Small Cap Value Report (Wed 9 Aug 2017) - TCM, TAST, SCS, WATR

I too have a regular look at shareprophets site. Tom W is a good digger and has several justified scalps to his name. One company he has mentioned as being distinctly iffy and sniffy recently is BNN Technology (LON:BNN), and sure enough you can't go short on this (at least with IG Index), due to borrowing restrictions. I recon there is nothing of any substance to this company and Tom is on it's tail. I'd be interested if any other readers here also smell a rat there (at a £137m market cap!).

Well done to Tom W for his investigative work, and to Paul for his completely correct accounts take down on Telit Communications (LON:TCM) - as that once infamous brokers note once said of Maxwell Communications Corp: "Can't Recommend A Purchase"!

just wanted to add a quick comment on the global events taking place, and how it may impact investors this week:

- Donald Trump's comments sparks sell-off on global stock markets. Europe and Nikkei seem the worst hit, the FTSE 100 retreats from near record close
- G4S is the biggest faller on the UK's benchmark index despite the security firm's results confirming that its turnaround remains on track.
- Investors turning to safe havens such as gold, the Swiss franc and the Japanese yen

Re: TCM

Uzi Katz doesn't look like a real name to me (in my opinion). I wonder if he has more than one identity?

Telit's "Art curator"!

Remember Afren's art collection of 97 works going under the hammer at Bonhams in 2015.

A new Red Flag for the future?

From the Tasty (LON:TAST) statement:

Currently, the Group has 65 restaurants in operation, 7 Dim T and 58 Wildwood

Their Dim T website is only listing 6 restaurants. I think the missing one is Highgate which I happen to know closed down a while ago as I cycle past it fairly frequently.

One restaurant out of an estate of 65 is hardly material, but I hope if they have provided an inaccurate number in today's trading update, they are being sloppy rather than anything more sinister.

nothing TASTy about that statement! Sold at around -30% loss on these today. was hoping for a surprise positive statement. Not the best restaurant around, reality bites.

my comments on Telit Communications (LON:TCM) at 100p from Tuesday did prove prescient as they touched this today. The crookery of Cats added to the cookery of the books does make this a very high risk punt at almost any price.  What is compelling is the technology space and the credible technology offerings the company has along with the acquisitions it has made. Many of those companies may now feel like they have made a deal with the devil. It is worth remembering that this includes Motorola's M2M business and numerous other credible companies.

Given the SP collapse then a kitchen sinking is now needed with a clean broom and a few more scalps of senior bods (mixed metaphor multiplier there ) The clear concerns now added are questions over potential Cats malfeasances while at Telit Communications (LON:TCM) and who on the board may have been aware of these. If there are none then this could be a great buying opportunity. I'd take a position at 80p if only for a punt on acquisition

As to Shareprophets, they are not a bad call for potential dirt on companies, I do recall one of their journos also speculating on Telit Communications (LON:TCM) irregular and inconsistent treatment of tax given their revenues and profits in different countries. Total tax did not reflect the sum of those parts

Finally, one thing that did bother me about Telit Communications (LON:TCM) is why it ever paid a divi. Surely this is another red flag for tech companies focused on growth: Amazon has barely bothered to make a profit let alone even dream of paying a divi.

In reply to andrea34l, post #2

I attended the recent directors' lunch for PIs and others (I'm long). There were three times as many people there as last year amd the directors gave an up-beat presentation. They clearly see the ANNOVA acquisition as very important, but they are conservative and have structured the buy-out so that if all works out well then SCISYS (LON:SSY) does well, whereas if the major BBC contract goes badly then they have bought ANNOVA at a bargain price.

I was impressed.

In reply to tomg23, post #3

tomg23, sincere apologies for the downtick; it won't let me correct it - I meant to uptick but the mouse had a mind of its own...

In reply to rlyoung, post #13

I've given him an uptick to compensate.

In reply to dscollard, post #11

I understand the appeal of the IoT space to investors , but you'd have to be highly confident there is no credible chance of the NOMADS walking away and this being a complete loss to equity holders, as per Paul Scott's worst-case scenario. I don't know what the basis of your temptation to punt at 80p is. I hope it is based on a heavily-discounted valuation of the Motorola M2M business and any other acquisitions you have good grounds to view as legit and susceptible to reliable valuation - I couldn't say, since I stopped looking at Telit in Nov 2015 when I concluded that it was burning cash like it was going out of fashion and its accounting was, at the very best, highly aggressive, albeit there did seem to be some genuine businesses.

