RCG Holdings

Ah, good old RCG Holdings, where the intrigue never dies. There's a nice write-up on TMF which explains much of it:

Over the year they've announced the departure of the CEO then the CFO and more recently the COO. They are changing strategy from selling techie equipment to 'offering solutions, projects and services'. As a result they have written off vast amounts of stock and good will. The new strategy hasn't been that successful due to delays in projects.

 and

 A major shareholder in RCG, Ms. Nina Kung, a very wealthy HK celebrity, died and her boyfriend Fung Shui Master Tony Chan claimed that he inherited her RCG shares. A major court case was initiated. Later in early 2010 Tony Chan was arrested in the wake of a High Court judge's ruling that a will giving him Nina Wang's HK$100 billion estate was a forgery. The judge described Chan as a liar and a scheming sycophant lacking in credibility. Round about the same time the RCG offices were raided by the HK Police but no further action was taken

and

In the last few days the company, just to remind you, an international provider of biometric and RFID products and solution services with a primary focus in the Asia Pacific markets, acquired a mining and exploration company called SPAG. Just don't ask !!.

 Groovy stuff. I wouldn't touch it with a bargepole, of course.

Diary: net-nets, value investing, pvcs, tw., housebuilders, rcg, cwr , agk, growth, hlma, imi

So many things to talk about. So little time.

PVCS: PV Crystalox Solar - Alternative Energy - 7.55p/£31.5m
Shares in PVCS dropped 42% yesterday on news of weaker-than-expected demand in Germany, the biggest panel market. PVCS make "multicrystalline silicon ingots and wafers". which are used to make solar cells. I am a big detractor of "alternative energy", viewing it as a fad investment theme that is uneconomic in the real world and only exists because governments pump money into the idea. To me, the whole idea that you sell electricity back to the grid is going to look, in a few year's time, as harebrained as the notion of selling your excess grapefruits back to Tescos. It should be obvious that only centralised operations can produce economies of scale.

Now that my Alternative Energy rant is out of the way, it should be noted that PVCS has 25 years in solar tech development, so presumably it isn't a fly-by-night operation. It has only been quoted since 15-Jun-2007, though. The interesting thing about PVCS is that it's now a net-net. It has £36,2m in net cash, against a market cap of £31.5m. Its NCAV (current assets less all liabilities) is £74.1m. So it's well and truly a net-net. There's a monster spread on this share: bid 7.60p, ask 7.75p. I'll do a check-up on this company in 6 months time, and see how we get on.

Interestingly, I mentioned PVCS in a post that I wrote on 14-Nov-2010. I was looking in the top quintile of stocks that had a low "Graham Ratio" (market cap to NCAV). Their performance was "mixed", with some delisting for unknown reasons, possibly at substantial profits, possible at substantial losses. I said that there were 4 net-nets, 3 of which were housbuilders. Alas, I didn't identify the remaing company. Actually, the housebuilders seem to have acquitted themselves quite well YTD, having mostly risen (TW. Taylor Wimpey is up nearly 16%) whilst the market has fallen 7%. RCG (RCG Holdings) has been an ongoing unmitigated disaster, falling from 30.25p in November to 3.71p as of yesterday.

CWR: Ceres Power - Electronic & Elect Equipment - 17.5p/£15.1m
According to Google Finance, it:

is principally engaged in the development and commercial exploitation of micro generation products based on the Company’s solid oxide fuel cell technology.

... whatever that means.  The company has been listed since 03-Dec-2004. Shares have dropped 51% over the last month. The hubub reported in Bloomberg is:

 Ceres’s fuel cells won’t be commercially available until the first half of 2014. The Horsham, England-based company said in March 2010 that they would be available in the second half of this year. The cells provide heat and power for homes.

 CWR is another net-net, having cash of £26.7m, and a NCAV of £22.7m. The company has minimal revenues (less than £1m), and has never reported a profit. That will probably rule it out as a net-net possibility.

AGK: Aggreko - Support services - 1709.5p/£4.6bn
OK, now onto a company that wont make your belly twist into a knot. According to Google Finance, its trading activities are:

Aggreko plc is engaged in the rental of power generation and temperature control equipment.

