Small Cap Report (20 Feb) - STVG, TAN, NET, PDC, CSG, CAU

20th Feb '13 by Paul Scott

3 comments 11250 reads

Pre 8 a.m. comments

Good morning! I'm trying out a new idea of posting a report just before 8 a.m. for the most time-sensitive couple of results (assuming the investegate news feed is working properly, which seems a largely random factor at the moment). Then I'll carry on typing & publish the full report as usual around 10 a.m..

(follow me on Twitter @paulypilot to be notified as soon as articles are published every weekday. We're aiming to get an email notification service set up through Stockopedia in the future)

The most important results this morning for me are STV (LON:STVG) final results for year ended 31 Dec 2012, as I hold some in my personal portfolio. At 131p a share, the market cap is £51.2m, as there are 39,050,000 shares in issue. The attraction here is the very low PER (forecast at just 3.8, based on 34.4p EPS), but that is tempered by considerable net debt, and there's a pension deficit too.

STVG's results look encouraging, and I could certainly see them driving an increase in share price from today. Operating profit is up 14% at £17.1m, and adjusted EPS has come in at 32.5p. Whilst that's below the 33.8p and 34.4p forecast EPS figures that I can find online for market expectations, it's near enough, and puts them on a PER of just 4.

The most pleasing & important figure is that net debt has reduced 17% to £45.3m. That's a big reduction, and should continue, given strong cashflows. I also note that the pension deficit is coming down rapidly too, and has fallen from £23.0m to £17.7m (net of deferred tax).

Note how the 4 key indicators on the StockReport for STVG flash a warning signal over debt in the "Bankruptcy Risk - Altman Z-score" indicator.

Z-scores are a way of predicting financial failure, so at the very least it's a signal to investigate the balance sheet & ensure you are comfortable with debt.

Or for risk-averse investors, it's a signal to stay away completely.

I tend to ensure that shares with higher risk Z-scores are only ever relatively small positions in my portfolio, so that if something awful did happen, it would not be too great a loss. Personally I'm…

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SevenPillars

20th Feb '13

You raise an interesting point when asking whether Netcall can go a "little higher", because right now many companies, big and small have momentum to the upside, their trends are bullish. With the bigger companies when a market correction or down period comes we may well see a general sell off that brings a few of them back to more realistic valuations, but the smaller companies often have a momentum, good or bad of their own.

Netcall's chart, like many in the smaller company sector right now, looks bullish. It is becoming more difficult for those looking for value to find it and waiting or selling out in the hope of a pullback to get back in can often be frustrating in these bullish times because it often takes bad news to end the trend. If we really are in a bull market then fundamentals are likely to be stretched further as momentum takes over. Chances are, although fundamentals might not justify it, Netcall, like others, could go a lot higher purely on momentum from here.

Paul Scott

Hi SevenPillars,

You're certainly right that momentum is taking many shares inexorably higher, but that's not a good enough reason to hold in my opinion, as sentiment can quickly turn negative. Blink, and you might see a 10-20% drop in some smaller caps, if there's a sudden ugly turn in sentiment.

Personally I just look at risk/reward. So if a share has maybe 20% upside, that's not good enough for me. I like to only buy where I can see fair value at least double the current market price, with a 2 year view. Preferably also where balance street strength & divis mean that the realistic downside risk is only say 25%. An up-to-date positive trading statement is also something I look for, as that reduces the risk of disappointment.

In a way though, investing is really all educated guesswork, as nobody really knows what's going on inside a company, unless you're an insider, and even then things can change rapidly & unexpectedly.

Cheers, Paul.

Paul

I agree with much of what you are saying, you have a strategy that looks for value so if momentum takes it away you won't be tempted. I also like value, but will not shy away from momentum if that is what the markets are giving us. However, its important to know the risks involved. I don't have a position on Netcall, but given its chart I can see it going more than a little higher from here because the trend looks strong on the charts .

Printing.com has a strange look about it with those high dividend yields every year yet a share price chart that has been in decline for 5 years with profits falling. Noted that the CEO has a huge chunk of the shares, I assume he gets the dividend?! Though the dividend yield looks tasty you do wonder where the growth is coming from and how that share price will do more than just drift in the range its been in for 5 years.

Small Cap Report (20 Feb) - STVG, TAN, NET, PDC, CSG, CAU

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