The beauty of small company research and investment is two-fold: they are often thinly followed by the professional circuit which results in readily exploitable gaps between recognition of quality and appropriate pricing of that quality; and the turbo effect on price (beyond immediate worth) of the multitude of share tippers in the media.

Three companies previously mentioned here - Ascribe plc, Interquest plc and Empresaria plc – have benefited from one or the other of these tendencies. Now comes another, Adventis plc, this morning featured ("Buy at 62p"!) by mass pulp finance publication “Shares Magazine”.

It so happens this firm is another followed carefully by the scribe displaying, as it did until very recently, a profile closely matching what he generally looks for in any potential equity and business investment. Moreover, it operates in a market requiring some expertise to enter, has significant third party backing (equity placements) and has previously demonstrated excellent mass media contacts (ie exposure to potential investors). For the interested, the Adventis website contains a temperate and well-constructed analyst report from Robert Sanders of Arbuthnot Securities.

The point, however, is that in this case “Shares Magazine” is tipping a strong business but a share already extended by investors who did the thinking themselves, and a while ago. If previous tip trends hold, come next Tuesday retail investors will have pushed the price up to a point at which it becomes difficult to see further value in the equity until the business itself catches up with the enthusiasm.

Exhibit 1: Adventis plc 3 month price & volume chart


On the other hand, in these liquid times anything seems possible.

Usual disclaimers.

NB: The scribe owns equity in Adventis plc, Ascribe plc and Empresaria plc

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Abbot Group plc reported this morning. As posted in September at the time of the interims, this is a firm the scribe wants to like and thus follows carefully.
Unfortunately, and despite impressive prose accompanying the full year results, the numbers are troubling and the group is approaching Friar Tuck-like fitness levels. Retained earning are now only circa 4% of total assets; working capital has turned negative; the earning power (EBIT) of its assets has again worsened; and the company’s equity is now, for the first time in 4 years, worth less than its total liabilities.
The market may react positively to the huge rise in turnover (which, by the way, has halved as a function of total assets in the last 4 years). But on these data Abbot is a company under financial stress if not probable distress.
The scribe does not own Abbot equity. But, outside chance of a Haliburton bid or not, if he did he would be selling out such has been the degradation of its internal efficiency and productivity since 2003.

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A recent (UK version) starter question on the quizz show "Who wants to be a Millionaire" asked the contestant to identify the colours of the Romanian flag. Stumped, the hopeful asked the audience. They plumped in the high 30% range for the right answer and split most of the difference between two other suggestions. A small geographically-challenged 10% minority chose something like fluorescent green.

As far as this scribe knows, audience members are not obliged to press a button if they don’t know. Yet over half of them felt the need to say something wrong anyway.
This from today’s WSJ.com:
"Most economic forecasters in a new WSJ.com survey believe recent turmoil
in the subprime mortgage market is likely to spread to the broader mortgage
market…But they still believe the US will avoid a recession or even a
significant rise in unemployment"

Now, the scribe does not want to be the perma-cynic but the more interesting question is how many of the 60 economists surveyed had been sitting on a "shallow dip" forecast since last year. That will surely have driven their responses more than the recent deterioration in the subprime market. Changing one’s mind is more difficult than interpreting awkward facts to match existing prejudices.

And of course a "don’t know" answer is generally professional suicide although it ought to reflect the uncertainty of the situation rather than the competence of the speaker. So it appears that, as with the Millionaire contestant who would not trust the wisdom of crowds, most of the WSJ.com survey respondents have chosen to run with another lifeline – the 50/50.

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NCP chronology:

1998: Cendant Corp buy for £810m
2002: Cinven buy for £820m
2005: 3i buy for £555m
2007: Macquarie buy for £790m

Cumulative unadjusted "headline" capital gain, 1998 to 2007 = £(20)m
Cumulative adjusted gains (estimate, see text), 1998 to 2007 = £745m


When Cendant bought NCP plc's car parks for £810m in 1998 they were not expecting to become forced sellers 4 years later. But accounting scandals and class action lawsuits don't come cheap. Fortunately (for them), they had in the interim stripped out the car recovery service Green Flag from NCP netting £250m; and in 2002 the auction of the rump was offloaded to private equity group Cinven for £820m.

