Wednesday, October 19, 2011


Nothing in this post is intended to imply a recommendation, BTW. I don't own any shares in these companies.

RM.: RM - Software and Computer Sevices - 46.8p/£44m
According to Google Finance:
The Company is engaged in the supply of educational products and services to schools, colleges and universities, local government and central government departments and agencies. The Company operates in three segments: Assessment and Data, which includes systems, platforms and outsourcing for testing and qualifications, and data analysis and dissemination services for teachers, parents and policy makers; Learning Technologies, which comprises classroom technology, including learning platforms, computer systems and interactive teaching equipment and infrastructure and managed services, including systems, networking, management information system (MIS), access control and cashless catering, and Education Resources, which involves curriculum-focused products, including teaching equipment and materials, furniture and software.
I'm still not sure what all that really means, but I'm getting the words "public sector spending" out of it, and we all know that it is an unpopular theme right now. I first became aware of RM earlier this year, when I read a Motley Fool article on "3 Great Growth Shares for 2010", published on 13-Jan-2010. TMF recommends the shares RM (RM), CNT (Connaught) and SPI (Spice). How well did they do? Well, a think a commenter on the article sums it up pretty well:
Oh, how I wish I'd never read this.
Being a bit more specific: RM has dived - can I use that word - 70% since the article was published. Ouchies! But wait, there's more! CNT actually went bankrupt during 2010, and SPI shares were cancelled from the official list. I don't know what the story was behind it, but I see from Sharelock Holmes that the final results published on 06-Jul-2010 showed net debt of 117.5m, negative gearing (tangible or otherwise), and a z-score of 0.31. So, whatever the reason, it was unlikely to be good. So hat off to Alan Oscroft for selecting what can only be described as the biggest pile of crud imaginable.

There is something of a lesson here: "great growth companies" on cheap multiples should be treated with a huge dollop of suspicion. To the companies mentioned by Alan, I could add, off the top of my head, HLO (Healthcare Locums), and RCG (RCG Holdings). HLO was suspended from trading after accounting irregularities. RCG is trading on a PBV of 0.06 and PER of 0.55, and the whole story has been a tale of woe. I'm giving you an unambiguous "avoid" on that one. No price is too low for that pile of junk.

Also worthy of note is that "interest cover" was a poor safety factor. RCG has an IC (interest Cover) of 69, a truly monster level. SPI had an IC of 7.9, RM had 86.4, CNT had 8.2. These are all very respectable numbers, yet provided no safety when push came to shove.

Anyway, back to RM. The reason it caught my attention is that it dropped 8.78% yesterday. I'm not sure what the reason is. According to an article in Kerala IT News, "RM Education Solutions India opens third facility in Technopark", which I would have thought was bullish. Hey ho.

Some numbers for you: PER 5.3, YLD 6.61, NET CASH 8m, MKT 44m, 2011F -46% 2012F +19% ROE 23%
RM. has a current EPS of 8.83pps. Over the last 5 years, it has a mean of 13.7p and a median of 13.0pps. Based on a share price of 49p, that would give it a PER of 3.77. Directors own almost no shares. Could be a bad sign. So a PER of 5.3 and ROE of 23% might be a Greenblatt "cheap and good", or it might be a GreenSPLATT value trap.

 It will be interesting to see how this develops from here. Stay tuned.

DPH: Dechra Pharma - Pharma and Biotech - 483.7p/321m
OK, time to look at a possible growth company which hopefully wont go bankrupt within 6 months of my mentioning it. Trading activities seem easy enough to understand. According to Google Finance:
Dechra Pharmaceuticals PLC (Dechra) is an international veterinary pharmaceutical company.
 Here's some stats for you:


Current 5 yr median
PER 13.4 14.9
ROE 23% 23%
Operating Margin 8% 7%
Gearing 35%
z-score 3.17
Net cash/mkt cap -11%
Net cash/net profit -2.4
Insiders £10m
Growth over years: 5 10
-revenue 11% 11%
- operating profit 22% 18%
- EPS (adj) 20% 16%

Numbers look pretty reasonable, actually. See how there's been some nice consistent growth throughout the decade, return on equity is very good, debt looks OK, PER looks reasonable and there's a reasonably chunky amount of insider ownership. Numbers look pretty good.

