KBC Advanced Technology

Many of my regular readers may have noticed that I haven't been posting as regularly as I did when I first started. There are essentially two reasons for this. Firstly, I have been very busy in recent months leaving me little spare time to post and secondly, as regular readers will know, I am essentially a micro-cap investor. I tend to try and buy shares in these companies when there appears little interest from either private or professional investors. In short when I believe a company is unloved, undervalued and overlooked, but has the potential to achieve significant growth over the next few years. However, it is often more difficult to buy reasonable quantities of shares in these companies because of liquidity issues. It can therefore take me some time before I have finished buying sufficient quantities where I am then in a position to reveal which companies I currently hold. Clearly, I am not going to risk alerting other investors to possible opportunities before I have built up my own holding. Although, I suppose in practise I have largely found that few private investors are prepared to invest at the stage that I tend to, and certainly professional investors don't join the fray until the companies have achieved a far higher market capitalisation, and hence have become more liquid. The exceptions of course are where a company requires extra capital through an equity issue.

Anyway, I have found time to post today albeit about a company that I don't hold shares in, but which I believe may provide a good trading opportunity and long term investment depending on your preference. My interests lie elsewhere at the moment and hence free capital is currently tied up.

The company in question is KBC Advanced Technology. This is an outfit that has been on and off my radar for a number of years. KBC describes itself as, "a leading consultancy and software provider to the global hydrocarbon processing industry".  In truth I'm a little disappointed that I didn't free up some capital to at least take advantage of a trading opportunity that occurred in the recent sell-off when oil prices suffered a sharp decline and KBC was dragged down on sentiment. Hey-ho you can't win them all, and I suspect there is still significant upside to come anyway.

If I had to pick just one reason to invest in this company it would be because in recent weeks and months the Directors have been buying shares like they're going out of fashion. Not piddling little amounts either.

KBC's final results were issued mid March, and they make for interesting reading. Revenues were up 17% with adjusted profit up 13% at £9.5m, although reported profit was down at  £6.7m from £7.1m the previous year. You clearly take your choice as to which figure you care to use for the p/e ratio, but it might be reasonable to take the adjusted figure since this strips out depreciation and amortisation and arguably provides a clearer picture of the underlying business. Using this figure gives a historical p/e ratio of 8, and given a pretty bullish outlook with the pipeline of contracted work up by 13% to a record £88.0m, on the face of it the shares could be considered cheap at the current 107p.

The balance sheet looks pretty sound with a cash pile of nearly £12m and negligible debt. Net assets stand at £66m against a market capitalisation of £78m, although around half of the NAV is goodwill and intangibles which as I have opined before are worthless if a company gets into trouble, however unlikely it is in this case. If I had a concern it would be that net cash used in operating activities amounted to £6m, although this issue is addressed to an extent in the main body of the report.

Since the results they have also announced a cooperation agreement with Kongsberg Oil & Gas Technologies which looks a potentially lucrative arrangement for both parties.

In conclusion, I believe on a balance of all the known facts and not withstanding the vagaries of the oil and gas sector, I am pretty convinced that the company and it's share price has significant short, medium and long term potential, and a look at the long term chart might point towards a price of £4+
over a medium/long term time frame, highs last reached back in 1998, who knows?

P.S. Still holding on tightly to my shares that I have mentioned in the past including Avesco, Trakm8, Belgravium, Angle etc. I believe all of these companies may have only just started their significant growth stories despite recent gains in their share prices. "Mighty oaks from little acorns grow". Here's hoping anyway.

Virtual trading portfolio update

Some of you may remember that I started a virtual trading portfolio back in June 2014, I then updated the performance on two separate occasions to assess it's performance:-

http://michae1mouse.blogspot.co.uk/2014/06/vesuvius-set-to-erupt.html

http://michae1mouse.blogspot.co.uk/2014/07/virtual-trading-portfolio-update.html

http://michae1mouse.blogspot.co.uk/2014/07/addition-to-virtual-trading-portfolio.html

In the short term, the performance of this small portfolio that I had started was pretty poor, and as a consequence I decided that it had just confirmed that short term trading was not for me. I am by nature and experience a long term investor (micro-caps mainly). Certainly a long term buy and hold strategy has worked well for me, although you have to except that not all of your picks will be star performers.

I thought I'd just quickly review the performance of my virtual trades some ten months later to see how they had performed.