Cinven then did some serious financial engineering and business development. They sold and leased back £600m of NCP property; they pushed into managing local authority car parks; and they refinanced circa £100m of debt in order to withdraw their own equity, originally worth £140m. NCP turned over £165m in 1997. By the time Cinven sold it had nearly tripled. In all they made £280m on their stake when they sold to 3i in 2005 for £555m.


In the 18 months 3i have owned NCP they have, well, installed a new finance director, bought some IT gear and, umm, well that’s about it. They did, however, have the advantage of having beaten Macquarie to the deal in 2005 and knew the Australians were still tumescent at the prospect of owning car parks. Desire clouds judgement and Macquarie have now forked over £790m for essentially the same business they would not cough up much less for 18 months earlier.

Macquarie’s European Infrastructure Fund II (MEIF II), which is the vehicle buying NCP, was established only last May. It is a multi billion euro fund, and is hoping to raise more in Q2 this year. It is in buy mode – and with little choice in the matter: it failed in February to get hold of German metering company Techem for what would have been €1.4b. What chance fund raising if the boys don’t spend?

Macquarie may have faith in the NCP cash flows; they may also, though it would be remarkable, have seen flab and financial engineering opportunities that were missed by Cinven and 3i. But the truth is that there is not much major tinkering required at NCP: previous owners have cleaned house to the tune of £745m - and 30% of that was 3i banking asset inflation.

The inescapable conclusion is that in a loose monetary environment MEIF II had no choice but to deal, pay above the odds and close its eyes to the risks (including strike action from union chiefs describing the profits from the 3i sale as "obscene"). 3i handed them the bag and now Macquarie must hope that asset inflation continues long enough for them to hand it on in turn.

This was a trade, not an investment - and it does not look a too clever one at the moment.

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“Even to those only half interested, watching cricket is one of the best ways of avoiding working known to man.”

Douglas McWilliams, Centre for Economics and Business Research (CEBR), 9 March 2007

The UK’s CEBR estimate the Cricket World Cup will cost the UK £270m of GDP over the month of the competition. This, modestly, assumes England crash and burn thus not encouraging a great deal of domestic bookmaking activity.

The study also carries echoes of great economists’ work of the last 200 odd years; and three of those might have slightly nuanced views on the sporting clash compared to Mr McWilliams'. Here Veblen, Ricardo and Weber discuss the chances of Pakistan and the West Indies in the opening tie.

Thorstein Veblen: This competition is one manifestation of the many oppressions the ruling leisure class inflicts upon productive society. I will not be party to wagering on an event which is less useful than tilling the soil. The entire competition is pure and idle conspicuous leisure.

David Ricardo: Jesus Christ, Thorstein, lighten up and live a little.

Max Weber: It’s all right for you David – you are the lazy leisure class.

Ricardo: What, I should feel bad that I bet sterling bonds ahead of Waterloo and laughed all the way to the bank? I worked hard from age 14 to 42. Why shouldn't I retire and enjoy my gifts and those of society?

Veblen: [mutters] Bastard.

Weber: The idle lifestyle is sinly. Work, reinvest and more work is the name of the game. Had you converted to Protestantism instead of Unitarianism you might understand. And not swear.

Veblen: Sinly? Max you moron. Religion is another comprehensive waste of resources. But what should we expect from a guy who married his cousin.

Ricardo: The pair of you are truly killjoys. Do neither of you enjoy any idle pleasures?

Weber: David, look, I have, uh, latent parental issues on that count.

Veblen: Yeah, and David, I think my record with, ahem, the ladies speaks for itself.

Weber: But didn't married life with you contribute to your second wife’s being institutionalised?

Veblen: I meant all the other ladies. And Max, glasshouses bro, glasshouses. Anyway, to return to the betting – I will not participate.

Weber: Neither will I [whispers guiltily] but Pakistan look to have better form.

Ricardo: Maybe but they bat poorly in the Caribbean. And Chris Gayle will click at home in Sabina Park. Windies to upset the odds - and Jamaica to party hard tonight.

Yes, the scribe is excited. Caribbean upbringing...

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Live in France long enough and there is a phrase you will come to recognise as one of the nation’s favourites: “Oui, mais le problème c’est que”. Upon hearing it find something comfortable to repose in for solutions and proposals generally owe existence to an insatiable need to discuss and intellectualise at a length and in ways not imaginable to other cultures. Implementation, a frequently unexpected by-product of the practice, transforms intellectualisation into something called back-biting.

