Friday, September 23, 2011


Market changes

Don't worry, I'm not going to report on market prices every day. I thought that, given I made some observations on market movements yesterday, I thought I'd see how things had changed. FTAS (FT-All share) was up 0.3% to 2626.
  • CHW -  down 1.6% (down 0.9% yesterday)
  • CTN didn't budge, same as yesterday. As expected
  • DLAR - unmoved, same as yesterday. A strangely stubborn beastie. I wonder if anyone is accumulating this one.
  • DNO - up a fraction, same as yesterday.
  • DPLM - down 1.4% (yesterday down 0.2%)
  • IND - down 5.5% (unmoved yesterday)
  • GDL - down 2.2% (down 1.7% yesterday)
  • JD. - up 2.1% (yesterday fractionally up)
So, the shares seemed to be doing pretty much what they were doing yesterday, with the expection of IND, where there was some selling. Speaking of IND ...

IND - IndigoVision
IND makes business-grade (as opposed to retail grade) CCTV cameras that work over ethernet. It's been very interesting to watch this company, although I've never actually owned any shares. It is a small (13m cap) company, and is considered a growth share. The share price is down 66% YTD. It gapped down about 34% on 16 June after issuing a profit warning. It reached a high of approx 950p in 2007, and now sits of 170p. It has a massive spread, so what the share price is is dependent on what figure you use.

IND currently has a PER of 21 - which sounds a lot, but its recent results have been poor. PBT in 2010 was 3.1m, and the finals in 2011 were 1.2m. So you could argue that the high PER is an anomolous figure (although I'm not saying that that's my argument). Oliver Vellacoot, a director, owns nearly £3m of shares. So he has skin in the game.

IND is followed extensively on one of the Motley Fool boards. Some of those investors are very probably amongst the savviest private investors in the UK.

The whole issue surrounding the collapse of the IND's share price is as to whether the company has gone ex-growth or not. The fact there is no concensus view does, I think, demonstrate just how hard it can be sometimes to determine the future prospects of a company. A lot of experience and intelligence can go into a difficult problem, and yet it's still not clear who is right. Some poster worked out that the company might acutally slip into a loss, given its high operational leverage.

There's been a lot of good debate on the TMF boards, and this post by Paul Scott summarises his position:
  • the doubts that IND will make a loss, regardless of what sales as margins do. The company will protect its cash
  • it's cheap, so if you think it will recover, it will multi-bag
  • if you don't think it will recover, then don't invest
  • it has a mkt cap of 12m, and net cash of 5m
  • it's in a growing sector
  • he has had a senior management role in a growing company. As such, he is aware that things are rarely smooth. Things can often get bumpy.
Some of the facts are disputed, for example that IND will be able to prevent itself from making a loss. There also seems to be concern that IND will introduce down-market products, which could spell long-term disaster.

On interesting aside: a few weeks ago, a poster said that investors were panicing. This suggestion was rebuffed, saying that on the whole, investors were not panic selling but instead hanging on. This stuck in my mind - because I felt that that probably indicate further downward movement: people weren't yet capitulating. Since then, the shares have, indeed, moved lower.

It is interesting to consider this company from an investment case. There seem to be so many pros, cons and undecidables about it that it makes one wonder how one should approach it, if at all. I had been thinking about this today, and came up with the following idea: instead of worrying about exactly IF their Canadian sales would do this, or their US sales would do that, let's look at it this way: we basically can't be sure, but let's say there's a very plausible case for the company's growth phase to continue. We - or rather I - just don't know the probability. So, I figured, if one could purchase the company cheap enough, then it would make an attractive bet. Remember that management is committed. So, IF one could purchase the shares as a net-net, then I think it would make a very interesting purchase as a bargain share with the distinct - but by no means guaranteed - chance of growth. If you look at it that way, then I think it's worth the risk. I wouldn't bet the farm, but I do think it would be a viable idea.

IND has net current assets of 12.6m, and negligible non-current liabilities. So its NCAV is about 12.6m. Graham would insist on purchasing it at 2/3 of NCAV (a tall order). The company's market cap is 13m, so the shares would need to fall about another 33% for that condition to hold. At 172.5p, the share price would therefore need to fall to 115p to make the play.

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