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Small Cap Value Report (26 Oct 2016) – OTB, AVAP, PVCS, EPO, FLYB, CAU

Wednesday, October 26, 2016 8:13
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Good morning!

I had a late surge yesterday, and added several more sections to yesterday’s report – so here’s the link for that, to get you started whilst I’m busy writing today’s report!

I added sections on;

Braemar Shipping Services (LON:BMS) – good reasons to expect earnings to recover somewhat, but not strikingly cheap. Divis look unsustainably high.

Pendragon (LON:PDG) – very good update. Looks dirt cheap, but what impact will price rises have next year?

M P Evans (LON:MPE) – unsolicited bid approach.

OTB – On the Beach

Unfortunately, the technical gremlins struck, and the section on OTB vanished.  However, to recap, all I said was that it’s worth a look. The company (an online travel agent, specialising in short haul beach holidays) delivered 12% turnover growth, but increased profits further by restraining its marketing spend.

The valuation of OTB looks quite appealing, although as with most retail or travel-related companies, the market is naturally worried about the impact of weaker sterling. I’ve put OTB back onto my watch list, but am holding back on buying shares right now, as the price/chart look rather weak.

My feeling is that Brits will still want our summer holidays abroad again next year, despite stronger sterling. We just might trade down to a cheaper destination, and perhaps trim back on luxuries such as eating out – e.g. I often take a few packets of noodles (18p each from Aldi) with me in my suitcase, when holidaying.

So bombed-out holiday company shares might be worth considering, who knows? Especially something like OTB, which seems to be gaining market share from conventional travel agents. Anyway, I’ll give it some more thought, haven’t made my mind up yet about that one.

Avation (LON:AVAP)

Share price: 161p (up 5.9% today)
No. shares: 58.9m
Market cap: £94.8m

Possible sale of aircraft – an intriguing announcement this one.

Here’s an edited version, of the key points;

Avation PLC (LSE: AVAP), the commercial passenger aircraft leasing company advises that it has received an expression of interest for the purchase of its current portfolio of ATR turbo prop aircraft. The company will evaluate the expression of interest in due course and emphasises that discussions are at an early stage with no decision having been made…

The Company has 24 ATR72 aircraft with two currently under finance leases; the size of the portfolio the subject of the expression of interest is 22 aircraft

The Company’s Executive Chairman, Jeff Chatfield, said:  ”As a matter of policy, the Company is willing to sell aircraft and reinvest the proceeds in order to fund the equity for purchases of new aircraft. If this proposed transaction is to progress, the net proceeds would need to deliver shareholders significant value above book value

I’m not quite sure why anybody would want to buy these aircraft at above book value?

Still, it sounds an interesting potential deal, which has the potential to enhance shareholder value, by the sounds of it.

PV Crystalox Solar (LON:PVCS)

Share price: 20.7p (up 1.4% today)
No. shares: 160.3m
Market cap: £33.2m

(at the time of writing, I hold a long position in this share)

Arbitration / mediation – I flagged up this special situation in my report here on 25 Aug 2016. I hope some readers jumped in (as I did at the time), because it’s risen 53% in the 2 months since then. It’s a nice each-way bet – already asset backed, but with a free kicker of a potentially very substantial windfall from terminating a customer contract with compensation, that is very heavily in PVCS’s favour.

This is the latest;

Further to the announcement of 21 June 2016, PV Crystalox Solar plc has  been advised that the evidentiary hearing of the arbitral tribunal has been postponed until the end of March 2017. This hearing which was scheduled to take place in Frankfurt in November 2016 has been delayed following a request from our customer.

Meanwhile in an attempt to find an amicable solution both parties have agreed to follow a mediation process led by an external mediator.  This mediation will be conducted without prejudice to the pending arbitration.

It sounds like the customer is playing for time, requesting delays to arbitration hearings. You can’t blame them, that’s the commercially sensible thing to do if you’re on the hook for a gigantic legal claim.

A mediation process has now been agreed, running in parallel to the arbitration process. This might help speed up a resolution, but it would probably mean PVCS having to agree a reduced amount, to incentivise the customer to cough up more readily than the alternative of repeatedly delaying arbitration.

My opinion – this could drag on for a long time. Therefore, I’ve banked half my profit, and will let the balance run until things are concluded.

Earthport (LON:EPO)

Share price: 15.75p (down 3.1% today)
No. shares: 477.0m (taken from RNS dated 21 Jul 2016)
Market cap: £75.1m

Results year ended 30 Jun 2016 – yet another lousy set of loss-making accounts under its belt. This is a payment processing company. I visited them about 8 years ago, to do some due diligence for an investor friend who was considering investing in the company. Much to my amazement, one of the Directors took me to one side, and said, “I just can’t believe that people keep pouring more money into this”.

Now admittedly the company has grown considerably since then, on the top line anyway. Trouble is, it chalks up a loss somewhere between £5-10m every year. Over many years. So the accumulated losses now stand at a staggering £140.3m. There’s no sign of this being a viable business yet either!

The adjusted operating loss for FY16 more than doubled from £5.0m a year earlier, to £10.4m this year. The figures are in stark contrast to the upbeat narrative, which talks about stupendous growth, gaining traction with various banks, etc. Basically, it’s the same old flannel that the company has churned out every year since it joined AIM in Jan 2001, moving up from OFEX.

