Small Cap Value Report (3 Jun 2016) - GOAL, SVS, SEA

Good morning!

It's a very unusual day today - there are no results or trading updates at all, in my universe of stocks. That's rather handy actually, as I'm off on a jolly today - I'm visiting English wine producer, Chapel Down. Their shares are listed on ISDX - I reviewed recent results here on 22 Apr 2016. Pity I didn't buy some shares, as they're up 41% since then - a big rise in just 7 weeks.

There are decent shareholder discounts (about 33%, from memory), if you own 2,000 shares or more in CDGP (about £930-worth at current share price of 46.5p). Mind you, on trying their white wines previously, which retail for about £10, personally I wouldn't seek them out. Perfectly pleasant, but nothing special, in my view. I reserve the right to change that stance, after today's slap-up lunch, and wine-tasting at their premises. So there's the distinct possibility of some rambling Tweets later today.

A few other things have caught my eye today, so here goes.

Placings (again)

Some readers may recall that, a couple of years ago, I set up a (now defunct) website called PlacingWatch. I reviewed every Placing that occurred, and rated it on some key criteria;

• Whether there had been suspicious share price movements in the month before the Placing was announced (which there often were).
• Also I looked at the level of discount to the prevailing share price for each Placing (the smaller, the better).
• Dilution should not be excessive (where the price discount is large)
• Finally, I urged companies to include an Open Offer for existing shareholders to participate - especially where the price discount was significant.

I had expected to find considerable problems. However, in most cases, the deals done actually looked perfectly reasonable. If you buy shares in a small company, with a weak balance sheet, then you should accept that at some point you're likely to be diluted a bit by a Placing.

Institutions usually demand a discount of say 5-10%, to compensate them for the lack of liquidity - i.e. if something goes wrong, then they can't exit quickly, unlike small shareholders. That's not unreasonable.

You only really need an Open Offer for existing shareholders if a deeply discounted Placing is being done. If there is a deep discount, then chances are the company is crap anyway. So shareholders can't really blame anyone other than themselves if you get caught up in a situation like that.

Placings do however rely on privacy, and everyone respecting the rules on inside information. This quite obviously doesn't happen right now. Whether it's spivs who are told about the placing, and then break the law by insider dealing in the shares. Or misguided journalists/bloggers unilaterally deciding to scupper a deal by publicising inside information. Both make a mockery of the current system where a company's shares continue to trade, in what is undoubtedly a false market whilst a fundraising is being done on the quiet.

The only solution is to suspend shares once the fundraising process begins. Only then can there be a fair market in any share. Fundraisings should be done quickly (say, within 1 week), then the shares should resume trading. That is the only fair way to do it. I look forward to brokers taking up this point, and hopefully some might take a lead on this issue, demonstrate some integrity, and do things in the fairer way I suggest.

So what is the essence of a good Placing? It should:

• be done quickly,
• have no impact on the share price (i.e. no leaks),
• and at only a modest (under 5%) discount to the prevailing share price.

Whether we like it or not, the best way to achieve the above is by the broker only involving a small number of Institutions.

In an ideal world, I think companies should actively manage their shareholder base to achieve a roughly 50:50 split between Institutions and private investors. The role of each is then:

Institutions - to support Placings when the company needs more funds, e.g. for acquisitions.

Private investors - to provide liquidity, narrow the spread, and set the price. There's not much point in having a listing, if there's no liquidity in the shares.

Goals Soccer Centres (LON:GOAL)

Share price: 107p (up 3.4% today)
No. shares: 58.5m + 16.75m Placing shares = 75.3m post-Placing
Market cap: £62.6m (pre-Placing). £80.6m (post-Placing) 

Placing to raise £16.75m & strategic review completed - this deal falls squarely into the "good placings" bracket, in my view. So a pat on the back for Canaccord Genuity in this instance.

The Placing price of 100p per share does not disadvantage existing holders at all, as you can see it's at the top end of the recent share price movements. It looks as if the share price was well supported at 100p, which might be a coincidence, I don't know:

The Placing proceeds are being used for:

The net proceeds of the Placing will be used by the Company to primarily fund the following strategic priorities:
(i) arena modernisation catch-up programme;
(ii) clubhouse refurbishment programme;
(iii) committed US pilot site;
(iv) deleverage the balance sheet.

