Small Cap Report (5 Feb) - ALL, ALU, LWB, HNT, GHT, LID, CRA, BAE

Yesterday was an interesting day, with the FTSE 100 down 100 points, yet my portfolio of small cap value shares was actually up on the day, helped by a further rise in Amino Technologies (LON:AMO) and good results from Walker Greenbank (LON:WGB). Long may it continue, although I'm very mindful of the reality that this excellent run we're having at the moment can't carry on forever.

OK, let's look at some results! Firstly, Allocate Software (LON:ALL) releases its interims to 30 Nov 2012. They provide "workforce and compliance optimisation solutions", whatever that means?

I like the way they have presented the breakdown of turnover on the face of the Income Statement, that's a helpful initiative, giving a subtotal for recurring revenue, and then showing licence revenue, and service revenue separately too.

The numbers don't look good though. Whilst turnover is flat, costs have risen by about £1.1m, meaning that the highlighted EBITDA figure has fallen by two thirds to £562k. Amortisation & other charges take them to a basic EPS loss of 3.48p. I can't see anything in the figures or the narrative that excites me, especially as the £51m market cap seems pretty racy, given these lacklustre results.

 

Alumasc (LON:ALU) is a £35m market cap (at 99p a share) supplier of premium building & precision engineering products. Their shares are up over 50% from the low in July 2012, but still well below their recent peak in Jun 2011. The headline figures for their interim results to 31 Dec 2012 look pretty good - underlying EPS has more than doubled to 4.8p, and the interim dividend has doubled from 1p to 2p.

Whilst net debt has fallen sharply to £8.4m, that is expected to partially reverse in H2. They are on track to deliver on "previous expectations for underlying results for the full year". I'm not sure what the significance of "previous" is, in that sentence? Perhaps there has been a very recent broker upgrade which should be disregarded?

The forecast PER of 10.5 looks reasonable at first, but when you factor in a fair bit of debt, and the pension deficit, it stops looking good value, so to my mind this is probably fully priced at around a quid a share, hence doesn't interest me.

 

Low and Bonar (LON:LWB) is a manufacturer of technical textiles, such as carpet underlay, side curtains for lorries, marquees, etc. Their results for year-ended 30 Nov 2012 look solid, with adjusted EPS coming in ahead of forecast at 6.3p (forecast was 6.1p). So at 59p that puts them on an apparently reasonable PER of just under 10.

However, the Balance Sheet rules it out for me, with £83m in net debt, plus £25m in pension deficit, figures which are far too high to make it a safe investment, in my opinion.

 

Huntsworth (LON:HNT) is a public relations group. with a market cap of £106m at 45p a share.

Their pre-close trading statement this morning says that rigorous cost control will deliver a double digit (percentage, presumably?) improvement in profitability for 2012 against 2011, and that they will meet expectations for 2012. Sounds good. Rather too much debt again for my liking, although it's reduced to £67m at 31 Dec 2012.

The most striking thing here is the dividend yield, which at 3.5p seems to give a yield approaching 8%! If that's sustainable, then the shares might be worth a look, although such high levels of debt are not usually compatible with a big dividend yield - i.e. earnings should probably be used to pay down the excessive debt, rather than paying dividends. Personally I only attribute weight to a high dividend yield if it is well covered by earnings, and where net debt is low, because both factors need to be in place to make a dividend yield sustainable. As we saw with HMV, a highly indebted company which continues paying an unaffordable high dividend, simply hastens its own demise when trading deteriorates.

 

I recall in 2003-4, shares in Gresham Computing (LON:GHT) were massively hyped up to a ridiculous valuation, and I've been suspicious of these shares ever since. Their trading statement this morning looks sensible though, with revenue and earnings for 2012 in line with expectations. However, that puts them on a PER of 24 times 3.1p EPS, which is far too expensive to warrant me spending any more time on it. They have net cash, but don't pay a dividend, which seems a rather glaring omission.

 

Lidco (LON:LID) issues a trading update for year-ended 31 Jan 2013. It's a cardiovascular monitoring company. The historic numbers look pretty weak for a £27m market cap (e.g. only £7.1m turnover, and breakeven for 2012), but they do talk about strong growth in the UK expected in 2013.

However, 2012/13 has been unremarkable, with no overall growth, and a small operating loss. So I can't see the sense in paying up-front for future growth with a £27m market cap, unless you have a very good handle on what the figures are going to look like in a year or two's time. I don't, so will pass on this one.

 

Shares in Corac (LON:CRA) have shot up 15% today on a positive-sounding trading update. Although they say that results for 2012 will be ahead of market expectations, the figures I have forecast a heavy loss of around £6m for 2012. It seems to be a blue sky thing on a racy valuation of almost £50m after today's rise, so not of any interest to me.

 

It's interesting to see that shares in Alumasc, Huntsworth, and Low & Bonar (mentioned above) are all up 5%+ today on positive-sounding results. What worries me is that people don't seem to be even looking at the balance sheet any more, or considering debt and pension deficits. That suggests a degree of irrational exuberance is appearing, in my opinion. I shall stick to my value investing approach, even if it means missing out on some of the more speculative upside.

On a final note, I see department store group Beale (LON:BAE) announced poor results yesterday afternoon. I don't normally cover results or trading statements issued during the day, as it's just too much for one person to cover, and the majority come out at 7 a.m., which I do cover. Suffice it to say that I'd be surprised if Beale is still around in a couple of years' time. It's amazing that they have survived this long really, as little has changed there since I remember losing my parents in the one in the Arndale Centre in Poole, in the 1970s, and suffering the humiliation of being announced as lost on the tannoy!

See you at the same time tomorrow. Don't forget to bookmark the home page of Stockopedia, as a reminder to check out my report here every weekday, if that's not too presumptuous a suggestion!

Regards, Paul.

(of the shares mentioned today, Paul holds long positions in: AMO and WGB only. He does not have any short positions)