity. This indicates that they might not be as unique as they suggest doesn't it? 

Perhaps that's why the shorters increased again two days ago?

(I was long)

Yes, I had similar thoughts, so decided to bank my profits on IQE, and move on.


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Modform 6th Dec '17 60 of 68

Ramridge, FYI I have a small holding in BTL but VELA has almost 3% stake in BTL in shares and warrants and is UK listed, no advice is intended.

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abtan 6th Dec '17 61 of 68

Genuinely interesting thoughts on "currency" and its "legitimacy".

To add to those comments, and for anyone interested, there is an organisation called Positive Money, who are trying to educate people on how money is created. Here's a quotation that may interest some:

"The money that banks create isn’t the paper money that bears the logo of the government-owned Bank of England. It’s the electronic deposit money that flashes up on the screen when you check your balance at an ATM. Right now, this money (bank deposits) makes up over 97% of all the money in the economy. Only 3% of money is still in that old-fashioned form of cash that you can touch."

Some might also find the video at the top of the link below informative:

Finally here is a short highlights video of when the issue of money creation was debated in parliament a few years ago, which I personally found fascinating:

Apologies for going off tangent; hopefully some will find the above interesting.


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dustyie 7th Dec '17 62 of 68

In reply to post #250228

This might interest you, the links below are to a uk stock on block chain technology for diamond exchange own by techfinancials watch the youtube clip

personally I think the hackers will undermine bitcoin ,eventually they will succeed

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Ramridge 7th Dec '17 63 of 68

In reply to post #250528

Thanks dustyie. You will find the first reply in the stockopedia link you have provided has comments from me. :)

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Ramridge 7th Dec '17 64 of 68

In reply to post #250463

Many thanks, Modform. I will follow up your lead.

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simoan 7th Dec '17 65 of 68

In reply to post #250373

Simoan. Another irony, as you mention in another post, you need to have a view on the equity issuance market for 2018 and beyond to invest in Numis (LON:NUM). But in its outlook statement, even Numis says “we cannot predict the direction of the market or the health of th equity issuance environment”. If they can’t who can? And I bet they don’t say that to their clients.

Hi WS,

I'd not read the RNS at the time I posted and had only looked at the StockReport. As you say this makes it doubly ironic - I presume they won't even be giving a broker forecast for their own company then :)

All the best, Si

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pbiom1 7th Dec '17 66 of 68

In reply to post #250448

Very interesting insights, thanks to all for responding.

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Wimbledonsprinter 20th Dec '17 68 of 68

In reply to post #250288


If you have access to Research Tree, Edison has published research on Numis (LON:NUM) today.

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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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