Small Cap Report (28 Feb) - BEG, ZYT, IPEL, SFR, INS, HAYT, FIF

Pre 8 a.m. comments

Begbies Traynor (LON:BEG) have issued a reassuring trading statement. It is the only pure play insolvency practitioner on the stock market. You might imagine that they are busy, given the depressed economic circumstances, but this is not the case. A combination of near-zero interest rates, and a reluctance from banks to recognise bad debts, together with political pressure on HMRC to give companies more time to pay rather than forcing them into insolvency, has made it an artificially quiet time for corporate insolvencies. BEG has therefore had several rounds of cost cutting (mainly reducing its staffing level), which has enabled it to maintain a healthy operating profit margin in the teens of percentages.

Their Q3 trading update today confirms that trading is in line with expectations, that net debt is "comfortably within the Group's banking facilities", and that full year expectations are unchanged, although dependent on trading in the important Q4, and supported by a lower cost base.

So that sounds pretty reassuring. I've been buying more BEG recently, because it's a share I like for the 6.2% dividend yield, and a PER of only 6.3 based on current forecasts. which are for 5.65 EPS for the year ending 30 April 2013. Furthermore, BEG should benefit from an improving economy, which is likely to see increased levels of corporate insolvencies, as banks finally pull the plug on the huge number of zombie companies which are only servicing the interest on their debt, but will never be able to repay the capital.

I also flag up the selling overhang from Caledonia Investments is now almost cleared - they reduced to below 3% this week, and hence the shares could well rebound when that selling pressure finishes.

The high level of debt at BEG does not concern me, as it is simply an unsecured bank facility to finance the extended debtor book which is inherent with insolvency work. I'm hoping to see BEG rise to 50-60p, once the seller is cleared, from the current 35p.

Zytronic (LON:ZYT) is a company I like, having met them last year. It is a maker of specialised touch-sensitive screens for ATM and vending nachines, and anything else which needs a touch sensitive screen. They specialise in larger, and unusual shaped screens.

ZYT have issued a positive-sounding AGM trading update. H1 (to 31 Mar 2013) was already expected to be slow relative to a strong period last year, but they give upbeat comments (but no hard figures) on order intake, and that a delayed product roll-out has now resumed. I'm waiting for a more attractive entry point for shares in ZYT, as they look priced about right to me at 320p, which is for a PER of just under 14.

Post 8 a.m. comments

I see that shares in Impellam (LON:IPEL) have surged 11% to 395p on publication of their 52 week results to 28 Dec 2012.

They have also announced a 35p special dividend, which is excellent news, and shows a focus on shareholder value, which I like.

Adj EPS is flat at 59p, and they have net cash of £16.8m. It's difficult to see why this buisness is on a PER of less than 10 (which implies a share price of 590p). They seem good value, even after the big rise today, at 395p (which will reduce to 355p after final & special dividends paid). Worth a deeper look, in my opinion.

I mentioned on 19 Feb here that shares in Severfield-Rowen (LON:SFR) had got off lightly, because their very poor trading, loss of financial control, and risky geared balance sheet, should have triggered a far greater fall in share price. I suspect the share priice might be being artificially supported, and would have no hesitation in selling (if i held, which I don't) on today's news of a 23p 7 for 3 Rights Issue. This forces existing shareholders to stump up the fresh cash, but there is no justification at all for the existing equity being at such a premium (the price is now 68p, which is bonkers). So I suspect the premium is likely to evaporate once they've got the Rights Issue away, and hence I believe by far the safest action would be to sell now, as the post-Rights price is likely to gravitate back to the 23p Rights Issue price.

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They talk about getting the operating margin back to 5-6% in the long run, so that means only about £12-15m operating profit, so perhaps £8-10m earnings after tax & financing costs, and a steel fabricator is never going to be a on high PER, so I just can't see any great upside here at the current price of 68p, which is a market cap of around £60m. Plus the £43m fund raising, and you're over £100m valuation at the starting point. It just doesn't stack up at this price, in my view.

Instem (LON:INS) seems to be going paces, and is worth a look. The shares have shot up 38% today to 139p, on a contract win with the US Government, for an initial $870k in year 1, wiith potential to extend both the timescale and number of sites. This was won on a competitive tender. Impressive stuff.

With 11.8m shares in issue, that look like the market cap is just over £16m, which giiven that INS was already making around £1m profit p.a. before this latest contract win, suggests to me that it could be an interesting one to research in more detail.

Shares in Hayward Tyler (LON:HAYT) have shot up 23% to 31p today, on the back of results for the year ended 31 Dec 2012.

The balance sheet looks weak, with £9.7m in net debt, although they refer to new financing arrangements in the narrative, which included £5m raised from it major shareholder. I note that HAYT have also announced they are changing their year-end to coincide with that of their major shareholder (what?!!!) and to give a more balance H1/H2 split. It looks to me like they are in the pocket of 41.7% holder, MBE, so it therefore doesn't interest me.

 I rarely, if ever, invest in food manufacturers, because it's a sector which requires heavy capex, and being an oligopoly the supermarkets squeeze out any wafer thin profits that manufacturers manage to make. Plus they hold the ultimate threat of withdrawing business, which can kill off a manufacturer on a whim of a major customer. Risk/reward is all wrong in my opinion.

However, Finsbury Food (LON:FIF) looks worth a look after announcing today what seems like an excellent price of £21m achieved for the disposal of its "Free From" business. This fixes the main problem which FIF had of excessive gearing. It looks like this will reduce group profit by £1.4m with the disposal of the Free From business. That looks like a sensible deal to me, and greatly de-risks FIF shares.