Small Cap Value Report (Wed 8 Feb 2017) - KWS, DSG, DPP, TLY, FLOW

Good morning!

Yesterday's report was late. Here is the link to it - covering 7 companies, to get you started today.

I'll have a quick whizz through today's results & trading updates now. Then I'm off for later today for a week abroad. So Graham will be (hopefully!) covering tomorrow's news. Then, subject to jetlag, it might be a joint effort on Friday. I'm taking my laptop with me, so it's more a question of doing the markets somewhere else, rather than a proper holiday!

Keywords Studios (LON:KWS)

Share price: 609p (up 2.9% today - so far)
No. shares: 54.4m
Market cap: £331.3m

Trading update - for the full year, calendar 2016.

This group describes itself as;

the international technical services provider to the global video games industry

This update reads very well. Figures are given too, which is always helpful. Revenues of E96.6m, and adjusted profit before tax of E14.8m are said to be;

...comfortably ahead of consensus market expectations.  This performance has been driven by strong like-for-like growth, due to the continued growth of the established business as well as the contribution of the eight acquisitions completed during the year.

Eight acquisitions in a year - that is very aggressive expansion, and could possibly carry some risk of over-stretching management? Although the total cash outlay of E20.7m suggests that they are smallish bolt-on acquisitions.

Outlook comments are fairly generic, but sound alright;

Although it's early in 2017, we are therefore confident of making continued progress in the year ahead."

My opinion - the shares have done fantastically well, tripling in price in the last year, so I'm sure the company has a lot of very happy shareholders.

The shares look richly-priced, but performance to date seems to justify that. Also, note that broker forecasts have been steadily rising, so it looks like one of these growth companies which is growing into its high valuation.

I don't really understand its business model, or how to value it, so it's not something I would be interested in. Well done to holders though, so far, so good!

As with all highly rated shares though, if the company does put a foot wrong, then the price would lurch sharply lower. Big ratings don't leave room for disappointment. It's always worth keeping that in the back of one's mind, I find.

Dillistone (LON:DSG)

Share price: 93.8p (down 4.3% today)
No. shares: 19.7m
Market cap: £18.5m

Trading update - for the financial year ended 31 Dec 2016.

Profit is broadly in line, so slightly below then. Broker WH Ireland quantifies this as 6.3p EPS, giving a 2016 PER of 14.9. That's probably about the right price - maybe even a little high?

Note this company pays decent divis - WHI says to expect 4.2p for the 2016 divi, giving a healthy yield of 4.5%.

The company plans to change its amortisation policy on capitalised development spend, which doesn't really matter very much, so I won't bore you with the details.

Outlook comments sound a little hesitant to me;

The Board remains optimistic about making further progress in 2017, although it is mindful of the wider economic influences and their potential to impact on the performance of the business. 

WHI has this morning trimmed its 2017 forecast, to make it roughly flat with 2016.

My opinion - it's a nice enough little company, and there are positive user reviews of its software online. However, this share is extremely illiquid, and seems to just plod along, going nowhere in particular.

I think the company should consider merging with one or more similar companies, to make a bigger, and more dynamic group, shedding duplicated costs, etc.

DP Poland (LON:DPP)

Share price: 59.5p (up 4.8% today)
No. shares: 137.2m
Market cap: £81.6m

Update on store performance - the company reports excellent LFL sales growth of +27% for calendar 2016. Also, the number of stores has increased considerably, by an additional 16 in the last 13 months. It now operates 16 Dominos pizza shops in Poland, with a further 23 sub-franchised.

All sounds great, but the company still has a long way to go, to reach breakeven. I seem to recall that was forecast for 2018, or it might be 2019, I can't remember.

So to value this at £81.6m seems round the bend to me. There are vastly better quality roll-outs available for not much more money, which are generating shed-loads of cashflow already, not loss-making like DPP still is. Examples include Revolution Bars (LON:RBG) and Fulham Shore (LON:FUL) both of which I hold. So quite why anyone would consider DPP a bargain, is beyond me.

I suppose the bull case for DPP must be that +27% LFL sales, compounded for a few years, would generate sizeable profits. Also, of course Dominos has been a very successful format in other European countries.

Let's see what the next set of figures look like. They're usually diabolical - e.g. the most recent interim results showed a £1m loss, on turnover of £3m. That was after achieving +28% LFL sales growth in H1. So it still has a long way to go, to even become viable, let alone decently profitable.

I'd speculatively value this share at maybe £20m-ish. So £80.6m market cap looks extremely aggressive in my view.

Totally (LON:TLY) - this company seems to have reinvented itself as something to do with outsourced healthcare. It makes encouraging noises in an update for 2016 today, saying results are;

...expected to be marginally ahead of current market expectations. Based on unaudited management accounts Group revenues for the 12 months ending 31 December 2016 are expected to be no less than £3.7m.

The trouble being, that I can't find what current market expectations actually are. So I can't take this one any further. Would it have killed them to have included a footnote, stating what they believe market expectations to be?

I'm wary of companies that give a number for revenue, but avoid mentioning profit. So I assume it's loss-making? But who knows. If they don't give me enough information, then I can't take it any further.

Flowgroup (LON:FLOW) - lots of detail in this update, all of which combines to make me even more convinced that this share is a dead loss. Its innovative boiler, which seems to be solving a non-existent problem, is now not considered economically viable in the UK, due to low feed-in tariffs. So they're going to instead try to crack the European market. This might entail disposal of its energy supply business, or a Placing. Sounds like they're flogging a dead horse. I'd be pushing to maximise shareholder value, not squander the cash on pursuing new markets.

That's all there's time for today. Graham will be taking the reins tomorrow.

Best wishes, Paul.