These are traits doubtless on extravagant display at UMP (M. Sarkozy) and Socialist (Mme. Royale) headquarters just now because a third candidate, centrist M. Bayrou of the UDF, is storming the election party.

Exhibit A: Poll trends for French voter intentions in the 1st Presidential round

Image from today's Wall Street Journal

For students of probability the betting is fascinating. Most odds are aimed at who ultimately will become president. However, there are two rounds of voting: round one separates the top two candidates; and round two is a straight runoff between them. A ton of money has already been laid on the assumption that M. Sarkozy, the ultimate odds-on favourite, will face Mme. Royale in the runoff. Now comes the finding that should rising star M. Bayrou make the cut he will beat M. Sarkozy comfortably as the left theoretically flounces his way post-Royale exit.

Yet Bayrou’s UDP has many links to Sarkozy’s UMP including an election pact at the last legislative elections not to compete and split the vote in certain constituencies. This tactic kept Socialists out but implies that a competing right and centre splits its vote in the first presidential round (and the trend of the graph appears to support the assertion). That would favour passage to round two for Mme. Royale. But who would be her competition?

Mme. Royale's policy pronouncements, such as they are, tend to involve throwing a government cheque at something. With public debt at 66% of GDP this would be a neat trick to pull off. M. Sarkozy, on the other hand, is pretty much all things to all people. This might be pragmatism; or, as was possible to conclude from his efforts last night here on national television, it might be perceived by voters as venal desperation to collect votes.

Then there is married at 22 (or thereabouts) with a flock of children, gentleman-farmer type Bayrou portraying himself as a centrist. Unafraid to borrow (steal) the best (voter appealing) ideas from left and right he has a set of concrete proposals that tap a broad seam of the electorate.

With up to 40% of poll respondents pleading “undecided” all results are possible. But that money on M. Sarkozy should definitely not be rated odds-on. The first round is far from done and dusted.

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Ascribe plc, mentioned here on 9 May 2006 at 34p and a security held by the scribe both for its investment merits and as a hedge against troubled fellow holding iSoft plc, today saw Hargreave Hale Limited take a 4.85% stake at circa 50p.

Is this notable?

Private stockbroker Hargreave Hale is 35% owned by Investec, the specialist South African banking group. But there is no obvious connection between Investec’s corporate clients and a medical software maker like Ascribe. The significance of this purchase, besides putting Ascribe plc more firmly in the investing public’s eye once the likes of Citywire.co.uk report the purchase, probably lies elsewhere.

Hargreave Hale is also investment manager to four UK unit trusts, the relevant one in this case being Marlborough UK Micro Cap Fund. The manager of the fund is Giles Hargreave; and software is by far his favourite sector amongst micros. Nothing especially unusual there.

However, the timing is surprisingly confident: Ascribe reports interim results on 21 March and buying ahead of results is not always a terrific strategy. Additionally, the magnitude of the holding is striking (at least on the face of it): Hargreave Hale now own 4.85% on top of the 5.89% Marlborough Fund Managers Limited already holds in its own name. Together theirs is the third largest shareholding.

According to the blurbs Marlborough make available, the Hargreave style is aggressive, detailed and usually involves company visits. And so it appears he and the team left Ascribe HQ on their last visit feeling comfortable enough to double-dip (although this is not the only possibility).

Small caps frequently explode - either upwards or downwards – in a way larger firms rarely do. Get the research right and the rewards are generous. And vice-versa. Readers may want to take a look and decide if this might be one of those situations.

Usual disclaimers.

_______________________

Update @ 9 March: Next day gain, net of spread, +15.6%. ASP mid-price at close = 59.5p

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Investor Non-relations

Thursday, March 08, 2007 | | 4 comments »


Regularly this scribe stumbles upon junior UK quoted companies and their brokers who appear to regard small/smaller investors as a source of funds only. The idea of earning those funds by answering questions, performing a tour d’horizon for contextual purposes or doing other than shutting ear-holes is, it seems, a risible concept.

