Shorting would give me the shivers

It’s been very quiet over recent days in regards to my own holdings, with little in the way of company news or share price activity. Remembering the Chinese curse “may you live in interesting times”, I shall not complain.

I did notice that Scapa (SCPA) released a positive trading statement yesterday, and that the share price rose by 11% as a consequence (currently 43p). I have mentioned Scapa in a previous blog as ‘one that got away’. Perhaps I should be kicking myself for not investing at 16p when the company first came to my attention. In a strange sort of way I never get too distressed by these situations because I take a great deal of comfort in the fact that at least my stock picking radar is still working. Anyway there are always plenty of opportunities out there if you keep your eyes open.

Kenmare resources also briefly moved back above 50p in recent days. I noticed in the press that, once again, there is talk of KMR being a possible takeover target. You might remember that I sold shares in Kenmare for over 50p a couple of years or so ago, and then watched as they fell back to 7p, but never bought back in. Curiously one of the reasons I never bought the shares again was that I suddenly got ‘cold feet’ because it is (certainly was) a company dependant on a single mining operation in Mozambique. However, it is this very feature that might make it attractive to potential suitors. Kenmare has been touted as a potential bid target for several years, and my gut feeling is that this will eventually happen at a premium to the current share price. I shall watch with interest and wish shareholders continued success.

One of the Directors at the Mission Marketing group has picked up a few more shares. After releasing its results 31 March, the shares fell back a little from their recent peak. As mentioned before, it’s not really the type of company that interests me for the long term, but if the shares were to fall back further then I would consider revisiting the accounts and outlook, and ponder upon a medium term investment.

Finally, I noticed into today’s Times that Simon Cawkell (Evil Knievel) has a short position in ASOS, a company that I mentioned in my very first blog ‘Magnificent micro-caps’. Over the past couple of days ASOS’s share price has continued to climb on the back of a positive trading update. At the close of play today the shares stood at £20.50. ASOS stands on a very high rating indeed, and I can understand the rationale behind SC’s short position. However, shorting shares has never been an option that I wish to pursue. It strikes me that whilst some shares can look very expensive, they can remain that way for some considerable time, and indeed get even more expensive. ASOS for example stands on a very high p/e ratio, but that hasn’t stopped the share price reaching an all time high in the last two days. Each to their own of course, but betting against a share doesn’t suit my temperament.

I believe SC was also short on Avanti communications. If true, then it appears he is having more success here as the share price continues to slide despite the recent bout of purchases by the Directors

Happy hunting.

Hidden value, hidden treasure?

Is it fair to compare the valuations of two companies whose respective businesses are unrelated? Visiting the DCD Media bulletin board (ADVFN) over the weekend, two posters have questioned my comparison between the current valuations of BURST Media and DCD Media. They argue that the two organizations are totally different, and hence a comparison between the two has no merit. I would agree that apart from both appearing in the same listings sector, they are essentially two very different animals, but does that mean we can’t compare their respective valuations? Both posters appear to be suggesting that BURST should command a higher premium than DCD because its business, internet advertising, is ‘sexier’. I already feel transported back a decade to the arguments about ‘old’ economy and ‘new’ economy stocks. Gulp!

When I invest in a business I want to know if that business is making a profit (or will make a profit in the future) and how cheap it is to buy. There are various valuation tools that can be used, but for me, two key tools are p/e ratio and net asset value. Quite frankly I don’t care what the business does, as long as it’s cheap to buy, makes a profit and will (hopefully) continue to grow profits.

Firstly, let’s consider Burst Media. It made an operating loss of $3.3m and indeed a loss of $1.4m at the EBITDA level. The net assets on the balance sheet were around $21m (including intangibles). In short, it may be a ‘new’ economy stock, but it isn’t making any money. BLINKX are paying about $30m for BURST which is about 1.5 times current net asset value. Paying 1.5 times net asset value for a company that is making a loss at the EBITDA level does appear generous.

DCD Media is essentially a production, distribution and publishing outfit. In its last report, fully diluted earnings were 2.82p per share; EBITDA was £2.1m and net assets stood at £21m (including goodwill and intangibles). At the current SP of just over 9p, the shares sit on a historic p/e of 3, a multiple of around 2.5 times last reported EBITDA  and about a quarter of net asset value.

