Small Cap Report (1 Feb) - BEG, ANP, IGP, EKT, ACL

Begbies Traynor (LON:BEG) today issues the quarterly "Red Flag" report, which is always worth a read, since it gives an unbiased overview of the levels of corporate financial distress, and hence outlook for the economy overall. Today's report for Q4 2012 is striking in that it's remarkably upbeat, suggesting that companies which have survived this far are now recovering. Although consumer facing sectors are still in difficulties.

As regards the Stock Market, most of us are wondering how long this bull market can continue for? On the one hand the rises feel too far too fast (where have I heard that phrase before?!), but on the other hand markets have overall just gone sideways for the last 15 years or so. With small caps I'm finding plenty of reasonably priced companies (on PERs in the 8-12 range), but not many absolute bargains (PER below 8, with little debt).

That said, if you start factoring in increased earnings from an economic recovery, then many shares could end up looking very good value now with hindsight in a couple of years' time. So I'm inclined to stick with what I've got, and am fully invested at the moment.

Furthermore, there is also the hot topic of discussion at the moment about Bond investors starting to switch into equities, given the ultra-low yields on Treasuries. Anyone holding long-dated Treasuries is out of their mind in my opinion - not only have they got an artificially inflated (by QE) asset, but it's yielding virtually nothing, indeed has a negative real yield, plus we are probably heading for higher inflation as the inevitable result of money printing. So they are sitting on something that yields about 2%, yet could easily see 30% wiped off its capital value through higher interest rates. Surely at some point holders of those Gilts will wake up and smell the coffee, and rotate into equities? Arguably they need to feel pain from Gilts falling in value first, before they switch into equities. Maybe that is now happening?

Interestingly, I'm also seeing people reappear who have been out of the equities markets for years, drawn back in by this bull market (3 years too late!). So I suspect equities might surprise on the upside, as fresh money bids up prices, driven by poor returns elsewhere.

 

Anpario (LON:ANP) issues a trading statement which reports a successful year to 31 Dec 2012, "...with EBITDA and profit after tax in line with market expectations". They also report a good start to 2013, and net cash balances of £3.7m (almost 15% of the market cap of £25.1m at 128p a share).

These shares traded sideways for 3 years, but then rose about 50% in the last year. The forecast PER is 12 and the dividend yield 2% on forecast figures for 2012. So that looks reasonably priced. Might be worth a deeper look, if you like the company & its prospects. It doesn't jump out at me as a particular bargain, so I'll move on.

 

Intercede (LON:IGP) is an identity management software company, whose sales are mainly in the USA. They warn on profit today, blaming caution on Government spending decisions in the USA, triggered by the fiscal cliff problems.

They state that revenues are likely to be similar to last year (which were only £7m) and result in an operating loss. The blow is softened somewhat by cash balances which are expected to remain over £6m.

At £36m, the market cap (at 78p) looks like it's heading for a big fall today on the back of this statement. I'd be bracing myself for a c.20% drop if I were a holder. Although the final paragraph which speaks of a more positive sales pipeline might mitigate the fall?

 

Components manufacturer Elektron Technology (LON:EKT) also issues a profits warning, due to various factors which have resulted in lower sales, explained in a rather long-winded way.

The crux however is that they have a portfolio of old products, they need to restructure, and are operating at breakeven. They also have £6m in debt. I wouldn't touch it with a bargepole, and think the 7% fall in share price this morning is a good opportunity to exit from an unappealing investment.

They've only just introduced a dividend in 2012, but it's difficult to see how that could be maintained. New products in the pipeline provide some hope, but it looks unattractive to me, based on this morning's statement.

They do say something very interesting on a macro level, in that they mention China "is no longer regarded by the Group as a low cost location". Maybe that provides some hope for beleaugured European economies, as perhaps some production might return onshore?

 

Perhaps a shift away from China might help explain why European electronics distributor Acal (LON:ACL) is trading well? They issue an Interim Management Statement (IMS) today which has positive news on sales and book to bill ratio. They indicate that full year results to 31 March 2013 are on track to meet management expectations.

That puts it on a PER of 12.7 times forecast earnings, which is probably priced about right.

 

Well that's it for my first week of morning reports exclusively at Stockopedia. As they are now paying me to write these reports, I've been able to justify spending more time on them, so I hope you've found that useful.

Also, I'm not being asked to promote anything, and am free to write whatever I like, which is marvellous! Stockopedia just like my reports & want to publish useful content here for the investing community, which surely everyone will agree is a terrific approach.

Regards, Paul Scott.

(of the shares mentioned today, Paul has a long position in BEG only, and no short positions)