Densitron - still no good reason to re-invest

Densitron, a company that I have commented on in the past, released a statement this week concerning the settlement of a claim made against the Company by the landlords of a property in Newcastle previously occupied by a former subsidiary, Densitron Ferrograph Limited.

In the past I have held shares in Densitron, but decided to sell when this case appeared to be dragging on and trading had deteriorated. Below you can see my comments back in August:-

 http://michae1mouse.blogspot.co.uk/2013/08/updates-ubc-media-densitron-ddd-group.html

"Densitron was a company in which I held shares, but I did sell in June following a poor trading statement. You can follow my reasoning in the blog below:-

http://michae1mouse.blogspot.co.uk/2013_06_01_archive.html

Following Friday's interim statement, I have no appetite to repurchase any shares in this company.

Revenues decreased by 6% whilst orders booked fell by 7% and the company reported a £315,000 loss.

Whilst the company sounds positive about the second half, has a reasonable balance sheet and is paying an interim dividend of 0.1p, I am nervous about the outstanding writ against the company. This matter has been dragging on for many months despite their attempts to resolve the matter out of court. A date has now been set for the trial on 8th December. This suggests to me that the Landlord has a very strong case, and any settlement either inside or outside of court could (imo) be very punitive for Densitron.

I'll continue to monitor the situation, and never say never, as the saying goes, but allied to recent inconsistent trading this one will remain on the monitor."

Whilst the management state that "the settlement is in the best interests of the group", no financial details have been disclosed and it appears that Densitron are still lumbered with the lease payments until an agent can find a suitable tenant.

I am guessing that the settlement is a hefty one, and then of course they will have incurred legal fees and are still liable for the rent of an unoccupied property.

In response to the news, the share price did move up a few percentage points surprisingly, but whilst Densitron's market cap. is very low, I can't see anything to get excited about and it will be interesting to see their balance sheet when they release their finals.

I really find it most odd that they state:-

"It was agreed that the details of the settlement would remain confidential but in essence the Company has agreed to a settlement amount and the rectification of the lease at the current market rent. "

Are they hoping to keep it secret forever? Will they just ignore it in their final results?

Perhaps they've forgotten that their shareholders are part owners of the company. Bizarre.

Personally, I wouldn't touch this company with a bargepole in the future following this fiasco.

How much longer before the current Bull Market runs out of steam?

Well it's full steam ahead for the current Bull market which has been running for five years now. Surely it's time for a correction. Well possibly, but as I commented back in February, I think that this Bull run might continue well beyond some of the most optimistic forecasters predictions.

Why do I believe this? For very simplistic reasons. Firstly, the 2008-2009 market capitulation was extremely severe. Stock prices were pummelled so much that some quite ridiculously low valuations were created by investor panic and forced selling. At the time, I stated that I believed that this had created the investing opportunity of a lifetime, and for many investors this has certainly been the case.

Whilst some stocks are clearly running ahead of themselves, and it's becoming more difficult to find outstanding bargains, they haven't completely disappeared and with a few exceptions, valuations of many UK companies are relatively modest. Euphoria is still some distance away.

Significantly though, true global economic recovery is yet to appear, and when it does earnings for many UK companies may rise significantly. During the recession, companies that survived have become leaner and more efficient and some have benefitted from competitors going to the wall.

Furthermore, low interest rates still prevail. Where else do you invest your money? Gold, coins, wine...? No thanks.

Finally, bears will argue the risk comes from the withdrawal of quantitative easing in the US and interest rates rising sooner than expected. Surely these circumstances will only occur when it is clear that economic recovery is assured and sustained. Doesn't this bring us back to improving earnings for many of our leaner and meaner companies? Indeed many companies on modest earnings ratings may look cheap again as recovery takes a stronger foothold.

Anyway, we shall see, and as stated in a previous blog:-

http://michae1mouse.blogspot.co.uk/2013/02/datong-up-for-sale-markets-overheating.html

"As a long term investor and stock picker I'm only ever concerned whether or not the stocks I hold are undervalued or overvalued, if it's the former then I continue to hold and acquire and if it's the latter then I sell."

There is a good article written in the FT today by Dominic Picarda.

http://www.ft.com/cms/s/0/9e8d7730-3c97-11e3-86ef-00144feab7de.html#axzz2iqAZvLz8

"I would not be at all surprised if UK equities produced double-digit annualised returns over the coming five years".

Anyway, it's a bit of a mugs game predicting the direction of the markets and my next blog will stick with my stock picking experiences and news stories that have been released recently.

Trakm8 acquires Box - a good deal?

This week TRAKM8, a company that I have mentioned several times on my blog, announced a proposed reverse takeover of BOX TELEMATICS, one of the UK leading providers of fleet management systems. The acquisition comprises an initial cash consideration of £3.5m plus the repayment of a Director's loan of £750,000.

The acquisition is being funded from TRAKM8's cash reserves, a new debt facility of £2.5m and a subscription by the Directors for new ordinary shares at a price of 22p to raise £720,000.  They will also raise £1.35m through a placing at 22p for additional working capital purposes.

Is this a good deal for TRAKM8's  existing shareholders?

On the face of it, it looks like an outstanding deal.

Firstly, BOX brings with it £8.4m in revenues and profit before tax of £850,000 (2012). The combined group will boast revenues in excess of £13m (based on 2012 figures) which I would expect to rise substantially in future years. I'm not going to guess at profit, but suffice to say, with the enhanced business opportunities and cost savings for the enlarged group, I would expect profits to be very healthy indeed alongside strong cash flows.

The market reacted very positively to the deal and the share price leapt up over 40% on the news, but even at 29.25p per share the combined group has  a market cap. of just £8.5m, and looks a snip at that price to me.

Both groups have a very strong and healthy recurring revenue base, and TRAKM8 will also have access to BOX's manufacturing and assembly facilities which should help to improve margins for the combined group. In 2012 TRAKM8's gross margins had improved to 72%. In addition BOX brings with it a Blue Chip client base.

The enlarged group will further benefit from synergies, cross-selling  opportunities and scale advantages.

I like TRAKM8's management and believe that they have secured an excellent acquisition here to enhance their organic growth. The Director's take relatively modest salaries whilst seemingly always purchasing shares above the market price, indeed the current placing with institutions and Directors was at a small premium to the share price before the announcement.

They also have a substantial amount of 'skin in the game' and hold around 55% of the enlarged group's share capital. Such a large stake would make me nervous in certain circumstances, but the great thing about this company is that the Director's have consistently shown that they act in the best interests of all shareholders.

Finally John Watkins, Chief Executive Officer had this to say about the deal:-

"The acquisition of BOX is a significant milestone for Trakm8, bringing strong financial and strategic benefits as it will enable us to exploit the growing demand for vehicle telematics in a fragmented market place.

 

"We have been delighted by the positive reaction to acquire this profitable and complementary business and furthermore are pleased to welcome a number of high quality UK institutions to our share register."

 

As ever, no advice is intended or given.