Small Cap Value Report (Tue 23 Oct 2018) - CMS, OTMP, FLO, BMY, MCB

Good morning, it’s Paul here!

In case you missed it yesterday, after spending several hours in the hammock with Stella Rimington’s book, I added 4 more brief sections to yesterday’s report (on Cerillion, GFinity, CML Microsystems, and Croma Security) – here is the link. 

Following on from weekend press reports that a co-founder of Superdry (LON:SDRY) is highly critical of management strategy. Another co-founder called James Holder has reinforced this view, saying that “an urgent sea change” is needed in approach.

The 2 co-founders hold 28% of the shares, so I wonder if an EGM could be in the offing, to sack the CEO? This could get interesting. At some point, the market might start to see turnaround potential, and get bullish on the shares again? the big question though, is when? I’m very reluctant to risk catching a falling knife at the moment.

Recommended cash bid at 71p

Congratulations to shareholders here, who have received a cash bid at 71p, which is a 40% premium to yesterday’s price. That’s a decent premium, and the offer looks fair amp; reasonable to me.

It means that CMS shareholders get to cash out at around the peak price the shares have achieved in the last 10 years. Given that there’s not much organic growth in evidence, and that the balance sheet is weak, this represents a good outcome.

Big shareholders seem to be supportive of the deal, with 42.9% having given either irrevocable support, or letters of intent. Institutions often agree to takeover bids, because it creates a one-off liquidity event for them. The rest of the time, they couldn’t sell, even if they wanted to. This is where private investors have a massive advantage over instis – if you have a small shareholding, then you can usually sell whenever you like.

There’s always an outside chance someone else might come along with an increased offer, but on balance I’d say this looks a done deal.

I wonder how many other bombed out shares will receive bidding interest? CMS is one of many which had sold off in the general market correction recently. The bidder for CMS is called OSG Holdings Inc, and is an acquisitive American group.

Share price: 140p (up 1.8% pre-opening at 07:50)
No. shares: 61.4m
Market cap: £86.0m

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

Belvoir to list all its properties on OnTheMarket

OnTheMarket is a challenger (to Rightmove amp; Zoopla) residential property portal. Most people have written it off as a dud, and certainly the financial results justify that view. The conventional wisdom is that Rightmove amp; Zoopla have the property portal market sewn up, and are so dominant that they’re unassailable.

I disagree. Rightmove in particular is clearly over-charging, making massive amp; unjustified profit margins, hence it’s upsetting its customers, particularly by pushing through price increases to further take advantage of a captive (and struggling) customer base. I don’t think that is wise, long-term.

OTMP didn’t work first time around, so it floated on the stock market to raise more cash, and change strategy. It is now attracting property agents to its portal by offering free trials. That’s clever, because once agents are up amp; running, and routinely adding properties to its portal, then they’re hooked, and charges can be introduced. As long as the fees are modest, then agents are not likely to baulk at them.

In this way, OTMP is strongly increasing traction, in terms of number of properties on its portal. The difficult bit is getting property buyers/tenants to visit its website. The strategy here is also quite clever, in that agents are being encouraged to steer buyers towards OnTheMarket.com

Today’s announcement says that Belvoir Lettings (LON:BLV) is joining OnTheMarket, with all 300 offices listing all properties on the portal. This is one of many announcements of agent take-up.

These comments are interesting, and highlight the agent discontent with Rightmove/Zoopla dominance;

Dorian Gonsalves, Chief Executive Officer of Belvoir, says:

“We have for some time believed that the property portals landscape was ripe for disruption. OnTheMarket is the first serious contender for several years to be injecting genuine competition in the interests of agents and property-searchers alike.

It is agents who provide the portals with the majority of their content and income. It is also agents who serve their clients and property-searchers on the ground in selling, letting, buying and renting property.

I’m very pleased to be announcing our strategic support for OnTheMarket as an agent-backed business and am confident that with agent momentum building it will continue to go from strength to strength.”

My opinion – the likelihood of OTMP supplanting Rightmove are obviously very low. However, OTMP does seem to be gaining traction. I like its strategy of disrupting via free initial offers, rather than wasting a fortune on marketing spend.

OTMP looks pretty binary to me – if it works, then this could be a serious multibagger. Or (probably the more likely outcome), it might struggle, and need to do repeated fundraisings to survive.

Zoopla received a surprising takeover bid, and that could be the outcome with OTMP at some point too.