We can expect a new CEO to kitchen-sink the accounts even if nothing more untoward is found than highly-aggressive accounting, so you'll need a big discount to intrinsic value, because the market reaction is likely to be severe even if it isn't devastating. I accept the upside could be large if things turn out better with Telit than many of us fear (which is, in the worst case, the possibility of shareholders being wiped out). Some will think we're wrong (or just be so blinded by an optimistic upside that they don't properly consider the worst possible downside).

Anyone punting on this one needs to be philosophical about it if it blows up in their face. I'm sure you will be, and good luck if you do.

I bought WATR in 3 small maximum sized lots at wide spreads. As a result I am still a bit under water (!) in spite of today's 14% rise. I I like company and am prepared to wait for profits growth.

Richard

In reply to vik2001, post #6

@vik,

I tend to the view that Trump's Korean threats are meant to distract us from the ongoing legal investigations looking at his campaign team.
e.g. http://www.bbc.co.uk/news/world-us-canada-40879798

Thanks to Paul for his great dirt-digging on Telit. I was tempted to buy some after the 40% drop, and was kicking myself yesterday that I didn't due to the 21% bounce, but would I have had the discipline to sell before close of play or been too greedy and hung on for more? It would have been pure gambling. Oozi Katz is exactly the kind o fincredible name I would give a corrupt businessman in a didactic graphic novel! £tcm

SCS (LON:SCS) went under in financial crisis for a rather TKO reason to do with inability to get the credit insurance they required (I think previous provider went belly up). Like the rest of the world (Including masters of the universe) they did not understand the financial plumbing...throw in a super acute cyclical downturn and there was no time and no one to help them out of their unwitting folly. In their new incarnation all the credit risk is borne by the finance partner.

Of course, they remain exposed to cyclical risk.

They have outperformed DFS Furniture (LON:DFS) with a much more conservative balance sheet.

DFS enjoy higher margin but they sell more aspirational pieces of crap. Whereas SCS sell low aspiration crap...council house and low cost furnished rental chic. DFS balance sheet risk of debt is compounded by inhouse manufacturing some of produce and expansion abroad.

There is debt catastrophe risk in our economy. Undoubtedly a global crisis bigger than 2008 is coming. Holding lots of cash is the best thing to do and uncorrelated assets. However, in the next crisis the consumer will be bailed out rather than the financials.

I have lots of doubt (on everything) but SCS seem worth the risk. Between now and crisis they may rerate significantly (there's the chance of some homespun margin improvement and a positive solid management story relative to the hubris DFS) and if the crisis does arrive, well, equity markets are screwed. But saving the consumer may mean some of the UK's hated domestic cyclicals are relatively good value relative to more exciting stories.

The market largely ignores SCS as it's a tiddler in unloved area. Results have been rather good for a while. Balance sheet is relatively strong as the financial risk isn't on them. Under macro economic duress their weakness is leaseholds. However, in extreme, exits or unheard of ratchets down in rent likely. Wage costs also decline with downturn in sales as there is a strong performance element to it.

My view is of course extreme and potentially wrong.

In reply to RichardK, post #16

I bought 5000 Water Intelligence (LON:WATR) at 98p last December and I'm notionally up 30% offer-bid. They seem an interesting niche company but the Beneish score concerns me. Has anyone here dug into the underlying data to understand whether the red flag over earnings manipuation is a genuine concern?

In reply to FREng, post #20

FREng,

I looked at this yesterday, funnily enough. My view is that three of the four fails - excessive sales growth, decreasing depreciation and increasing administrative expenses - are clearly directly attributable by the gradual shift in the business model from franchise outlets to corporate-owned outlets.

Increasing trade receivables is also probably related to the same matter, but is harder to rationalise. I suspect that monthly franchisee royalty cheques are paid promptly, whereas direct customers of corporate-owned stores are somewhat slower to pay. Note 17 of the most recent full year accounts would seem to support this.

Hello Paul, I wondered if you could have a look at (AFS) Amiad Water Systems. I bought a small packet of these when it was stock rated in the 90's I think. Soon after there was a change of CEO and the stock dropped to its current level and has done nothing for the last 12 months. I can't see any obvious problems but missed any opportunity to sell as the drop was practically overnight. The Stocko page does not look too bad but I can't decide whether to cling on or take the haircut.

In reply to alpha2, post #22

Hi alpha. Amiad Water Systems (LON:AFS) basically have flat revenues for several years. They've been in existence for 50 years but their turnover is only around $100m. Considering the increasing issues of water scarcity they should have been able to grow their sales if they had any distinctive technology that works well, even if only in their home country. So I would conclude that they either have poor execution or average technology or both and so the company is going nowhere. So I would sell and look for a better opportunity but getting out at a reasonable price may be easier said than done.

Thanks Paul, food for thought. None of their public statements seem to have any optimism and their foreign sales do not seem to be getting anywhere so I think you are probably right.