Small Cap Value Report (6 Feb 2015) - CCT

Good morning!

Character (LON:CCT)

Share buybacks - here's an interesting one. There have been a number of announcements from this company concerning it using surplus cash to buy back its own shares in the market. To me, that seems a good idea, since the company looks under-valued, so using that surplus cash to reduce the number of shares in issue, enhances my position as an existing shareholder, by increasing EPS, and divis per share.

Here is the announcement today;

I got a bit confused by the above announcement, i.e. whether the 21.2m shares included the shares held in treasury or not, so I rang the Company Secretary at Character this morning to clarify, and it turns out that it was just me being thick! So there are about 25.2m shares in issue, of which 4.019m are owned by the company itself, held in treasury. Therefore the correct figure to use for valuation purposes is the net figure of 21.2m shares.

Valuation - I've double-checked that the broker consensus forecast of 40p EPS for this year is calculated on the correct number of shares, and it is. Therefore at the current price of 363p these shares appear very modestly valued, on a PER of only 9.1. In my view a PER of 12 would be more realistic, so that gives about 120p potential upside from here.

My opinion - share buybacks are great when a share is genuinely cheap, as appears to be the case here. It enhances EPS, as earnings are applied to fewer shares, and also removes any overhang from the market. Although it could make the shares less liquid.

I did raise an eyebrow recently by the company buying back a chunk of shares from a Director.

The company looks to be on a roll, and has attractive value characteristics in my view. Note that the Stockopedia system likes it too, with a StockRank of 99 putting it right at the top. I am comforted to see that a lot of my favourite small cap stocks have high StockRanks, so I must be doing something right!