Small Cap Report (26 Mar) - KBC, TRCS, DLC, DPP

26th Mar '13 by Paul Scott

5 comments 12267 reads

Pre 8 a.m. comments

Good morning! It's a busy day for results again, and this morning I shall first be looking at preliminary results for the year ended 31 Dec 2012, from a company whose shares I hold personally, KBC Advanced Technologies (LON:KBC). It is a software and consultancy business serving the oil industry, in particular helping oil refineries optimise profitability.

At 66p a share, and with 58.9m in issue, the market cap is £39m.

The recent history of KBC is that they encountered trading problems during 2012 with a soft H1, warned on profits, but then recovered rapidly after a restructuring & new management being brought in, such that they issued a series of positive trading updates later on in 2012. This is reflected in the share price gyrations in the last year:

Results from KBC this morning are not the easiest to interpret, since they have had an enormous tax charge, which more than wipes out all profit, so clearly some one-offs in there, but also a problem in that they allude to having a tax inefficient structure - i.e. high profits in high tax countries, and vice versa. Action is being taken to restructure to minimise future tax liabilities, so I'm prepared to view that as a temporary factor.

This renders the EPS figures meaningless, as these show a loss due to the tax problem.

Underlying profits are £5.5m (against £6.0m last year), which seems a reasonable outcome given the poor H1. Cash has absolutely gone through the roof, given a large customer prepayment made near the year end. This resulted in year end cash of £21.1m, which adjusts down to £6.4m once that large customer prepayment is stripped out, less £5.4m in bank loans, takes them to a small underlying net cash position of £1m.

So a bit of a messy year, which ended well, with a "very strong final quarter". The all important outlook comments are positive.

In 2012, contract awards were £95.4m (2011: £44.9m), a record for KBC, resulting in an order book at the year end of £82.9m (2011: £48.7m) which, together with a large new software contract award in Japan, has contributed to a strong start to the year.

The exact timing of contract awards, particularly for software licences, will…

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EssexPete

26th Mar '13

It will also be interesting to see how Russia will retaliate against the EU, and in particular Germany. They're not going to take the theft of Russian depositors cash lightly, so I'm sure there will be payback of some kind.

Maybe we should be buying Pallonium futures? :)

I agree with your analysis of KBC, seems to be recovering now.

Paul Scott

Interesting Tweet from @equity_research on Twitter, who attended the analyst meeting this morning for KBC Advanced Technologies (LON:KBC), who say as follows (and KBC is not a client of their's so it's impartial comment from an analyst who is a mate of mine & I rate highly):

Equity Development ?@equity_research 18m
$KBC meeting with mgmt: targeting 40% tax charge, utilisation increasing and expected to normalise in 2013, intend to reinstate dividend.

CantEatValue

Paul, re:TRCS

"crucially says that it will be immediately earnings enhancing"

This is a huge bug bear of mine. For an acquisition paid in cash in the current interest rate environment to be 'earnings enhancing' the business needs to earn more than the cash current earns in interest... which is close to zero. If you assume that most businesses are earning ~1% on their cash balances then it means any acquisition on a P/E of less than 100 is earnings enhancing! It's an almost completely meaningless statement in this environment, although I suppose it's better than the business being loss making.

That being said, I know TRCS put a lot of emphasis on price when it comes to acquisitions so I bet they'll have done their homework. On a P/S ratio basis it's really quite cheap so if there's any synergies or cross sell opportunities it looks like it could be a good one. I'm a shareholder on the basis that they were cheap when you considered the excess cash they had available to deploy (and their historic record of quality capital allocation), the non-capital intensive nature of their business (and hence, crucially, low re-investment costs for growth) and the potential overseas growth available to them in a market where their competitor is essentially old school 'pen and paper' methods.

Hi CantEatValue,

Yes, you're right! I hadn't thought of it like that, of course if a company is buying another one out of its surplus cash reserves, then it will automatically be earnings enhancing if it makes any profit at all! I was thinking more in terms of deals being earnings enhancing if they are paid for in shares (and I think part of this deal involves shares), so it is earnings enhancing taking into account the small amount of dilution. I only skim read the announcement (as that's all there is time for here).

I certainly rate the management at TRCS, and given that they've built up the cash for several years now, and that says to me that this deal is being done for the right reasons, and not just an ego-fuelled takeover deal, as is too often the case with many CEOs, who just enjoy doing deals & being big & powerful.

Cheers, Paul.

jonesj

The chances of the US government seizing US equities might be nil, or close to it. However, if our US shares are held in a European (incl UK) stockbroker nominee account, then I figure they could be seized from within Europe.
Perhaps it's time to diversify with a broker account in Singapore or Hong Kong.

It seems the time has come to place some money completely outside of the EU, as the EU leaders think it's OK to compensate for their economic incompetence by stealing other peoples money.

Small Cap Report (26 Mar) - KBC, TRCS, DLC, DPP

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Paul Scott

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