So it looks a high risk, but potentially high reward situation. I like it. This is probably too racy for most readers, especially at the moment when confidence is low.

Share price: 117.5p (up 3.1% today, at 08:41)
No. shares: 60.9m
Market cap: £71.6m

Trading update

AIM listed specialist technical fluid power products supplierFlowtech Fluidpower (LSE: symbol FLO), issues the following unaudited Q3 Trading Update for the nine-month financial reporting period ended 30 September 2018

• Revenues up 54% to £83.7m, mainly from acquisitions
• Organic revenue growth of 6.7% looks impressive
• Solid trading, in line with market expectations
• Acquisitions in Mar 2018 are going well
• Net debt has increased to £17.6m
• New CFO joining on 1 Nov 2018. Focus will be on cashflow amp; efficiency savings
• Return to positive progress on £1.5m order for Thames Tideway project
• Compelling acquisition opportunities, but short term focus is to bed in existing businesses

Outlook – positive, but cautious;

As previously reported, the buoyant conditions seen in the first half have now given way to a steadier pace of growth.  The Board remains positive, although cautious, about overall growth rates for the fluid power market as we move into 2019, and this view is supported by the very broad spread of sectors within the Group’s customer portfolio, both in the UK, and its euro-based operations.

My opinion – this looks an attractively cheap share.

Although as with everything at the moment, it depends whether you’re prepared to look through any temporary economic disruption which might arise from Brexit. Should we be fearfully sitting on the sidelines in cash, or greedily taking advantage of the recent sharp dip in prices? Answers on a postcard please!

As you can see below, the valuation looks cheap on a PER basis. Plus there’s a strong dividend yield. Although I question the wisdom of paying out big divis, then doing equity raises for acquisitions. That seems a bit circular to me.

I’ve checked the most recent balance sheet, and it looks pretty solid to me.

Overall, I like it. This could be an attractive entry point, possibly?

Stockopedia’s computers like it too, with a high StockRank, and favourable categorisation as: “Speculative, Small Cap, Contrarian”.

A reminder, that StockRanks don’t guarantee success for any share. Statistically though, they are proven to increase the odds in your favour, for a portfolio of shares.

Share price: 200.5p (up 0.3% today, at 09:21)
No. shares: 75.3m
Market cap: £151.0m

Interim results

For the 6 months to 31 Aug 2018, from this book publishing business.

The summary says;

The Group delivered a strong first half performance and trading is on track to achieve the Board’s expectations for the full year.

Traditionally, sales of trade titles peak for Christmas and sales of academic titles at the beginning of the academic year in the autumn. We therefore expect our sales to be second-half weighted, as in previous years.

There’s no need to be alarmed by the H2 weighting comment in this particular case, as BMY has a very lop-sided financial year. Last year, for example, it reported £2.5m H1 pre-exceptional operating profit, and £13.1m full year. Thus H2 was £10.6m, or 81% of the total.

For this reason, I don’t think there’s much point in reporting on the detail of the H1 figures. I’ve had a quick skim of the figures, and cannot see anything untoward. The outlook comments are more important.

Balance sheet – remains strong. No problems here.

Valuation – this company looks good value. Probably because not many investors would want to invest in a book publishing company, given the perception that things are moving online. That perception may be wrong though, as BMY seems to regularly churn out decent results.

Note that it had broker upgrades earlier this year, which can be due to acquisitions, so it’s worth checking if that’s the case or not;

As you can see below, the valuation appears undemanding, especially considering that the company also has a strong balance sheet, with net cash of £16.9m.

My opinion – this seems a decent company, on a modest valuation. The divis are good, and it’s all supported by a strong balance sheet.

The commentary with today’s numbers also explains a 7-pronged strategy for more growth.

Overall, I quite like it, but am really not interested in buying anything at the moment, unless it’s an unmissable bargain. This looks good, but not compelling, given the turbulent political situation.

For long-term holders, who are happy to look through temporary problems, then today’s update is reassuring. The 4%+ dividend yield is covered 1.8 times, and has risen steadily in recent years. So quite a good income stock. I prefer divis that are well covered, and supported by a strong balance sheet, rather than chasing the very highest yield, which can often be a mistake.

Stockopedia absolutely loves it:

Right, I’m off for my morning jog – to get to McDonalds before they stop serving McMuffins, lol     :-D

Stockopedia