Small Cap Report (18 Apr) - INL, LVD, SHRE, FTC, GBG, TEF, PMP, PRV, CRA, SDM

Pre 8 a.m. comments

Inland Homes (LON:INL) announces that it has been successful in the first round of the Government's "Build To Rent" scheme, under which builders can borrow the money to build new houses. Sounds like a good scheme to kick-start some desperately-needed new housing in the South East especially. The statement refers to a £15m loan across two sites for Inland, which is a material amount relative to the size of company, so will be good news if this goes ahead.

Lavendon (LON:LVD) provide rental of powered access equipment ("cherry pickers" & similar), and have issued an in line with expectations Interim Management Statement (IMS) for the calendar year to date. Interestingly, they state that poor demand in Europe (partly due to bad weather) has been offset by strong demand in the Middle East. This seems to be a trend, as I've heard that from several other companies recently. So one increasingly feels that companies need to have a global footprint, or at least operate in growth areas outside of Europe, to offset weakness in Europe which must surely continue indefinitely until the Eurozone crisis is brought closer to resolution?

Share (LON:SHRE) issue a Q1 "Market share and trading update". Unless I've missed something, it doesn't actually say anything about profitability, so seems pointless. It mentions market share gains, and has some interesting background about market sentiment (they are an online stockbroker), but a trading statement is pretty useless if it doesn't tell you whether profits are above, equal to or below expectations.

 

Post 8 a.m. comments

I didn't spot it on my first sweep of the morning's announcements, but the IMS from Filtronic (LON:FTC) looks good. They "design and manufacture microwave electronics products for the wireless telecoms infrastructure market", which sounds impressive!

Their year end is 31 May, and the IMS covers H2 to date. The key sentence is that "the Board expects that revenues and profits for the Group as a whole will exceed market expectations, with revenues expected to be in the region of £38.5m".

Stockopedia shows consensus forecast of £36.0m and 3.4p normalised EPS, so it looks like a 7% out-performance at the top line, and allowing for operational gearing that might drop through to (finger in air) perhaps 20% at the bottom line? So around 4p EPS looks possible for year ending 31 May 2013. The shares have already risen 14% this morning to 62p, so the PER is over 15, doesn't strike me as worth chasing up from here, but I don't know anything about the company.

 

GB (LON:GBG), which provides identity verification software, has issued a positive pre-close trading statement today. In it they state that results for the year ended 31 Mar 2013 are expected to be ahead of market expectations, with a 49% increase in adjusted operating profit to £5.5m. Some of that increase is due to an acquisition made during the year, so not all organic growth.

Stockopedis is showing a consensus forecast of £5m, so they seem to be about 10% ahead, which looks like normalised EPS might be close to 5p a share. Therefore the valuation is pretty rich at 95p a share. I'd have to be very confident indeed about further growth before paying that kind of multiple.

 

If anyone is in any doubt about how strong the London property market is, then you won't be after reading today's trading update from Telford Homes (LON:TEF). Profit for the year ended 31 Mar 2013 will be ahead of market expectations, they talk of "exceptional levels of demand", and they are already 94% pre-sold for the current year (ending 31 Mar 2014), and 50% pre-sold for the following two years. Remarkable stuff!

I've found in the past that the most sensible way to value housebuilders is not on e PER basis, but on a build-out value, i.e. looking at what their net tangible asset value will be once they have built and sold the houses on all their existing plots. I don't have any figures on that for Telford, so cannot comment on whether the shares offer good value or not. They're up 4% so far today, and have risen 111% in the last 12 months, so looks like I've well & truly missed the boat on that one.

 

Investor Presentations

It was a busy day in London yesterday, with two investor events meaning that some people sat through no less than 8 presentations from smaller companies! Blackthorn Focus held their AIM Investor Focus event, with five companies presenting. I dropped in briefly to have a private meeting with the Chairman and FD of Portmeirion (LON:PMP), a company in which I already hold shares, and have spoken about here before.

In my view it's a good steady company, at a reasonable price - forward PER of 12, forward dividend yield of nearly 4%, a solid operating margin in the teens %, reliable profits, net cash on the balance sheet, high quality brands, and good management.

I wanted to speak to management about their growth strategy, which we did, and I came away with a much clearer understanding of where the company is going. So a very useful meeting, and many thanks to David O'Hara and others for going to all the trouble to organise this, and to FinnCap for hosting it.

 

In the evening, it was Equity Development's quarterly investor forum, where they have three smaller companies each doing a short presentation, followed by Q&A, then networking & drinks/canapes. Kindly hosted by lawyers Faskin Martineau in their plush offices in Hanover Square.

Here are my brief thoughts on the three companies that presented last night:

Corac (LON:CRA) - a useful & detailed presentation by their FD, but overall I feel it's too speculative for me. I can't see enough certainty in the successful outcome of their core project to justify paying a £35m market cap for a loss-making company. However, it's useful to meet management, as I can react to any future news on commercial success or failure of the core product.

Stadium (LON:SDM) - an excellent presentation from their CEO. I have a much clearer idea of where he is taking the company, and what he's trying to build it into - i.e. a larger, and higher margin designer and manufacturer of electronics. Stadium, has been on my watch list for a while now, and whilst I'm not quite ready to buy yet, I'll certainly be looking to pick up any if the price slips back below 40p at any point.

Porvair (LON:PRV) - the star presenter of the evening was undoubtedly Porvair's CEO. Everyone I spoke to commented on how well he explained the business - in crystal clear, simple language, in a lively & interesting talk. If you could clone this CEO and put him into every company you have shares in, you would! Absolutely terrific business, but the valuation is far too high for me at the moment. But I would certainly be a buyer if there is a hiccup in growth, or a stock market correction at some point. Around 150p would start to interest me, but at 227p it's on a PER of 20, which I think looks a bit stretched.

 

As an aside, I'm keen to learn about how Direct Market Access (DMA) for investors works in small company shares overseas. I seem to recall Australia already has this. If any readers have experience of the Australian market, perhaps you could post in the comments section below about how well (or not) DMA works in Australia for small caps. Do they still have Market Makers as well as DMA, or is it just an electronic order book where anyone can put in an order? Could we replicate this system in the UK, and would it be beneficial? Are there any other countries where investors have DMA for small caps? I'd be grateful for any guidance you can give me on this issue.

That's it for today, same time tomorrow!

Regards, Paul.

(of the companies mentioned today, Paul holds a small long position in INL, a long position in PMP, and no short positions)