If the scribe sounds bitter he is not. Merely surprised that investor relations departments miss such tricks. Even if they abhor dealing with non-institutional sized investors it is still the best way to empty their pockets and buoy equity. Well-deployed manners are amazingly profitable ("where are the customers yachts") and word-of-mouth publicity is astonishingly effective.

A small and unfairly chosen example (for polite but forgetful Scisys plc and their broker Bridgewell came a close second in a wide field) is Chelford plc. Tiny financial software installer and maintainer. Two profit warnings for the same delayed contract from what appear to be perma-optimists in management. Slight credibility issues as a result.

Yet the recovery prospects for the crucified equity look decent enough. Cue emails and calls to company and broker Charles Stanley for the barest financial details and context. Charles Stanley provided a well meaning run around ending at an unresponsive analyst department. For their part, Chelford may as well not provide contact details such has been the silence.

There are enough on-the-ball enterprises clamouring for funds that investors can just walk away from instances such as these. But it is curious that when some smaller firms' equity is shunned they still fail to embark on a bit of glad, as opposed to bitch, slapping with potential investors.

Enough spadework goes into research without investors being required to forge the tool as well; and it is tempting to conclude that inability to communicate reflects on management’s talent more generally.

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This was the thoughtful comment from IBEX Salad* when it comes to equity analysts recommending sales; and it is indeed a larger space than first glance reveals.

So here is a sop along the lines of yesterday's graph-without-a-speech. No predictions, mind. But if admirers of shipping-exposed companies like Clarksons plc, Frontline, General Maritime, Teekay or little emerging market choices such as Precious decided this was a reason to buy it would be unusual decision making.

Exhibit A: Baltic Dry Index vs US 10 Yr bond rates


The shift to bonds is not compelling. But it will cost maritime volume if it continues; and the Baltic Dry Index is in turn a useful proxy of global economic activity. Not to mention ship brokers' and shippers' prospects.

*Where else can one see the olive oil futures markets as applied at the grove-face?

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Downtime coffee-machine prediction of stock movements in the next 4 weeks: bounce, drop, drop, drop, bounce, [insert risk repricing shock of your choice here] drop. Have a lie down.

Exhibit A: US bond & stock correlation, 2001 - 2007



And if it happens, the scribe was not joking.

Prediction work now shifting to sporting events in the Caribbean.

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Probably the only other way to have had so many Australians read this blog yesterday (thanks to the FT and its excellent Alphaville) would have been to point out the attractive odds on shorting skipper Ricky Ponting in the forthcoming Cricket World Cup* (and then stand well clear). But first, a couple of additional, speculative observations regarding IBA Health.

Executive Chairman Gary Cohen is a deal maker; and this is a transaction he is keen to make. He’s come from a deal making company, Allco Finance Group, has the contacts to structure some sort of funding and (the balance of probability suggests) would not have publicly uttered as much as he has done if the funding was not ready. But it is hard to envisage much other than a paper deal involving significant iSoft asset sales; and convincing majority iSoft shareholders to go that way will take more than a silver tongue.

iSoft asset sales are, to this minority shareholder also, a seriously problematic part of the potential IBA deal – more so than the likelihood that the purchase would be paper-based. Why (in the presence, it still seems, of alternatives) should owners of 40% of an established market in the UK & Eire, plus a decent chunk of Germany’s, exchange some part of that stable 145 million person market for the political risk associated with many of IBA’s poorer emerging market countries? A complementary deal bears scrutiny, a substitutive (and essentially destructive) one less.

As an aside, based on information received (thanks, you know who you are), IBA may have the equivalent of a monopolies investigation to endure on their home turf if they acquire iSoft. The IT health market in Australia is not large in the grand scheme of things (21 million consumers), but it is fragmented. A monopolies referral – though a ponderable - might not, therefore, compel unexpected disposals.

* The 100pt line that Ponting ends the tournament as Australia’s top scorer is at 31-36, the shortest odds in the squad. Looks a decent bet since modern-great Ponting averages almost 42.5 runs in ODIs. However, his ODI average in the West Indies in a less stellar 26.4 runs. Course, that’s against the WI, not the likes of first round fodder the Netherlands and Scotland. And Ponting comes in at no. 3, so he will probably face them. Nonetheless, a little patience and resisting taking the under until the Super 8s stage might be interesting. Finding a hedge, though, would be sensible.

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