Finally, something that makes sense. The numbers are very impressive:

AGK
	Current	5 yr median
PER	20.4	18.8
ROE	25%	27%
Operating Margin	26%	22%
Gearing	29%
z-score	5.64
Net cash/mkt cap	-6%
Net cash/net profit	-1.5
NCAV/MKT	-3%
Insiders	£13m
Growth over years:	5	10
-revenue	23%	18%
- operating profit	37%	23%
- EPS (adj)	42%	26%
Dated:	22/10/2011

At a PER of 20.4, it's not cheap. Looking at the balance sheet, intangibles account for 5% of total assets - which seems very low when you look at most companies. So, it hasn't gone out on any big spending sprees. At first flush, it looks like one of those companies where you think to yourself: "solid balance sheet, good solid business generally, if I could get 10 such companies at a PER of around 15 I'll probably do very well".

HLMA: Halma - Electronic and Electrical Equip - 331.30p/£1.25bn
Trading activities according to Google Finance:

The Company operates in three sectors: health and analysis, infrastructure sensors and industrial safety. The Company makes products, which detect hazards to protect assets and people in public and commercial. The Company’s sub-sectors include water, photonics, health optics, fire detection, security sensors, gas detection, bursting disks and safety interlocks.

Another solid company. Here are some stats that I currently favour when looking at growth companies:

HLMA
	Current	5 yr median
PER	14.8	14.8
ROE	21%	22%
Operating Margin	20%	19%
Gearing	10%
z-score	4.93
Net cash/mkt cap	-3%
Net cash/net profit	-0.5
NCAV/MKT	-5%
Insiders	£4m
Growth over years:	5	10
-revenue	10%	8%
- operating profit	11%	10%
- EPS (adj)	13%	10%
Dated:	22/10/2011

The numbers aren't as impressive as AGK, and there is a lot more intangibles, but overall the numbers look good. Balance sheet looks fine debt-wise, and investors have been getting double-digit growth over the last decade. The business is what I call a "sensible" one, making all those little fiddly bits and bobs that no-one seems to pay much attention to. Its price multiple doesn't look excessive, and has been trading at around 15X for the last decade. A fair price for a good business.  YTD, the share price has performed about in line with the Footsie. It reached a peak in July, and has since then underperformed the market. The share price had gotten ahead of itself, when the valuation levels were too rich. At these levels, it looks like HLMA will be a solid, if unspectacular, compounder. Not a bad one to have in a diversified portfolio, I would say.

IMI: IMI - Industrial Engineering - 778.5p/£2.5bn
Trading activities according to Google Finance:

 Its businesses consist of five platforms organized into two principal activities: Fluid Controls, consisting severe service, fluid power and indoor climate; and retail dispense, consisting of beverage dispense and merchandising. Severe service designs, manufactures, supplies and service critical control valves and associated equipment. Fluid power designs, manufactures and supplies of motion and fluid control systems for original equipment manufacturers. Indoor climate designs, manufactures and supplies of indoor climate control systems and balance valves. Beverage dispense designs, manufactures and supplies of still and carbonated beverage dispense systems. Merchandising designs, manufactures and supplies of point of purchase display systems for brand owners and retailers.

 So, another one of those bits-and-bobs companies (not to be taken prejoritively). In fact, its returns are pretty impressive. Here's some stats:

IMI
	Current	5 yr median
PER	10.3	12.7
ROE	36%	37%
Operating Margin	17%	13%
Gearing	29%
z-score	3.63
Net cash/mkt cap	-7%
Net cash/net profit	-0.8
NCAV/MKT	-8%
Insiders	£8m
Growth over years:	5	10
-revenue	6%	2%
- operating profit	12%	9%
- EPS (adj)	12%	11%
Dated:	22/10/2011

Like HLMA, the company has had a huge run-up to July, whereupon its valuation slumped. It is trading at a discount to it 6-year median PER. Intangible account for 30% of total assets, so the company isn't shy about making acquisitions. It hasn't damaged its balance sheet in the process, though. Revenue growth has been unimpressive, but its operating profits and EPS growth over the past 5 and 10 years had been pretty good. ROE is good, too, having been achieved with sensible debt. It recently acquired TH Jansen Armaturen GmbH ("THJ") for 12.3m EUR, and an EV/EBITDA of 7.6 - which looks OK. IMI currently trades at an EV/EBITDA itself of 7.37, which also looks OK. IMI is currently trading below its 5-year median PER. At a PER of 10.3, the valuation looks undemanding, and it looks like you're getting a pretty solid company for your money.

Followup
Seeings as I've mentioned many companies in this post, it will be worthwhile me doing a follow-up in 6 months time. Will the solid companies outperform the cheap-as-chips one? That's for Mr Market to decide. FTAS (all-Share index) currently stands at 2827 for comparison purposes.

Diary: BP, BSY, CNT, CPH, HLO, LOG, PMG, RCG, RM

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:

DPH
	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
NCAV/MKT	-11%
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!