Small Cap Report (31 Jan) - AGL, HYNS, RGD, MBH, NBI, ITM

I generally avoid blue sky, or story stocks, as my experience of the dot.com boom & bust in 1999-2000 has taught me that very few (in fact, hardly any) story stocks actually deliver on their promises. Even if they do deliver, it's usually years behind schedule, and many dilutive fund-raisings later.
That said, the financial memory is reputed to be around 15 years, and we are in a bull market, so there may be another opportunity to make hay whilst the sun shines, possibly?

Angle (LON:AGL) has always intrigued me, as they are developing a non-invasive method of screening for certain cancer cells in the blood, called a Parsortix device. The shares have recently spiked up, more than doubling in price to 65p. Another Placing today has put the dampener on that a bit, with 10% more shares being Placed at a not unreasonable discount (considering the recent huge upward move in price) of 17.4%. So the issue price is 50p. Shares in the secondhand market will obviously gravitate towards this price, as people who take part in the fundraising "flip" shares in the market, to lock in an instant profit, which can be done either by selling, or by opening a short position via a CFD/Spread Bet until the new shares are delivered.

I believe we need to lobby Government to radically reform the current system for company fund-raisings. The law needs to be changed so that a Placing is open to all shareholders (since anyone can buy the shares secondhand, why restrict who can buy newly issued shares?), and done instantly online, over say a 7-day period, with the shares being suspended whilst the Placing is undertaken. Also, instead of companies fixing the price of the Placing, it should be set by electronic auction, with firm bids submitted by existing shareholders first, and then opened up to anyone else subsequently. A minimum price could be underwritten by a third party, in return for a fee.

Going back to AGL, I am meeting the Directors today for lunch & their interim results presentation, so will report back with my impression either tomorrow or over the weekend. I've not read the accounts yet, although being a blue sky share, it's the narrative & outlook that matters more than the figures.

 

Car repair manual publisher, Haynes Publishing (LON:HYNS) has issued poor interims, with basic EPS down from 7.5p to 5.2p. The high dividend yield was a major support for the share price, but the interim dividend has been cut from 6.2p to 3.5p. There appears to be an H2 weighting to their results, it looks like they are only heading for about 15p EPS for the full year (my guesstimate, based on H2 falling a similar amount to H1 vs last year), which makes the share price of 200p rather difficult to justify. I would only be interested at around half that price, for a business that is clearly finding it difficult to adjust to the digital world. The balance sheet is strong, but that is negated by a £9.5m pension deficit.

 

I've never understood why so many investors get excited about Real Good Food (LON:RGD), it has always struck me as an unappealing investment, given its negligible profit margins, capital intensive nature, and far too much debt. Their Q3 trading update this morning is a complete mess, I have no idea whether it's a profits warning, or a positive statement, it seems completely contradictory, saying that Q3 trading was "lower than anticipated, with December proving particularly challenging", and then going on to say that, "overall the group has performed well"!?

On a more positive note though, they have completed a new 5 year bank facility with existing lenders. If anyone else can make sense of their trading update, then please comment below.

 

Michelmersh Brick Holdings (LON:MBH) announce in a trading update today that they finished 2012 with a positive Q4, and hence are now expecting a modest profit for the year, instead of breakeven. I met the management at a Mello Central event at FinnCap's offices last year, and several of us came to the conclusion that there isn't really a viable business there, in terms of it paying no dividend, and there not really being any prospect of a recurring dividend.

Instead, the operating business just chugs along, washing its face, and providing jobs for Directors and employees. The only value in it for shareholders is the surplus land, so it's a special situation really. Or you might take a more positive view of the operating business if you believe that it could make a sustainable profit once the building sector picks up a bit more?

Today's statement gives some updates about their surplus land situation, including negotiations with Persimmon over a 15 acre site at Telford. Once the property has been disposed of, and the proceeds distributed to shareholders, it would probably make sense for Michelmersh to become a workers co-operative, instead of a Listed company. It really is high time that policymakers innovated on this issue, and created new structures to encourage more enterprises to be owned by their own staff. I suggest that any company which distributes at least 50% of its profits to its staff, should be exempt from corporation tax. The savings on the welfare bill (no housing benefit or tax credits neeeded) and additional payroll taxes, would surely make this at least self-funding? Plus the owners of the business would see a more motivated & productive workforce. We need to challenge the status quo of screwing wages down to a level that are inadequate to live on, to maximise profits, since the social cost of doing so is so enormous, and the bill is picked up by the taxpayer.

 

I've not looked at Northbridge Industrial Services (LON:NBI) before, it's a £42m market cap equipment hire business.

They have issued a pretty upbeat sounding trading update this morning, saying that 2012 results will be in line with expectations, and that 2013 has started well. Might be worth a further look perhaps?

 

Results from ITM Power (LON:ITM) look an absolute car crash to me. Just £30k in turnover, and a £3.8m loss. This is for just 6 months! They had £8m in cash at 31 Oct 2012, so look to be burning at least £0.5m per month, so by now they probably only have about a year's cash left. So another fund-raising likely. The £32m mkt cap looks bonkers to me, but shareholders must believe that a dramatic turnaround is likely to happen. There are so many companies, large & small active in this fuel cell space, that it's not an area I would even consider gambling on again, in the hope of picking one of the few winners.

 

There are lots more trading statements today, it felt like trying to find a needle in a haystack. Just a reminder that I only usually cover small caps between £10m-200m market cap, and I specifically exclude the resources & financials sectors, and usually only cover UK-based companies.

Although it has to be said that one or two resource shares are beginning to appear on my value filters, so I'm thinking of relaxing my exclusion of resource shares, if they are producers on a low PER, and pay a reliable dividend.

Have a good day, and see you same time tomorrow morning.

Regards, Paul.

(of the shares mentioned today, Paul holds no positions, either long or short in any of them)