Small Cap Report (19 Mar) - MGR, HYD, XAR, PEN, NXR

Pre 8 a.m. comments

What an excellent evening, seeing many friends at the monthly Mello investor evening in Beckenham last night. It was very well attended, must have been approaching 100 of us there for dinner, and a very interesting talk from Gervais Williams, the guest speaker from Miton (LON:MGR) - I must look again at their results from yesterday, even though financials are normally off my radar. An experienced and successful small cap fund manager, keen to grow assets under management, strikes me as a pretty good place to start.

I was most encouraged by his value message, and his belief that reasonable value small caps, and steadily increasing dividends are the way to go, which very much validates my approach of eschewing investing fads and focusing on decent fundamentals.

Quite a few results this morning, so I shall report back shortly. Apologies for the slow start this morning, slightly muzzy head!

Post 8 a.m. comments

I am looking firstly at results from Hydro International (LON:HYD), which is a company making niche products for the management of waste and storm water. The shares have opened down 7p at 92/95p, so looks like results have not impressed. 

Adjusted EPS is reported down 1% at 12.7p, it has net cash of £2.9m and a maintained dividend of 3.6p, so at sub-100p that looks interesting to me. The big problem is in the Outlook statement, where they reiterate previous comments that, due to the ending of large contracts, "revenue & profitability for 2013 will be materially lower than 2012 levels".

So, it's really very difficult to value, and a PER basis on historic figures which are not going to be repeated, is not valid.

dotDigital (LON:DOTD) has been on my radar for a while, although I've not properly looked into it yet. The shares have come off 6% this morning on an announcement that they are winding down part of the business (their services division). However they do say that, "the core SaaS business continues to perform very strongly and we are optimistic about the outlook for the year". Sounds encouraging. If anyone has the time & inclination, do let me know what you think about DOTD.

I see that shares in Severfield-Rowen (LON:SFR) are down 41% to 42p this morning, so it must have gone ex-Rights. I'm negative on this company, as the market cap seems to me to already price in a trading recovery. Why pay up-front for a recovery that hasn't yet happened?

Xaar (LON:XAR) has announced spectacular results, with adjusted diluted EPS up 88% to 20.1p. The shares are up 11% to 388p, and in current bullish markets I could see them going higher. Xaar has net cash of £29m, about 10% of the market cap. The outlook statement is a bit vague, so it's hard to judge whether we should be excited about further growth or not.

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Results from Pennant International (LON:PEN) look very impressive too me - revenues up 40% to £14.5m, and profit before tax more than doubled to £1.6m. The final dividend has been increased 40% to give a total dividend for the year (including interim) of 2p, so a yield of about 3%. It also has net cash of £2.2m.

Basic EPS more than doubled to 4.46p. The shares were up about 60% yesterday, on news of a record sized contract win, but have eased off 5p to 65p this morning, perhaps as yesterday's euphoria wears off. The market cap seems to be around £17m, which is probably about right, based on my superficial skim of the figures.

It was interesting the way the market shrugged off yesterday's bank raid in Cyprus, although all investors I'm talking to are concerned that a precedent has been set of Governments effectively stealing depositor money directly from bank accounts. Where will it all end? On the other hand, maybe this is bullish for stock markets? After all, why would you want to hoard cash if the Government might just decide one day to help themself to it? Surely that reinforces the case for putting cash to work in assets such as shares or property?

It's getting more & more difficult to find value. Although I was reading a very informative note from Charles Stanley about Norcros (LON:NXR) (a share I hold), which really does look a good business (they make Triton electric showers, and tiles) at a very reasonable price. EPS if forecast for close to 2p, and the shares can be bought for just under 16p, a PER of about 8. There's a decent dividend yield, and net debt is only 1.1 times EBITDA. The pension deficit only requires overpayments of about £1m p.a. so it's not a major problem, and in any case they have some surplus freehold property. I could see EPS rising to 3p in an economic recovery, and the Charles Stanley note suggests a target price of 25p. It might take patience, as the shares seem to always be undervalued, but who cares? Value is value, and sooner or later they should re-rate.

There really are loads of results this morning, so I'm struggling to keep up. Results from T Clarke (LON:CTO) look poor. Underlying adjusted EPS is down from 7.4p to 4.4p, although their forward order book is up from £190m to £230m. It's very low margin work though, so doesn't really interest me. Low margin businesses tend to be accident prone on profitability, and hungry for working capital, as they get squeezed between customers wanting longer payment terms, and suppliers pushing for prompt payment. If you have little pricing power, then it's hard to manage that. At 55p the market cap is £23m, so it doesn't look good value on the 2012 figures. Also there's a fairly chunky pension deficit, so it's not for me.

OK, that's it for today. There are more results that I'd like to cover, but only have the mental bandwidth to cover about 5 companies, before all the figures begin to merge!

See you same time tomorrow.

Regards, Paul.

(of the companies mentioned today, Paul holds shares in NXR, and has no short positions)