Virtual portfolio                 Price paid                      Current  price               Price sold

Vesuvius                            £4.57                             £5.205(+13.9%)
Vodafone                           £2.07                             £2.24(+8.2%)
Morrison                            £1.93                             £1.98(+2.6%)
Rightmove                         £22.96                           £30.51(+32.9%)
Given a equal weighting to each investment the current return is 14.4%. Not too bad given a somewhat dismal start. What does this prove? Well it doesn't prove anything particularly, but it's further evidence to me (not that I needed it) that buy and hold is by far my best strategy, with at the very least a medium term view.

For those that missed it, you might also be interested in the performance of this virtual portfolio:-

http://michae1mouse.blogspot.co.uk/2011/08/very-little-research-but-are-these.html

http://michae1mouse.blogspot.co.uk/2014/01/hopeless-cases-portfolio-vs-ftse-250.html

It's worth noting that since I last reported, EMG (Man Group) is now above the original purchase price and most of the others have gone from strength to strength.

Fool me once shame on you, fool me twice shame on me!!!!

Regular readers of my blog will remember my posts about a company called DCD Media. DCD Media was an awful investment on my part, but it did teach me some invaluable lessons and in truth you learn far more from your mistakes than you do from your successes. I have a "virtual" fondness for the ADVFN BB investors in DCD Media, and their recent optimism and the current strength in share price prompted me to take a second look at the company. Please bear in mind that less than 20% of the company is in free float. In other words, the shares are extremely illiquid. Following some exchanges of opinion on the DCD bulletin board (http://uk.advfn.com/cmn/fbb/thread.php3?id=32717631), I am posting my final response to shareholders:-

I said I wouldn't post again, but given the optimism expressed on this BB, I've had another look at the interim accounts to see if this particular leopard has changed it spots, and whether or not I'm missing a massive opportunity.

Here are my thoughts. With great respect to all shareholders please consider the following extracts from the report. Remember Craven is hinting that profitability is just around the corner.

Firstly, last year's gross margins were 33%, at the interim stage they had fallen to 26%. They may recover to nearer 33% for the full year of course, I don't know? Anyway let's be generous and assume that they do. We'll assume that admin expenses come in around £6m(again generous indeed). To break even, they need to make over £18m in revenues. Revenues fell at the interim stage and were around £14m last year. Admittedly the market cap. is a measly £2.2m, but then how much is a loss making company with negative current assets worth?

Next up. Here is a classic from the DCD accounts:-
"Funding of GBP0.8m secured in the form of new convertible loan notes from the Group's largest shareholders, including GBP0.6m issued to Timeweave Ltd in settlement of amounts relating to accounting and director services."

They have borrowed near £1m to pay the Directors and "settlement of amounts relating to accounting". Given what I have said above how often are they going to have to do that? Oh dear, have a look at previous accounts and my previous reports. Leopard and spots instantly comes to mind. Still not to worry, the loan notes only carry a modest interest rate of 10% and can be converted into equity at £1 in May of next year (current share price £4.875). Good grief.

"UK productions, consisting of September Films UK, Rize USA and Matchlight, contributed GBP3.2m to revenue but made an operating loss of GBP0.1m."

As mentioned in previous posts, they make s*d all from productions.

"September Films USA contributed no revenue to the Group in the period as a result of the cancellation of the Bridezillas series."

At least the Directors got paid. Note the heavy sarcasm which pervades this report.

"DCD Rights has performed well in the first half of the year although revenue has decreased by GBP0.3m to GBP2.2m. Gross margin has remained constant between the periods. A focus on content acquisition in the first half will benefit sales in the second half and beyond."

A long way to go with this then given that distribution is where their focus will lie. £6m in revenues at year end possibly? What is the gross margin and did they make a profit? In fact there is no mention of margins or profits for the separate divisions only revenues. To be frank DCD Publishing and Sequence Post are hardly worth mentioning since they contributed a combined £0.6m in revenues and again we have no idea about margins or profitability.

Despite Craven's bluster about:- "the foundation is laid for accelerated growth" and "These developments, we believe, position DCD Media well for a return to profitability". I can find no evidence within the report to suggest that DCD is any different to how I remember it. Loss making and still some way off ever making sustainable profits.

Still they could always sell September Films USA. What price a production company that doesn't produce anything and contributes zilch to revenues?

DCD, a trader's punt maybe, but personally I wouldn't hang around.

As ever AIMHO and happy to be proved wrong.

Michael.

previous blogs re:DCD Media

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