That all sounds sensible, but it raises questions in my mind. What seems to have happened is that the company has allowed its UK sites to slip into disrepair. So there's a capex backlog.

This calls into question whether the previously reported profits can be seen as entirely genuine, or not? I think a more conservative approach is required - so expensing more costs as P&L maintenance spending, rather than capitalising it.

Also, the question needs to be asked - is this a business which was only able to report profits & positive cashflow by allowing its fixed assets to slip into disrepair? What would profits have been if those assets had been properly maintained & updated?

Current trading - looks similar to the last update:

The Company announced on 5 May 2016 that like-for-like sales for the first 18 weeks of the year were marginally negative compared to minus 12 per cent. like-for-like UK sales growth experienced in H2 2015. The Board can now report that trading for the first 21 weeks is tracking that same improved trend with like-for-like sales marginally negative.

Directors - are putting some (but not a huge amount) money into this Placing, clearly a moderately positive thing:

Certain Directors of the Company have agreed to subscribe for, in aggregate, 165,000 Placing Shares at the Placing Price. 

My opinion - I did dabble in this share recently, but changed my mind and sold. It's tempting to go back in, as with such a well-supported Placing, there's clearly good Institutional demand for the shares. With fresh money raised, and a new CEO, and OK-ish current trading, then the newsflow is more likely to be positive than negative, for a while.

So I could see this share having a reasonable run upwards over the next year. It could have maybe 20-50% upside in it, who knows? I'm just not convinced that the basic business model is any good, longer term. The company has mentioned before that competition from local authority funded sites is problematic. Overall then, it looks more a shorter term trade, with potential upside from more positive market sentiment. Rather than a good long-term proposition.

Savills (LON:SVS)

Investment in online hybrid estate agent - Estate agents Savills is not a small cap, with a market cap just over £1bn. However, we've been discussing Purplebricks (LON:PURP) here recently, so this announcement today from conventional estate agent Savills is relevant & interesting.

A group company within Savills is participating in a £16m fundraising by YOPA - which seems a similar proposition to Purple Bricks. There must be something in it, if existing estate agents are backing their own hybrid online estate agents. So maybe I was wrong to dismiss PURP the other day? Although my issue with PURP was more about its valuation, and the marketing budget, than the concept.

Savill's CEO says:

"We have followed the rapid advance of the online 'hybrid' estate agency model over the last year. This investment broadens the Group's access to the UK residential sector by enabling us to take an interest in the high volume segment of the market, comprising over 1 million transactions annually, to which Savills has had little exposure to date.

We have been consistently impressed by YOPA, whose technological edge, dedication to transparency and focus on the client at the heart of the sales process all resonate strongly with our core values and the way we do business."

All of which makes me wonder whether it's time to short shares in some conventional estate agents?

It is, after all, money for old rope. When I last sold a house in 2008, the conventional estate agent I used wanted a fee of something ridiculous, like 1.5% - which would have given them a fee of about £12k! I challenged it, and got them down to 1%, but even then it was a joke. Why is the fee even linked to selling price at all? They did exactly the same work selling an £800k house as they do selling a £200k house.

So this is clearly an area with excessive fees, ripe for disruption. I certainly wouldn't want to be holding shares in any conventional estate agents, that's for sure.

Sea Energy (SEA)

A tearful goodbye to this appallingly badly-managed minnow, which has gone into Administration. The only decent bit of the company, R2S, has been sold to James Fisher and Sons (LON:FSJ) .

Such a pity, as decent management could have really made something of R2S, despite the downturn in oil & gas markets.

Bond International Software (LON:BDI)

Possible cash offer at 105p - from Constellation, its biggest shareholder. This has been on the cards for a long time, with bid rumours surfacing every now and then.

Today's announcement looks much more serious though, with a proper statement from the possible bidder.

All done for today, and the week! Have a super weekend - sounds like some decent weather is finally on the way.

Regards, Paul.

(usual disclaimers apply)