Actually, it’s worth having a look back through the pages amp; pages of upbeat RNSs that Earthport has issued over the last 15 years. Here is its original statement on joining AIM. The numerous contract win amp; relationship agreements with many big name banks amp; technology companies. The never-ending optimism about the future, and being close to achieving breakeven (which never happens). Talk of shareholder value, despite this company actually having been a bonfire for investor funds.

This is the latest outlook statement from Earthport;

We are committed to meeting market forecasts for the 2017 fiscal year and achieving our target of becoming cash flow positive during the fourth quarter of the financial year.

I’ll believe it when I see it.

Cash – has reduced from £30.2m a year earlier, to £14.4m at 30 Jun 2016, so the money is running out fast – again.

My opinion – this company’s track record has been a sick joke, as evidenced by the massive destruction of shareholder value over the last 15 years.

I suppose there’s a chance that it might eventually become a viable business – after all, if you spend 15 years, and £140m trying, then there’s a possibility something positive might come from it.

Flybe (LON:FLYB) – as a reader points out below, it’s been announced today that the CEO, Saad Hammad has stepped down “by mutual agreement”.

It’s therefore fairly unlikely that things are going well.

I gave up on this one at about 40p per share, and for a few weeks it looked as if I’d sold right at the bottom. However, the price has since fallen back to 39.5p, valuing the company at only around £85m.

It’s interesting as a potential special situation, since the valuation is well below tangible book value. Who knows, an acquirer could buy the business, to restructure it further, and maybe achieve some synergies?

The core problem seems to be that Flybe simply cannot get enough bums on seats, so it’s flying aircraft below capacity, on short haul routes, thus planes are spending too much time on the ground, and not enough in the air.

That said, the business is in much better shape now than it was a few years ago, with legacy problems more-or-less resolved, and its finances look OK. I’ll keep a watching brief on this one, but am loathed to get involved again, having had such a bad experience with it before.

Centaur Media (LON:CAU)

Share price: 44.5p (up 1.7% today)
No. shares: 144.8m
Market cap: £64.4m

Trading update – covering Q4 of 2016, and with outlook comments for calendar 2016.

I last looked at this share about 18 months ago, and concluded in my report here of 13 May 2015 that the share looked too expensive at 78p. Also I had reservations about the weak balance sheet, and sustainability of dividends. Good job, as it’s come down 43% in price since then, to 44.5p.

The company description is;

…business to business information, insight and events group.

The three divisions seem a mixed bag, in terms of performance;

Digital revenues across the Group showed steady growth of 10%, with digital premium content revenue growing strongly by 22%. Progress across the portfolios was encouraging with Legal up 20%, Marketing up 10% and Home Interest up 9%.

Live events revenues were up 20% on an underlying basis.  Within this, Exhibition revenues increased 19%, and revenue at the London Homebuilding Show also grew by 19% with visitor numbers up 10%. The Festival of Marketing at the start of October showed delegate growth of 9% with sponsorship levels maintained.

Advertising revenue was down 12%, continuing the Q2 trend, with print advertising being particularly challenging, down 21%.  Digital advertising was more resilient, down 4%.

Overall, it says;

The Group currently expects to deliver full year adjusted earnings in line with market expectations and a net debt/ adjusted EBITDA ratio of approximately 1 times by year end, pre consideration for the Oystercatchers acquisition.

Although it should be noted that cost-cutting has played a part in this;

The Group is making good headway with its cost reduction programme and is on track to deliver £2 million of annualised savings.

Cash collection amp; net debt – cash collection has been very good, with year-to-date cash conversion running at a very high 206%, reducing debtors, and net debt. Mind you, this looks a bit of an aberration, as cash conversion in 2015 was unusually low, at just 32%. So it looks as if there was some unusual factor last year, which is reversing this year.

Net debt was £13.6m at the end of Q3, which sounds OK.

Valuation – the forward PER is about 8.6 – quite attractively low. Although note that it has a weak balance sheet.

Dividends – this looks very good, with a yield approaching 7%. Although I’m always wary of indebted companies with weak balance sheets paying big divis, as the divis can very easily end up being reduced or cancelled if the company hits any trading problems.

My opinion – it looks to have a good spread of activities. However, the declining ad revenues from the printing side of things (trade magazines, I suppose) is a concern. It has the look of a business that is trying to move conventional operations into the digital space, with mixed results. This is confirmed in the Directorspeak today;

Andria Vidler, Centaur CEO said: ”We remain focused on building high value, premium digital content and events whilst reducing our exposure to print advertising. We’re making steady progress on that journey. Cash collection, cost cutting and debt are on track and we expect Centaur to meet market expectations for the year”.

Overall then, I’m wary of getting into anything that is battling against headwinds, unless it’s ridiculously cheap – which this isn’t, yet. I’d rather pay more for companies that are roaring ahead in growth niches.

All done for today! It will be a shorter, but earlier report tomorrow, as I have to travel to an investor lunch in Reading, so time will be short.

Regards, Paul.

(usual disclaimers apply)



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