Diary: AFF, CPP, DNO

I'll tell you this for nowt: the market knows how to seriously test your convictions. The last couple of days have been very, um, "exciting" for me.

Yesterday, DNO (Domino Printing Sciences) dropped 12% on anticipation of today's results. A sure sign that the results will be bad, right? Wrong! In the final results RNS, it announced underlying EPS up 9%, 33rd year of sales growth with record profit. Dividends increased by 20%, currently standing at a yield of 3.99%. Come to daddy! It's currently up 12% in trading today - although there's obviously volatility there. Poster on ADVFN writes:

I agree, impressive numbers, though the rate of growth in H2 did slow quite a bit. The main worry must be the segmental dependence on Europe, which seems determined to embrace austerity, and I think that is what is spooking the markets.

 AFF (Afferro Mining) is a minnow iron ore miner that's really been putting my portfolio through the grinder. I had bought after seeing reports about the likely NPV calculations on its resources, suggesting it was severely undervalued. People were getting puzzled about the directors quietness as to its funding arrangement, with everyone wondering if there'd be dilution of holdings, or liquidity problems. Anyway, all that got blown out of the water yesterday when it announced:

Afferro divests interest in the Putu Iron Ore Project for minimum US$115 million cash ... allows the Company to focus on its 100% owned flagship Nkout project and minimises shareholder dilution. With the focus and cash, Afferro will be extremely well placed to enter a new and exciting phase of growth.

115m USD is  64m GBP. The company has a market cap of £57m, plus a lot of resources to exploit. This company looks very undervalued. It rose about 38% yesterday (!), and is down 4% after such a massive runup. I have renewed confidence in this company. The company has a tendency to spike up on good news, but then sag down. I'm thinking of waiting for the dust to settle and top up. Riskier play, and it is a commodity company, but I think that topping up is the right way to go. Unless Europe and China slide into the sea, of course, then not so good.

CPP dived a lot yesterday - about 12% if memory serves. The trading statement made for unpleasant reading:

 The FSA investigation ... continuing to have a material impact... in the UK. A new, non-insured service product ... will not be adopted by business partner.  [In] 2012, there are good opportunities to achieve improved revenue growth compared to 2011. Underlying Group operating profit in 2012 is likely to be significantly lower than 2011

An ADVFN poster writes:

The bottom line is that they have lost millions already due to the lenght [sic] of the investigation and will then doubtless have to pay a fine on top of the lost business.

Stay tuned on this one. It still has high ROE and low price. 

Diary: PIC, CPP, IQE

Changing your mind

An author over at Seeking Alpha writes:

one thing I learned from Buffett was that the best companies to invest in are usually those you dismiss the first time you hear about them. It isn't until you move in for a closer look that you discover the true value of the company, and by then you have an edge over the market because most people do not bother to move in for a closer look.

PIC - Pace - Tech hardware and equip - 64.6p/£197.1m

The company's share price continues to fall, but Slashdot  reports that Logitech is stopping production on STBs (set-top boxes) for Google TV, calling it a "big mistake". Logitech Chief Executive predicted:

the "grandchild of Google TV" might succeed but not the current product. For now, that leaves Sony televisions with the Google software for people looking for the Google TV experience.

According to my calculations (DB02/21), it has a ROC of 96.6%, and UEY of 18.8%, putting it high on a list of magic formula companies.

CPP - CPP Group - Support Services - 145.6p/£249.6m

Some points from CPP's IMS on 25-Oct-2011:

• revenue grew by 6%
• costs and lost revenues associated with the ongoing FSA investigation have had a negative impact on margins. Discussions are ongoing.
• revenue growth in UK has been achieved despite the ongoing suspension of new sales of Identity Protection
• India and China drive revenue growth, and the directors see a lot of potetnial in those markets
• company has net cash at of £9.9m at 30-Sep-2011, compared with net debt at 30-Jun-2011
• anticipates continued revenue growth

For the 6 m/e 30-Jun-2011, revenues in UK amounted to £116.9m (68%) of the total revenues of £172.1m over all geographical regions.

