Small Cap Value Report (3 Apr 2014) - SNTY, LZYE, MCB, IGP

Good morning!

Synety (LON:SNTY)

I attended an excellent meeting yesterday with the Chairman of Synety. As regulars here will know, this is my favourite bull market growth stock. Even the most disciplined of value investors should allow themselves a little excitement, and in my view this one could be a big winner if growth rates continue at the current very rapid rate (from a low base).

My comments here were highly critical of the company’s recent Placing amp; Open Offer, because the discount was too large (and unnecessary) at 250p, a 20% discount, and existing shareholders were only allocated £0.5m of stock, in a 1 for 32 open offer. As an enthusiastic existing holder, I felt let down by this, as it diluted me at a highly attractive price for other people who got in on the Placing (unfortunately news of it didn’t trickle down to me, despite me keeping my ear to the ground).

I didn’t want to sour an otherwise very positive meeting, so waited until the end, and then asked if it was alright for me to raise some questions about the structure of the fundraising deal. I found the Chairman refreshingly open, and he tacitly accepted that the structure of the deal had upset a lot of people. Their problem was that when they started doing the fundraising, the share price was only a little over 250p, so it was a sensible price at the start of the process, but paradoxically the subsequent rise in share price was rather unhelpful.

I grilled the Chairman on why they had done such a tiny Open Offer (only 10% of the £5m total fundraising), and interestingly he indicated that tacking on the Open Offer onto a Placing incurred only very marginal additional fees. So the people who have been saying that companies save money by doing just Placings, are clearly wrong on that front. The main problem with the Open Offer is that the company had no idea what the take-up would be, hence if they had made the Open Offer larger, then there would have been a greater risk of the fundraising failing.

I found that amazing, as it’s blindingly obvious to someone like me who is an active small cap market participant, that existing shareholders will not only mostly take up their entitlement in full, but will over-subscribe for many more shares than are available, given that we’re being offered shares at 250p when the market price is 300p! So I boldly predicted that this offer will be 5-6 times over-subscribed. Let’s see what happens!

It very much strikes me that brokers who set up these deals are completely out of touch with the private investor shareholder base, and there is definitely a need for some kind of intermediary to have a seat at the table to represent private investors when these deals are organised. As it is, Singers have deeply unimpressed me with this deal – bagging a £300k fee for doing precious little, and doing what they did pretty badly, from my perspective. This is an exciting growth company, so they should have raised money at a negligible discount to the market price, and should have split the fundraising 50:50 between Placees and existing shareholders. Any idiot can raise money if you give away a 20% discount on a good company!

Synety has a £25m mkt cap, which people might say is very high for a company with sub-£1m turnover, and making increasing losses. On the face of it that is a fair comment. However it’s all about growth. You can hear more about this company from the horse’s mouth at the ShareSoc growth company seminar in London on 8 May. As always, please DYOR, and bear in mind that SNTY is a much more speculative company than I usually report on.

Edit: Forgot to mention, the other rationale for the Placing is that Synety’s Chairman had a list of high quality Instis that he specifically wanted to have on the shareholder list. He was successful in this, so the shareholder base now reads like a who’s who of small cap experts – e.g. Miton, Hargreave Hale, Henderson, ISIS, Octopus, etc.

LZYE (LON:LZYE)

I mentioned yesterday how de-Listing is the inevitable end game for most (if not all) Chinese amp; Indian companies listed on AIM. When they announce the de-Listing, it usually has an instant 50-75% downward impact on the share price, as happened yesterday with Rare Earths Global (LON:REG).

Today it is the turn of LZYE (LON:LZYE) which has announced an intention to de-List, and the shares are down 68% on the day to 0.2p. Why anybody holds these tiny, overseas stocks, baffles me. The sooner they are all gone, the better. Anyway, you have been warned, so I hope none of my readers get caught on the future de-Listings of Chinese companies.

McBride (LON:MCB)

There’s another profit warning from this company. Can’t say I’m surprised – I last reported on this company on 11 Feb 2014, concluding;

“Overall, with too much bank debt, low margins, and an uncertain outlook, risk/reward doesn’t look particularly favourable to me. The shares might do well if trading does improve in H2, but I wouldn’t be surprised if they warn on profit again in April or May. So it’s not for me”.

Sure enough, here we are on 3 April with another profit warning. The 5p annual dividend is looking attractive, but a weak Balance Sheet means that in my opinion the dividend is not secure. If you had to make a list of all the things to avoid with an investment, this one ticks almost all of those boxes – very low operating margin, highly competitive markets, dominant customers, pension deficit, too much debt…

Intercede (LON:IGP)

The market likes this company’s trading update today, which has put 9% onto the share price, taking it to 209p, or about £100m market cap. That looks an extraordinarily high valuation, based on the company’s historic performance.

Today’s update doesn’t say anything about profitability. It just reports that sales are strongly up;

Following a strong end to the year, pre-audit indications are that revenues will be ahead of expectations and in excess of 40% higher than the prior year as Intercede continues to experience high levels of demand for its proprietary MyID identity and credential management technology, with notable contract wins secured in the telecommunications, aerospace amp; defence and public service sectors.

The shares seem to be on a PER of 60 times next year’s earnings. Hmmmm.

Wincanton (LON:WIN)

This logistics company probably has the worst Balance Sheet of any company on the UK market, in my opinion, so the shares are uninvestable as far as I’m concerned.

As I mentioned when last reviewing their accounts, it has tangible net assets of £400m negative! How on earth they got into that state, goodness only knows. As such, the shares are worth nothing in my opinion.

Today’s trading update says the company is trading in line with expectations. Also it has closed its pension scheme to further accrual.

I shall leave it there for today, see you again tomorrow morning.

Regards, Paul.

(of the companies mentioned today, Paul has a long position in SNTY, and no short positions)

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