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

Wednesday, Aug 09 2017 by

Good afternoon!

Let's start with a really shocking turn of events at Israeli, AIM-listed internet-of-things company, Telit:

Telit Communications (LON:TCM)

Share price: 127p (down 30.3% today)
No. shares: 129.8m
Market cap: £164.8m

Statement regarding Chief Executive Officer - Events have taken a shocking turn at Israeli internet of things group, Telit Communications (LON:TCM) . Hopefully readers listened to my repeated warnings over several years here, about this company's red-flag laden accounts. Also that its profits are essentially fictitious, the way I look at things.

Telit shares are down a further 30% today, to 127p. A bombshell announcement came out today. Here is the full text;

Telit Communications PLC (AIM: TCM, "Telit", the "Group"), a global enabler of the Internet of Things (IoT), notes speculation regarding historical indictments in the United States of America of Telit's Chief Executive Officer, Oozi Cats, in respect of matters which are unrelated to Telit and significantly pre-date its establishment.

The Board of Telit has appointed independent solicitors to conduct a thorough review of this matter. Pending the outcome of this review, the Board have agreed to Mr. Cats' request for a leave of absence from the company. Yosi Fait, Finance Director and President, will serve as interim Chief Executive Officer during this time.

Further updates will be made as soon as possible.

I think this must relate to explosive revelations on ShareProphets, which seemed to clearly link Telit's CEO & his wife to property frauds committed in USA many years ago.

To my mind, if innocent, then the CEO would have stayed on, and fought to clear his name. The fact that he's requested a leave of absence (jumping before he's pushed, perhaps?) makes this look almost certain that he's guilty. Indeed, the evidence presented by ShareProphets made it look like the people who skipped bail in the USA over fraud charges, are almost certainly the same people as the CEO and his wife. A wife who amusingly, seems to be on the payroll at Telit's "Art curator"!

So the big question is, what happens next? I expect the CEO is toast now. With him gone (probably permanently), then who knows what else could come out of the woodwork. Today's announcement makes this stock completely uninvestable now, in my view. So…

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Telit Communications PLC (Telit) is a United Kingdom-based enabler of machine-to-machine (M2M) communications providing cellular, short range and positioning modules via its brand Telit Wireless Solutions. The Company develops and markets cellular, global navigation satellite system (GNSS), short-to-long range wireless modules plus mobile connectivity services and application enablement platform to onboard edge devices to the Internet of Things (IoT). The Company is organized into three geographical segments: EMEA, APAC and Americas. Through its business unit m2mAIR, Telit provides platform as a service (PaaS), including M2M managed and value added services, application enablement and connectivity, including mobile network side and cloud backend services. Its modules are integrated in a range of applications, including asset tracking, remote industrial monitoring, automated utility meter reading, insurance telematics, consumer electronics and mobile health devices. more »

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Tasty Plc is a United Kingdom-based company engaged in the operation of restaurants. The Company operates through operating restaurants segment. The Company operates in the United Kingdom. The Company operates approximately 50 restaurants, including over seven DimTs and over 40 Wildwoods and Wildwood Kitchens. The Company's restaurants are located at Plymouth, Hereford, Telford, Chichester, Taunton, Yard, Worcester, Port Solent, Brentwood, Whiteley, Kingston and Liverpool. The Company's trading subsidiary, Took Us a Long Time Limited, is engaged in the operation of restaurants. more »

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ScS Group plc is engaged in the provision of upholstered furniture and flooring, trading under the brand name, ScS. The Company specializes in fabric and leather sofas, and sells a range of branded and ScS branded products sold under registered trademarks, including Endurance and SiSi Italia. The Company also offers a range of third-party brands, including La-Z-Boy, G Plan and Parker Knoll. The Company operates from approximately 100 stores nationwide along with an online sales and also has approximately 10 distribution centers across the United Kingdom. The Company has operations in retail park locations and in House of Fraser stores across the country-as far north as Aberdeen and as far south as Plymouth, offering a range of upholstered furniture and floorcoverings. The Company also runs a made-to-order sofas, furniture and flooring concession within House of Fraser. The concession operates from approximately 30 House of Fraser stores across the United Kingdom and online. more »

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

24 Comments on this Article show/hide all

fredericktug 9th Aug '17 5 of 24

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"!

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vik2001 9th Aug '17 6 of 24

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

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EssexPete 9th Aug '17 7 of 24


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

Website: Utility Warehouse Discount Club
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Soundbuy 9th Aug '17 8 of 24

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?

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bestace 9th Aug '17 9 of 24

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.

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tic_tac_toe 9th Aug '17 10 of 24

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.

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dscollard 9th Aug '17 11 of 24

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.

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FREng 9th Aug '17 12 of 24

In reply to post #206308

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.

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rlyoung 9th Aug '17 13 of 24

In reply to post #206349

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...

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Effortless Cool 9th Aug '17 14 of 24

In reply to post #206474

I've given him an uptick to compensate.

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ed_miller 9th Aug '17 15 of 24

In reply to post #206434

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.

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RichardK 9th Aug '17 16 of 24

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.


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JohnEustace 9th Aug '17 17 of 24

In reply to post #206389


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.

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runthejoules 9th Aug '17 18 of 24

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

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mojomogoz 10th Aug '17 19 of 24

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.

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FREng 10th Aug '17 20 of 24

In reply to post #206539

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?

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Effortless Cool 10th Aug '17 21 of 24

In reply to post #206754


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.

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alpha2 10th Aug '17 22 of 24

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.

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Graham Ford 10th Aug '17 23 of 24

In reply to post #207014

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.

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alpha2 10th Aug '17 24 of 24

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.

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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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