Small Cap Value Report (24 Oct 2014) - FOUR, ODX

Good morning! A shorter & earlier report than usual today, as I've been roped into doing a talk this afternoon, on the Stockopedia stand, at the London Investor Show at Olympia. I think registration is still open, here is the link. So perhaps see some of you there? I'll do my usual thing of running through how I use Stockopedia, and talking about current small cap investing themes, stocks I do & don't like, etc.

4imprint (LON:FOUR)

Share price: 727p
No. shares: 28.0m
Market Cap: £ 203.6m

This is such a good company, it's been filed in my "kicking myself that I didn't buy any, but it's a bit too expensive now" tray. The recent dip on general market sentiment, was with hindsight a buying opportunity. The company has today put out another positive update, and the shares have shot up about 10% this morning.

Interim Management Statement - this is a calendar Q3 update. Strong performance is continuing, and remember that this is essentially an American company, as that's where the bulk of turnover & profits come from;

The Group continues to report strong organic growth. Revenue* for the third quarter was £66.13m, 16% ahead of last year. Year to date revenue* was £181.79m, 15% ahead of last year. The average year to date USD exchange rate was 1.67 (2013:1.55).

North American revenue* in US dollars for the third quarter was $106.14m, 25% ahead. Year to date revenue* was $291.24m, 24% ahead.

That's clearly an excellent performance, 25% revenue growth (which I think is all organic) in constant currency means that the company has shrugged off the adverse move in sterling:dollar. The reporting currency is being changed to US dollars for 2014 results and beyond. That's a sensible move in my opinion, as it will eradicate big currency translation moves within the accounts, helping investors to better understand underlying performance.

Outlook - again, sounds positive;

The Group has continued to achieve strong revenue growth, leaving it ahead of management expectations at this stage in the year and underpinning the Board's expectation that the Group will achieve a good result for the year as a whole.

Valuation - broker consensus is currently for 37p EPS this year. I'll stick my neck out here and say it looks as if they might get to 40p. That puts the shares, at 727p on a PER of 18.2, which looks about right to me.

Dividends - not spectacular, at a forecast yield of about 2.5%, but certainly worth having. In my view it's a company's ability to pay future divis that is more important than the actual yield at this point in time. So clearly with the company powering ahead, and probably having little other use for the cashflow, then higher divis in future would make sense. Therefore it's not difficult to imagine that the 2.5% yield could grow to say 4-5% over a few years.

My opinion - I really like this company, although it's worth noting that its business is highly cyclical, so it would be the sort of share to drop like a hot potato if the US economy looks as if it's moving into Recession. No sign of that at present though. Overall then, a very nice company, probably priced about right at the moment.

Mello Derby

This new event is unique, in that it's an investor show being organised by a very successful investor, David Stredder, under his own steam, on a not-for-profit basis. He started with a blank sheet of paper, and designed an investor event from the ground up, how he would like it - so interesting companies only - proper businesses which make profits & pay divis mostly, with one or two more speculative things thrown in too, but none of the junior resource companies that usually dominate these events, nor the trading software people trying to flog us the latest get rich quick scheme!

Speakers have been hand-picked from contacts of David's from both the private investor world, bloggers, and fund managers. There are some big names presenting, such as Giles Hargreaves, Gervais Williams, Lord John Lee, and others.

I understand that ticket sales have been going quite well, but are surprisingly skewed towards people from the London area taking the train (1hr 25m only) up to Derby. We often hear people from the Midlands & North complaining that investor events are always in London. Well here is one that is not only high quality, but also more local. So I think it's really important that more people from that neck of the woods support this event by coming along. Otherwise there is a risk that it will just be held in London next year, and the opportunity to have a quality investor show in the North will have been lost.

The website seems to be on a go-slow at the moment, but once it's had another cup of coffee & got moving, the link is here.

Ooh, almost forgot, I have a discount code for you to use when booking Mello2014 tickets - the code is MELLO-DISCOUNT and this will transform your tickets from good value to exceptional value! Numbers are limited, because this event is all about quality rather than quantity. They don't want armies of people turning up clutching carrier bags looking for free sandwiches! I shall be in residence for all 3 days, so do say hello if you're there.

Omega Diagnostics (LON:ODX)

Share price: 16p
No. shares: 108.7m
Market Cap: £17.4m

I last reportedon this small medical diagnostics company on 23 Jun 2014 wondering if it might drop further, due to the uncertain outlook. It has done;

Trading update - this is mixed, in that trading for the six months to 30 Sep 2014 looks OK, with a slight improvement against last year;

Turnover is expected to be £5.69m, slightly ahead of last year's first-half result (30 September 2013: £5.59m).  Due to careful management of costs and an improved segmental mix of business, profit before tax (before acquisition costs, share based payments, IFRS-related discount unwinds and amortisation of intangible assets) is expected to be approximately £0.56m, some 30% ahead of the £0.43m earned in the previous half-year period to 30 September 2013.

Note the bit I've bolded about amortisation. As mentioned in my last report on 23 Jun 2014, the company is capitalising a lot of development spending, so to ignore the capex and the amortisation charge too, is highly misleading in my opinion. So the profit figure quoted above is meaningless in reality, for that reason.

The disappointment comes from delays to the launch of an HIV testing product called CD4. The company today says;

Our future growth continues to be strongly influenced by the prospects for Visitect® CD4 but management does not now anticipate receipt of any revenues from this product in the current financial year. Accordingly, management expects that this year's financial performance will be below that previously envisaged. While it is not uncommon that issues are discovered as one moves from small batch production to large-scale manufacturing, these are certainly frustrating events for both management and shareholders.  However, we must deal with these issues and solve them prior to launch, to ensure that only high quality, reliable product enters the market. The engagement with high level expertise is a significant step that we feel will be instrumental in achieving resolution of the current issues.  We are convinced that Visitect® CD4 remains in a strong prospective position with regard to the competition and will be a major success for the Group.  We will however, continue to operate in an environment of timing uncertainty until we resolve the issues we face and evaluations lead to full market acceptance of the product.

Brokers have therefore already downgraded turnover & profit for this year and future years.

My opinion - this is not my area of expertise at all, so can't comment meaningfully. Other than to say that the 16% drop in share price this morning looks about right, in adjusting for the negative news today.

Got to leave it there for today, and there's nothing else that caught my eye anyway.

Have a smashing weekend, see you back here on Monday morning!

Regards, Paul.

(of the companies mentioned today, Paul has no long or short positions.

A fund management company with which Paul is associated may hold positions in companies mentioned)