Small Cap Value Report (14 Aug) - SID, QPP, MUR, PGB, YOU, ECK

14th Aug '13 by Paul Scott

8 comments 15155 reads

Good morning! The situation at Silverdell (LON:SID) appears to be slowly improving, as far as I can tell from the extremely limited information provided to shareholders. This has to be one of the most bizarre situations I've ever seen. The group's shares were suspended without warning on 2 Jul 2013, and a two sentence RNS was issued on that day containing the dreaded words, "pending clarification of the Group's financial position", which is almost always terminal when that phrase is used.

However, a statement on 16 Jul 2013 then said that only part of the group (Kitsons) was in Administration, and that discussions with HSBC had reached a "satisfactory outcome".

On 24 Jul 2013 it was announced that Silverdell was buying back the business & certain assets of Kitsons from the Administrator in a deal capped at £8m, funded by bank facilities.

Today's announcement confirms that HSBC has agreed to provide an additional £5m facility to finance the acquisition of Kitsons, up to 31 Jan 2014. So that's good news. Encouragingly it also says that contracts & operations are being moved across "with minimal disruption".

The last sentence confirms what I've been saying for a while, namely that the shares are likely to likely to resume trading at some point in the not too distant future, but will probably open down at least 50% (my guess is 4-6p), and that there will almost certainly be a deeply discounted Placing & Open Offer:

The Group is currently assessing the impact of the administration on its trading performance and therefore the capital requirements of the business for the remainder of FY2013 and for FY2014 in order to work towards lifting the suspension from trading of the Group's shares.

In these bizarre circumstances, where a large chunk of the Group seems to have fallen into Administration by accident (these things can happen - if important legal documents gather dust in someone's in-tray, instead of being acted on), then a fund-raising from equity holders is now a near certainty.

It is vital that the interests of all existing shareholders are respected - so retail investors MUST be given the opportunity to invest in the next fund-raising on the same terms as Institutions. Yes, it costs more to prepare the relevant documentation, but I think the group…

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shipoffrogs

14th Aug '13

QPP - I find it odd that the RNS spends says so much about debtors and debtor days, but doesn't actually say anything about the cash balance - and I just don't understand this comment - "...and a reduction in receivables in relation to acquisition related payments".

It always seems so obtuse with them.

DJLJ23

Could "a reduction in receivables" be a reference to the Derivative financial instruments for 13.297M referred to note 7 of the May statement and which caused such a lot of debate?

I quess we will find out on monday

Jardine

Hi Paul,

Could you explain what you mean by the term "value trap" which I've not heard you using here before?

Thanks, Andrew

Paul Scott

Hi Andrew,

By "value trap" I mean any share which appears to be cheap (usually on a very low PER), but which has serious underlying problems - e.g. a declining market and/or market position, or some other kind of underlying issue which is likely to damage the business - e.g. a large legal threat, huge pension deficit, an unstable political situation if overseas company, incompetent and/or dishonest management, dodgy accounting practices, etc.

Chinese & Indian companies often appear very cheap, but I regard all of them as potential value traps, since you cannot rely on their accounts, and as a minority, foreign shareholder, you effectively have no control or access to any of the company's assets or earnings. So effectively all you have is a piece of paper (i.e. a share certificate) which purports to give you ownership rights, but which in practice gives you nothing at all. Therefore to my mind, the shares are worth nothing.

Therefore I automatically exclude all Chinese & Indian companies (and indeed usually all foreign companies listed on AIM, unless they have a good, long track record, and pay dividends) from my investable universe. After all, why take risks when you don't have to?

Cheers, Paul.

intuitive6191

It would probably help if Stockopedia had a screen for eliminating companies based on their percentage free float of shares. This would help avoid some dubious value traps

Otherwise this can be done manually.

djpreston

Paul,

Ive always been somewhat more relaxed about the cashflow from the legal services side of the business. As you may remeber, this firm used to be part of a legal practice and I was all too well aware how lax the control of WIP/credit control could be - something that would improve significantly if handled by a more commercial company.

rmillaree

Ref PGB

Perhaps i am turning into a miserable old *** but i wasn't too impressed with the PGB announcement today (ignoring the good news) - perhaps i should have been as the shareprice is up 10%.

It was the associated waffle that was lacking simple clarity. Why not simply state we expect profits to be slightly ahead of current forecasts or something to that effect that lets us know where we are.

I have EPS forecasts this year of 2.5p with 2.37p last year - so the waffle about higher operating profits leaves me thinking that there is not really much change - albeit i would now expect EPS to come in at least 2.37+10% = 2.6p - although i have a niggle that operating profit isn't the same as the profit for EPS purposes. In some respects i would rather they say nothing (or guidance unchanged) and then update later if there is any chance that EPS will come in below the 2.6p i now expect - will be interesting to see if brokers take a different view and upgrade expectations by more than 0.1p

Murakami

Hi Intuitive, you can already screen on the free float % - see Float here:

Any screen can be forked and that criterion added - http://help.stockopedia.co.uk/knowledgebase/articles/143177-can-i-edit-fork-the-guru-screens- -

Or it can be added to a custom screen: http://www.stockopedia.com/screens/create/

Hope that helps.

Cheers,

Admin

Small Cap Value Report (14 Aug) - SID, QPP, MUR, PGB, YOU, ECK

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Paul Scott

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