There's not a great deal of chatter on the BBs, which is encouraging. Reading quickly, brokers seem to rate it as a "hold". Here's a comment by Brewin Dolphin:
The company's Pharma division is its main growth driver, with US sales up 51.5%, but Brewin is disappointed that the launch of its new product is to be delayed by six months, due to a change in manufacturer.
My instinctive reaction to this is: "hold" is a good sign to see (a screaming buy by analysts is probably asking for trouble), and the "delays" comment seems a bit myopic and too focussed on minutiae.

In an RNS dated 06-Sep-2011, the board reported the following prospects for the prelims for y/e 30-Jun-2011:
Although footfall through veterinary practices has declined and the general economic climate remains uncertain we are continuing to demonstrate solid growth in markets in which we trade.  Our branded product range, the focus of our key strategic objective, continues to grow strongly. To sustain this growth we have increased investment in product development, extended the geographies in which we operate, acquired complementary businesses and increased the number of people within sales and marketing.  We believe, therefore, that we are well positioned to ensure future solid growth is maintained and Shareholder value enhanced.
Maybe a bit waffly on the management-speak, but it looks positive on balance.

The Independent says "buy", but the Times says:
Received wisdom has it that in hard times people will cut their spending on their children before they make economies on their pets. Possibly so, but there is a suspicion that a decision to economise is behind a slowing in the rate of growth in sales of diet foodstuffs in the French, Dutch and Scandinavian markets for Dechra Pharmaceuticals. Dechra is an attractive way of investing in a robust sector of pharma but, with the shares on about 12 times’ this year’s earnings, the good news would seem to be in the price
My reaction to the Times is this: "huh?" If you view the sector is robust, then why is 12X earnings "in the price"? If you think that the company is earning mid-double digit earnings growth, with high returns on equity, then surely 12X is a good deal? Sometimes I just don't get what people say. The dividend yield is OK'ish at 2.5%, although of course not spectacular (we're aiming for growth, after all) - I just want to see what extra we get on top for the earnings.

So, at first flush, quite interesting.

BSY: British sky Broadcasting - Media - 711.5p/£11.8bn
Grrr. BSY is up 5.3% today, as good news seems to be flowing. Here's a few headlines:
  • Evolution hails strong quarter at BSkyB
  • Sky adds 77,000 new customers as revenues rises 9%
  • BSkyB Q1 Pre-tax Profit Rises; Issues Cautious Outlook
  • BSkyB First-Quarter Progit on Demand for Broadband Services
  • Sky TV usrges for Rugby World Cup
 If you recall, kelpiecapital wrote a bullish article on BSY recently. I say "grr", of course, because I've been sitting on the sidelines on this one, picking my nose and breathing through my mouth. Anyway, kudos to Duncan for his pick (stock pick, that is; l I don't think they hand out kudos for nose picks). Well done, sir.

PMG: Parkmead Group - Financial Services - 11.50p/£70m
They say they don't ring a bell when a stock reaches its minimum or maximum price. Well ... sometimes they do, so to speak. Want to know how? ... then read on my friends ...

For my sins, I work hard ... OK make that hardly work ... in the oil and gas sector. Don't ask me for insights in this sector, because honestly, I don't have any. Trust me on this. Here's what PMG do, according to Google Finance:
[PMG] is principally engaged in the provision of business services and investors in the energy sector. It operates in two segments: corporate finance and energy economics. The corporate finance segment provides corporate finance advice and investment advice with a primary focus in the oil and gas exploration and production sectors. The energy economics segment provides energy sector economics, valuation and benchmarking, advising on energy policies and fiscal matters, undertaking economic evaluations, supply benchmarking services and provide training. During the fiscal year ended June 30, 2010 (fiscal 2010), its energy sector investments were in Faroe Petroleum plc (Faroe), Reservoir Exploration Technologies ASA (RXT) and Transeuro Energy Corporation (Transeuro).
During the xmas period last year, I ventured out from my isolated desk "downstairs", conveniently situated next to the toilets. No, I'm not making this up! This ensures minimal interaction with people; certainly minimal interaction with clients! Maybe I'm an undiagnosed Aspergers sufferer. Or maybe I'm just plain rude and don't comb my hair that often. For whatever reason, like I said, I decided to go upstairs and visit the managers, more senior staff, and you know, the people with social skills. One thing they were discussing was PMG and how the share price was rocketing lately. Apparently, Tom Cross had been appointed to PMG. The significance of that is that he had a strong reputation through the way that he had built up Dana Petroleum into a very credible oil and gas producer. I learnt this, or most of this, on that occasion. One guy told another guy not to tell me this, in case I bought shares and pushed the price up. It turns out that I didn't buy any shares, on the basis is that if I heard it from the office, then everything was priced in.

