SUN will keep shining until at least 2013 (apparently)

Well that was an interesting week in the run up to the Bank Holiday (UK)!

On Tuesday 21 April, Surgical Innovations (SUN) released there 2010 final results. You may recall that I bought shares in Surgical Innovations for less than 2p (See blog entitled "Will (the) SUN keep on shining?"). After the results, I think it's fair to say that (the) SUN is still shining, and will be for some considerable time to come.

"We remain confident about the future growth prospects of the business for the remainder of 2011 and further into 2012 and 2013 as new products are launched towards the end of this year and the increasing traction with OEM customers gains momentum. "

A great forward looking statement, and I continue to hold all of my shares in this company.

The 2010 results were impressive with a massive hike in profits and an EPS slightly above expectations at 0.48p, which puts the shares, currently at 8.65p, on a historic p/e of 18. Given the growth prospects I consider the current valuation to be cheap, in fact their broker has set an intial price target of 12p.

What excites me most about Surgical Innovations is the accelerating growth coupled with a rapid improvement in margins (set to improve further in 2011). It also appears that they are increasingly gaining traction in the US with a marked increase in enquires.

It was a very bullish report and I shall sit tight. Given the consolidation in this sector there is also the outside chance of a bid. Either way, it's looking increasingly like a very long term hold for me.

Elsewhere, I see ASOS continues its heady climb, and now stands at £24.10. In my very first article I mentioned that I saw ASOS at 15p, and thought about a £5000 investment. I didn't buy any shares though. If I had then the current value of that £5000 investment would be £803,333. I'll just go and weep into my coffee for a few minutes! Just joking, and well done to those that bought early and held on.

I also see that BLINKX leapt another 17% yesterday, taking Burst Media with it (now 29p). Both these companies shares have multibagged in recent months. BRST perhaps being the most spectacular when BLINKX bid for the company. BRST sat on a SP of 5p before the bid, and has become a six bagger in a matter of weeks. Don't you just love small cap companies when they behave like those mentioned above.

In my last article I wrote about why I never short shares. Events over the last few weeks certainly haven't caused me to change my mind. As I said in that article, companies like ASOS can remain on a very high multiple for some considerable time. ASOS continues to defy gravity.

I have also been watching Avanti Communications where there appeared to be a struggle going on between the bulls and the bears. An impressive trading statement has handed control back to the bulls, and the share price has recently shot back up above £5. As mentioned before, there had been heavy Director buying in this company recently. It's worth remembering that these are the guys with insider knowledge, so when they put their money where their mouth is, it shouldn't be ignored lightly.

Finally, a quick mention of Kenmare Resources. KMR released their final results recently, and after a small blip in the share price, I notice that it is still hovering around 50p. For those that place great store on chart patterns, from my less than expert interpretation, it appears to remain in an upward trajectory. I still think a bid will arrive for KMR well above its current valuation. However, I might add that I am not a holder of this stock, and haven't read the report in any detail other than a cursory glance.

As ever, good luck to all investors, good health and may you all prosper!

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.