On 09-Nov-2011, I estimated (DB02/20) that CPP had an EBIT of £49.1m, TEV of £17.2m, EV of £270.3m, implying a ROC of 285%, and UEY of 18.2%, based on a share price of 150p. It has since declined to 145.6p. Unsurprisingly, this company is ranking very highly as a magic formula company.

IQE notes

Here is a summary of some of the points made by Jessica Furseth in an article on IQE on 31-Oct-2011.

While other areas are becoming significant, IQE's success so far comes downs to the booming wireless tech industry.. "The smartphome cycle ... is still just beginning so we still see very exciting growth in this sector".

In 6 months to June, revenues increased 16%, pre-tax profits rose 28%, and it went from having £7m debt to £1m cash.

Only 28% of the world's mobile phones are smartphones, and this segment continues to grow rapidly. This increases the need for chips. Silicon is hitting its physical limits, so compound semiconductors, such as those from IQE, are more attractive. The economics of crystal chips are changing. IQE has 30% of global share. Dr nelson, co-founder of IQE in 1988, says that Intel believes these new integrated circuits may well become the future of chips, with the first products incorporating the new tech set to see the light of day by 2015.

Compound semiconductors use less power, and can store more data.

Intel's Light Peak cables, developed in partnership with IQE, will be launched in six to nine months.They are expected to replace USB-2 cables. Cost reductions are making this more economically viable.


The following information appeared in an article in Compound Semiconductor.

6" GaAs [Gallium Arsenide] epitaxial substrates will be the most prevalent, accounting for slightly more than 80% of total device demand over the 2010 to 2015 period. The demand in 2010 was for about 29,600 ksi (kilo square inches), and estimated to be 40,200 ksi in 2015.

Valuation Metrics

IQE has a share price of 20p, giving it a market cap of £105m. PER is 13.7, and it has net cash of £1m. PBV is 1.58, gearing -1.5%, and z-score is 3.21.

Diary: CPP, PTEC, RM.

Just a round-up of various company news today.

CPP - CPP Group - Support Services - 130.5p/£223.7m
Up 10.4% today on latest IMS for p/e 30-Jun-2011:

We have continued the revenue growth shown in our half year results announcement, with Group revenue growing by 6% for the period. ... Costs and lost revenues associated with the ongoing FSA investigation have had a negative impact on margins, as has ongoing investment in the future growth of our business, the impact of which is partially offset by higher UK Identity Protection and Turkish Card renewals. Northern Europe revenue increased by 5% ... despite the ongoing suspension of new sales of our insured Identity Protection product through our UK voice channels. Operating profit for the region continues to be adversely impacted by associated costs and lost sales. ... Southern Europe continues to be impacted by well publicised challenging economic and regulatory conditions, and revenues have decreased by 6% ... North America has continued to exceed our expectations, and sustain the strong growth achieved in the first half of 2011. Revenues have increased by 26% ... India and China continue to drive revenue growth in Asia Pacific of 21%. With bankable populations of 748 million and 1,062 million respectively, we believe there is significant growth potential in these markets. ... Our financial position has improved ... On 28 March 2011 CPP announced that it was in discussions with the FSA in relation to certain issues surrounding the sale of the Group's Card Protection and Identity Protection products ... discussions are ongoing ... We anticipate continued positive Group revenue growth for the final quarter, albeit that revenues and margins for Northern Europe continue to be negatively impacted by the ongoing suspension of UK Identity Protection sales through CPP channels.

Strongly undervalued at a PER of 6.6. I really need to increase my exposure on this one. It's only a minute holding for me, but if I was going to choose 6 shares for a concentrated portfolio, I'd have this in it. Strong fundamentals, and totally hated.

PTEC: Playtech - Online gaming - 247p/£599m
Up 3.1% following successful resolution of staff disruptions in a number of William Hill Online operational locations, including Tel Aviv and Bulgaria. Cheap on fundamentals, in a growth market, but plenty of uncertainties regarding the possible conseuqnces of future regulatory environment.

RM.: RM - Software and Computer Services - 51p/£48m
Up an eye-popping 17.9% on the announcement of the resignation of CEO Terry Sweeney. I guess it's a case of "don't forget to close the door on your way out". Martyn Ratcliffe appointed Executive Chairman (1 June). Robs Sirs was going to leave after 21 years of service, but now isn't.