And priced in it was! PMG was trading at about 1pps (no typo) during mid-2010, and reached a high of 29.5p at the end of December 2010, having been at 10.5p on 17-Dec-2010. Since then, the share has had a massive decline to 11.21p. The Motley Fool has written some good articles on PMG. Here's a good snippet:
Parkmead Group invests in oil and gas exploration and production, focusing on the Middle East, Africa and Europe. The reason for Parkmead's recently rocketing share price is simple. In October, Tom Cross -- founder and former CEO of Dana Petroleum -- was named chairman of Parkmead. Investors rushed to buy Parkmead shares, hoping that Cross would turn Parkmead into the next Dana, which was sold last October to Korea National Oil Corporation for ?1.9 billion. Nevertheless, at present, Parkmead has but a single investment: a 2.5% share in Faroe Petroleum (LSE: FPM) made in December 2007. With Faroe's share price rising from 50p in January 2009 to 178p today, Parkmead's investment in Faroe is now worth £9.5 million, versus its market cap of £133 million.
In another article, TMF says that investors are basically making an investment in one man, who hopefully wont get run over by a bus. Notice the complete disparity between the market cap and its underlying investment.

It turns out that all the hubub in the office marked almost the exact top for the share price. As predicted.

It also goes the other way. I stood on the side-lines during the BP crisis, and wasn't interested in making a play on it, as I thought it too risky. However, there was an alignment of three things which soon led me to make a purchase:
  • Whitney Tilson recommended it
  • I heard that portfolio managers were dumping their shares in order to window-dress their accounts
  • a lady from the office decided to dump her shares in BP
I got in at 349p, for the curious amongst you. BP bottomed out at about 306p. In retrospect, it was a difficult play to get right. The Motley Fool stated that BP was an "obvious" play, but I'm going to contradict them on that. BP's performance has not been that good since the debacle, and their was only a small window of opportunity to buy at the real bargain prices. I was one of the really lucky ones, as most people would have picked them up at more mediocre prices, and hence would not have done well at all. So, contrary to bragging, I see the crisis as one where I got lucky and would have been something that would generally have been quite difficult to get right. Plenty of people didn't.

There are some morals here. Firstly, contrary to Peter Lynch, it's not always "buy what you know". There were plenty of people in the office whose knowledge of the oil and gas sector was better than mine. I think it's very, very difficult to translate what you know, or what you think you know, about a sector into an actionable investment decision. Maybe it's possible - which is what I'll discuss in some other post on GMG (Game), and why I think it's probably a sell.  Secondly is that even knowledgable, highly intelligent people are human, too, and are prone to the same psychological limitations as everyone else.

I also noticed this at the end of the 90's, when I worked for Logica, an IT consultants. A lot of the lads around the office were talking about some interesting IT shares worth buying. This would have been at the worst possible time to buy into the tech sector.

I also recall that Stephen Bland, a writer for The Motley Fool, has been saying this kind of thing for a long time. "Don't get Lynched", was the catchphrase. There was a thread with a discussion with someone who had quite  a lot of knowledge on the mining sector. He was not able to anticipate major movements in prospects or commodity prices in a way that he could capitalise on. I can't give you link to the thread - sorry about that.

Anyway, 10 minutes of writing has never been more over in my life. Good luck with my grammar!


Richard Beddard said...

RM used to be Research Machines - made computers for schools. Now supply networks, hardware, whiteboards and diversified into all sorts of non-tech educational supplies and services (marking, curriculum software, intranets etc.). Big footprint in UK education, attempting to diversify into US. I bought them in 2003 I think when they crashed in the tech bubble. It was a good investment over the following years. More recently I held them in the Thrifty 30 but ejected them before the recent collapse. I just thought there's a lot more competition now, and the bubble in education spending might be coming to an end. Also IT spending seems to come in waves as technology improves. Interpreted diversification as sign it couldn't grow in hardware market. Also I rated CEO Tim Pearson and he went. Mind you 70% cheaper now you say...

Mark Carter said...

Many thanks for the info, Richard. 70% down YTD, and counting! It's down 12% today at the time of writing. "Significant if true".