In my view you can make a comparison. At £18.5m Burst looks fully valued (?), and at £5.5m DCD Media looks cheap.

Over time I’ve come across some weird and wonderful valuation calculations and projections. It does appear to me that some stock prices are once again getting well ahead of themselves, and that a bubble is forming amongst some ‘hot’ stocks. Mr Market has a short memory. Buyers beware!

Be particularly cautious when companies or pundits talk about ‘hidden value’. Anybody remember Planestation? (previously Wiggins). I remember pundits talked about ‘hidden value’ in Planestation, but a look at the balance sheet just indicated negative asset value (warning keep clear!). Unfortunately, the value of this company was so well hidden that nobody was ever able to find it, and it wasn’t long before the company went into administration.

Anyway, back to DCD Media. I noticed at the weekend that All3Media is up for sale. Apparently, their private equity backers are looking for 12 times forward EBITDA. Whether they get it or not, of course, is a different matter. However, it will be interesting to see DCD’s EBITDA figure for 2010. Using last year’s figure, at 12 times EBITDA we get a market valuation of £25.2m which is well above the current £5.5m market cap.

On a totally separate note, Indigovision have just announced a 3700+ camera project at Delhi airport on their website. Apparently it’s the largest IP installation in Asia. Indigovision continue to win prestigious contracts, and I believe that the company is modestly rated given the outstanding growth it has achieved over the last few years.

Be lucky.

A sudden BURST of activity

The title of the first article I wrote on my blog was ’magnificent micro-caps’, and aren’t they just! At close of play last night Burst Media was languishing at 5p, but early this morning the shares had risen almost 5-fold to just shy of 25p.

Why, because they received an offer for the company from BLINKX at around $30m (£18.5m) or the equivalent of 25p per share. I’d suggest a near 400% rise in the SP in 1 day isn’t bad. That’s the appeal of buying micro-caps!

At the same time they released the offer news, Burst also released their preliminary results. Having given them a once over, they make for interesting reading. BRST made an operating loss of about $3.3m and an EBITDA loss of $1.2m. They have about $21m in net assets (or around $18m if you strip out the goodwill and intangibles). Cash on the balance sheet is $0.4m. Given these figures, I would fully expect BRST shareholders to take up the offer. At $30m it would seem a very generous offer from BLINKX.

It has certainly given me cause to smile because I can’t help but think about BLINKX’s valuation of Burst media, and compare it to the current valuations of two media companies that I currently hold. If you care to look back at the blog entitled, ‘It’s fun to look at the E B I T D A’, then you can briefly compare BRST’s figures and balance sheet with those of DCD Media and Avesco; currently sitting on market capitalizations of around £5.5m and £25m respectively. 

My conclusion suggests that both DCD and Avesco are either in the order of 10 times undervalued or BLINKX are paying too much for BRST. Anyway, whatever you decide, I for one won’t be selling either DCD or Avesco in the foreseeable future. Although sometimes, as BRST shareholders have just discovered, you can suddenly receive an offer that you just can’t refuse.

Speaking of Avesco, I received a nice dividend payment from Avesco on Wednesday. I do like dividends for the following reasons:-

A chunky payout enables me to re-invest my money in the company or elsewhere without having to sell anything.

It tells me that management are confident going forward, and don’t need all the cash the company has just made.

It shows management care about and wish to reward loyal shareholders.

Avesco have just re-introduced a dividend payment, and I expect, given their forward looking statements, that this payout may increase in 2011. It certainly will in 2012.

If they eventually receive a payout from Disney, then investors may be able to look forward to the ultimate Special Dividend. When they won the jury case last year, a press report said that the Directors had no plans for the money other than to return it to shareholders. Now that would be a bonus!

Finally, shares in SUN keep on rising, but just like Avesco, although this one has already multibagged for me, I’ve absolutely no inclination to sell any. Results are due on Tuesday 19^th April, but the sudden sharp rise in the share price makes me wonder whether there is news in the offing. That said, with forecast earnings of about 0.6p for 2011, even at today’s close this year’s forward p/e is less than 14. For a profitable little growth company with a healthy balance sheet and exciting prospects, it’s hardly expensive. In fact, if you compare it to BRST (different sector I might add) then you could argue that the company is hugely undervalued.

It’s all great fun, happy hunting!