Diary: CPP, DNO, gold

CPP - CPP GROUP - (Financial) Support Services - 121.90p/£209m
CPP is a "life assistance" products. Basically, if your credit card missing, or something like that, CPP will sort things out for you. I had a new credit issued to me the other day, and had to phone a number to activate it. That, of course, presents an opportunity to sell you typical financial product garbage. If you listen to the spiel over the phone, you realise that that's where our good friends over at CPP come in.

CPP floated in March 2010. At the end of March 2011, the FSA decided to investigate some of the stuff (I hesitate to call them "products") that CPP was selling, and the share price duly plunged. FT Alphaville referred to them as basically just another busted IPO. So, lots of bad sentiment surrounding it. I noticed that, at that time, the company was a "magic formula" company, for those who have read the writings of Joel Greenblatt. It generates very high returns on equity, and was available at a low PE.

Anyway, I decided to pass on the company at the time, figuring that it was high risk, and I couldn't be sure if the the whole thing would be a complete bust. As the weeks passed, the share price recovered, and I figured that I had missed the boat and that was the end of that.

Then, in about July, the whole market tanked, taking CPP down with it. In August, I realised that I had a second chance to buy into it if I so wished, so I took it. It was, in part, eventdriven's interest in the company that caused me to reappraise it. The directors have a massive stake in the company (£120m against a market cap of £209m), so I could be pretty sure that it wasn't going down without a fight. The directors had announced that it had re-engineered some of their products (which I assume means something along the lines of "same pig, different wig"), so the FSA investigation might not be as damaging - and more importantly not fatal - as I had originally supposed.

Other negatives pointed out on a thread on Motley Fool: negative tangible assets, and "its business stinks, selling the kind of insurance that nobody really wants but are sold on the sly."

So, where we stand today, at a share price of 122p, we are on a PER of 6.1, yield of 7.2%. The company has a high return on equity (115%). It has net debt of 7.2m, compared with net profits of nearly 16m at the interim stage. So the company looks fine from a debt angle. It trades at an EV/EBITDA of 3.8, which looks cheap to me.

Analysts have pencilled in a 15% rise in EPS for 2012, for those that have faith in that kind of thing. The company has also announced that it sees India as a growth market for its wares.



So, in summary, CPP is on a cheap rating, has high returns on equity, has recently been dumped on scary news, which looks overblown, plus it has identified real prospects for growth. That was my reasoning behind my purchase, anyway.

DNO - Domino Printing Sciences - Electronic and Electrical Equipment - 444.7p/£493m
DNO released an RNS yesterday, saying that it has taken its holding in Kameleon Source Codes from 10% to 98%. It comments:

Domino has been developing its label generation and printer integration capability using Kameleon software since taking an initial 10% stake in the business in 2010.  The move to acquire the balance of the company gives Domino full control over the deployment and future development of its software solutions that will enhance Domino's coding automation capability and offer customers the means to achieve enhanced productivity and coding reliability.  The acquisition is expected to enhance future sales growth opportunities

 DNO trades on a PER of 12, yield of 3.8%, with net cash of £12m. It has a ROE of 21%, and analysts expect 10% EPS growth in 2012. Looks good to me.


Gold
An article in Yellow Capital, dated 02-Sep-2011, speculated on the price of gold. He is bullish on it:

Western Governments are dealing with a solvency crisis not a liquidity crisis. Money printing is the only way politicians believe they can cure the patient. Austerity measures don?t win elections, only brave and patriotic leaders would embark on political suicide. Expect further devaluation of currency and my guess is one major default before or during 2012. Till [sic] then I will hold gold in its physical form.

He observes that there has been a 20-year bear market in gold, creating an under-investment in the gold mining sector. It takes an average of 10 years to get a mine operational and produce gold. Further:

Everything, I believe happens in cycles. World stock markets crash or dip severely roughly every 4.5yrs, property tends to have longer cycles due to its illiquid nature and tends to be at least 9yrs to 15yrs if one measures peak to trough.

 Summing up:

gold experienced a twenty year bear market from 1981 to 2001 and is likely to experience a bull market of twenty years from 2001 to 2021.