Small Cap Value Report (18 Jul 2014) - BEG, ESS, VLX, FDL

18th Jul '14 by Paul Scott

5 comments 14277 reads

Good morning! It's quiet for results & trading updates today, and judging by low volumes so far today, it looks as if a lot of people have taken the day off. So there could be buying (or selling) opportunities - because on quiet days important news from companies reporting can be overlooked.

Begbies Traynor (LON:BEG)

It's always worth having a read of this insolvency practitioner's quarterly updates about companies in financial distress. Surprisingly, today's report for Q2 shows a big increase in SMEs that are in financial distress, up 60,000 to 237,000 compared with the same time last year.

The report also indicates that even a 1% rise in interest rates would push a lot of zombie companies to the wall, and that many such companies tend to (just about) survive Recessions, but then go bust in a recovery, as they stretch their working capital to breaking point when trying to grow sales.

As a nation, at some point we're going to have to bite the bullet, and have a big clear-out of insolvent companies, which arguably is necessary for a sustainable recovery - as it frees up resources for more efficient, growing companies. Begbies describes the UK as having a "twin track economy", with large caps doing well, and many SMEs struggling and overtrading, due to lack of bank finance.

Of course more corporate insolvencies is bullish for Begbies.

The short report is here.

Essenden (LON:ESS)

Essenden operates 29 ten-pin bowling centres. It's had a chequered past, but sorted out its balance sheet a little while ago with a debt for equity sawp - I've written about it in great detail here before, if you search the archive using this page (or click on link on screen shot on the right).

We've got nearly 2 years' articles on the site now, so that's loads of background info & strident opinions on many (most?) small caps outside the resources, financial, and overseas sectors.

Back to Essenden, the company's H1 trading update sounds jolly good to me. LFL sales were up 6.1% in the 26 weeks to 29 Jun 2014. That's excellent in an economy where there is no real wages growth. So anything above 2%-ish (inflation) means they are out-performing. They mention that this has been achieved despite the…

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bsharman

18th Jul '14

I really like Begbies Traynor (LON:BEG) as a hedge against interest rate rises. They have been one of my better investments over the past year, having bought at 31p in Spring 2013. Initially it is strange to get your head around the fact that they do well in the boom years and badly during a recession. This seems perverse, as you would expect lots of businesses to go to the wall during a deep recession. However interest rates have been at record lows for such a long time and there is only one direction that they can and will move. Credit will become more expensive and thus impact these zombie companies. This is very good news for Begbies. They have been cutting costs and buying bolt on businesses during the lean years and should benefit when the number of insolvencies start to increase. There is also a great dividend whilst you wait. I don't know what there is not to like about this company and is probably top of my list for recovery potential/income and is a relatively 'safe' share to hold and as I say a hedge against (inflation) and interest rate rises. Cheers.

brucepackard

"many such companies tend to (just about) survive Recessions, but then go bust in a recovery, as they stretch their working capital to breaking point when trying to grow sales." - I have heard this from banks too. That SME insolvencies problems are a lagging indicator as we come out of recession.

FREng

Paul,

Re Begbies Traynor (LON:BEG). On March 6th you wrote "At some point corporate insolvencies will rise, as zombie companies are restructured, and that is likely to happen now the economy is improving, and bank Balance Sheets are more able to take the write-offs needed. So I am wondering if Begbies might now be over the worst?".

If you were right in March, then the increase in the number of SMEs in financial distress may be the result of their banks reducing their exposure ahead of an interest rate rise and not surprising at all.

It all seems bullish for BEG. (I'm long).

OsullivanB

Just for fun I looked at the Amazon fundamentals. Not much value there.

Best Bid /Ask: $ 359.24 / $ 359.42
1 Year Target: 420
Today's High/Low: $ 359.50 / $ 352.08
Share Volume: 2,389,125
50 Day Avg. Daily Volume 3,709,239
Previous Close: $ 352.454
52 Week High /Low: $ 408.06 / $ 279.33
Market cap $ 165,310,538,213
P/E Ratio: 570.22
Forward P/E(1y) 296.18
Earnings Per Share (EPS) $ 0.63
Annualized dividend N/A
Ex Dividend Date N/A
Dividend Payment Date N/A
Current Yield 0 %
Beta 2.86
NASDAQ Official Open Price $ 354.40
Date of Open Price Jul. 18, 2014
NASDAQ Official Close Price $ 352.39
Date of Close Price Jul. 17, 2014
Community Sentiment Bullish

19th Jul '14

Sorry, not my intention to spam (and I don't think I did). Just thought it might amuse some on a hot Friday evening. I can no longer delete the post, but promise to keep my (not very acute) sense of humour under restraint in future on this site, and, unless overwhelmed by need, to try not to post at all.

Small Cap Value Report (18 Jul 2014) - BEG, ESS, VLX, FDL

Begbies Traynor (LON:BEG)

Essenden (LON:ESS)

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Paul Scott

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