Small Cap Report - KBC, RGS, JDG, GTC

Good morning. I often do this strange thing, where for no apparent reason, I start humming or singing a tune. On stopping and thinking what tune it is, the lyrics are always something directly relelvant to whatever I happen to be doing or feeling at the time. This morning, Bill Withers song "Lovely Day" popped into my head, and it was just after reading the trading update from KBC Advanced Technologies (KBC)!

Their statement today indicates 2012 ended strongly, with a $100 contract award from EP PetroEcuador (previously announced). KBC provides software & consultancy services for optimising profit from oil refineries. Results for y/e 31 Dec 2012 are expected to be slightly ahead of forecast.

I bought shares in KBC recently, after they announced that humungous contract win. Even after an initial big surge in share price, the valuation was still cheap - as is often the case when really significant news comes out - the market takes time to digest news, people stop buying the shares after a (say) 15-25% rise in share price, yet if the previous valuation was really bombed out, and the news is really good, then that can often still be a buying opportunity even after the initial rise.

I've just bought a few more KBC at 66p this morning. The 2012 forecast PER is 10.7, falling to 8.4 for 2013. That's too low considering how well they are trading, in my opinion. They also just moved net cash positive, per today's RNS. I expect them to reinstate a divi soon, a further upward catalyst.

It's very surprising that the initial rise in SP this morning has since fizzled out, and this represents a buying opportunity at 65p in my opinion. However, please DYOR as usual. I'm adding it to "Paul's Picks" at the current offer price of 65p.

Another example of shares continuing to rise after positive trading updates,  recently was Regenersis. I flagged it here on the morning of their results in Sept 2012 as being good value at 96p, and the shares have since continued rising to 171p. Am still kicking myself on that one - I not only spotted it was cheap, wrote about it here, but for some bizarre reason it didn't occur to me to buy any shares! Proverbial wood & trees perhaps? Somebody give me a kick next time! This is also why I set up a new page here called"Paul's Picks" where we can keep track of shares that I've flagged as looking good value, and see how they subsequently perform.

Hopefully it will validate my investing approach, or expose me an incompetent fool, so will be interesting to see which it is!

Judges Scientific (JDG) is a lovely business. They are a serial acquirer of small companies in the scientific instruments sector, where Britain apparently is a world leader. Their model is to borrow cheaply, then make small acquisitions at very cheap cashflow multiples, then repay the borrowings from cashflow in a short time frame (typically about 2 years). Then they just repeat the process. Their charismatic and brilliant CEO, David Cicurel, just hasn't put a foot wrong. As he said himself at a Mello Central meeting, it's not about synergies, it's about making cheap, good quality acquisitions using cheap bank loans.

Their trading statement this morning indicates a positive end to 2012, achieving expectations "with a good degree of comfort"! Order book is strong too.

The shares have been remarkable performers, but the price is well up with events now, in my opinion, at around the 1000p level. Growth becomes harder to achieve, since it is compound, and a PER of 15 looks towards the upper end of reasonable, in my view.

GETECH (GTC) puts out a positive trading update for the first 5 months of their year to 31 July 2013, expecting to exceed current market expectations. Forecast was for 3.5p EPS, which at 67p would put them on a lofty PER of 19 suggests upside is already priced-in.

Best Wishes, Paul.

(Of the companies mentioned today, Paul holds shares in KBC only)