Friday, November 16, 2012


We seem to be in profits warning season, as some companies begin to realise that they're not going to hit their forecasts. Given the softness in the Eurozone, and UK economies, then one imagines we're likely to see more profits warnings that usual this year. So might be a good time to review the portfolio and trim back a bit on things that look vulnerable to warn? Handy to have a bit of spare cash on the sidelines too, so one can move fast to grab opportunities that arise.

One such opportunity that I spotted yesterday was a special situation called Security Research (SRG), a very interesting small cap that won an enormous & highly profitable contract from the MoD to provide detection equipment for bombs for use in Afghanistan. The earnings are not sustainable, which they freely admit, but it has brought in a one-off cash boost, which they are returning to shareholders via a tender offer at 225p. The shares can be bought for about 125p, so I picked up a few, with the intention of tendering 1 in 5, but getting almost double the money for each share tendered.

I also wonder if there is the possibility of repeat orders? You never know. DYOR as usual on this one, it does need careful thought, as it's such an unusual situation. But a tender offer at almost double the share price seems a pretty bullish signal to me.

Computer games company Zattikka (ZATT) is one of today's casualties, saying that proforma 2012 revenues will be $10-11m. Stockopedia shows that broker forecast is for $12.8m turnover in 2012. So that looks like a 10-20% share price fall on the cards for today.

Things are not going well at Stadium Group (SDM), a £15m mkt cap electronics company. I see that broker forecasts have already been lowered considerably throughout 2012, but they've warned today that H2 profits will be below H1, and therefore the full year will be "significantly below current market expectations". Not good that, so a sharp drop likely here too.

Although they do say that a Hong Kong property disposal will realise a £3m one-off cash inflow, and £2.2m exceptional profit, and that they are confident of an improved 2013. So I might put this on the watch list, to consider once the dust has settled.

Ooh, I forgot to mention, a reader emailed me to ask if I could approach Stockopedia and see if they would give a special offer on subscriptions to my readers. So I did, and they said yes!
I think it's a cracking offer, they've set up a special deal for readers of this Blog to claim £50 off an annual subscription (reduces the price from £180 to £130) for the first year, if you apply by 31 Dec 2012 deadline. You also get a 2-week free trial, and 2 free ebooks.
I've been using Stockopedia premium for a few weeks now, and have to say I think it's excellent. Well worth £130 if you spend much time researching companies. Some really useful valuation & screening tools too.

(for the avoidance of doubt, I am not getting any commission, or any payment at all from Stockopedia for anything, I'm recommending it purely because I think it's good!)

Bioquell (BQE) has been on my watch list for a while now, as I like the company but never quite pushed the button on buying any shares, because they never really looked cheap enough.

Their IMS issued today reads well, with the order book up 16% in the "period" (which I presume means 4 months?) to 31 October, with good growth coming from new products. That sounds great, although the benefit to turnover will mostly fall into 2013 (and beyond possibly?).

Bioquell's IMS provides lots of other detail, but unless I missed it, they've missed out the most important point, which is how profits are panning out compared with expectations. So annoying when this happens - lots of blurb in an IMS, but they don't tell you what you actually want to know, i.e. what the profit is going to be!

Financial PR companies please take note - the vital data that investors want above all else from an IMS, is how profits are compared with market expectations. Everything else is background noise.

I was surprised to see that Ultrasis (ULT) is still soldiering on, a relic from the Dot.Com boom in the late 90's. Their results today for y/e 31 Jul 2012 are absolutely dreadful, with turnover plunging from £2.8m to £1.1m, and going from breakeven to a £1.4m loss.

They look to have enough cash left to last maybe another year, but it looks pretty terminal to me. Their products have never really taken off, and surely there comes a point where you just give up & move on to do something else?

Headlam (HEAD), a £259m mkt cap flooring distributor, says that they are on track to meet internal targets for 2012 providing Nov & Dec pan out as planned. Shares look priced about right on a fwd PER of 11.5, and I note they have net cash, and a rather tempting 5% dividend yield. Bearing in mind those figures are being achieved in depressed markets, it could be an interesting cyclical  recovery play?

OK, that's it for now. Have a great weekend y'all!

Regards, Paul.


  1. Hi Paul great blog as ever !
    Just a question if you could explain re Security Research (SRG)- you state the tendering - would this be similar to a stock spilt by any chance?

    Sorry I had to ask I have tried everything to understand the process but cant get a definative answer.
    Wondered if could explain.

    Keep up the great blog -really enjoy reading it and as ever best of luck with the Half Marathon

  2. Tender offers are very unusual, but occasionally a company with surplus cash will make an offer to all shareholders to buy back a certain proportion of shares at a fixed or flexible price.

    You must check this out yourself, but it seems to me that SRG seems to be offering to buy back 1 in 5 shares at 225p. But it's a complex situation, and something I suggest is left to experienced investors if you're not sure what to do.

    Sorry I can't explain it in detail, but am pretty knackered, and it's a complicated special situation. Essentially the company will use its own surplus cash to buy back a certain number of its own shares, but the devil is in the detail. So look at the RNS today - they seem to be offering to buy back 1 in 5 shares at 225p. That will deplete their own cash pile by 225p * the number of shares tendered. So you have to work out the mkt cap before & after, and the balance sheet before & after, and then decide what to do.

    But clearly if shares are 125p in the open market, and someone comes along offering to buy them at 225p, then selling is the correct thing to do! But it only seems to be for 1 in 5 shares, so you have to weigh that up. Complex situation, not one for novices.

    Regards, Paul.

    1. Hi Paul thats a fantastic explanation !

      Even thou your knackered.. :)

      I know DYOR applies- but i just wanted a simple explanation to it I couldnt find the answer anywhere else - thank you very very much !

      I fully understand it now