Small Cap Value Report (13 Jun) - NXR, CAP, UTW

 

Good morning! It's results day for Norcros (LON:NXR) today, a share that I've been keen on (and held in my personal portfolio) for about a year. As you can see from the 3-year chart below, it's been in a steady up-trend for the past year, and in my view the shares remain under-priced on a PER basis, and ignore the growth potential of the business.

Having had a quick skim of the results, the key underlying EPS figure (which excludes exceptional items) has come in ahead of market consensus forecasts (of 1.8p) at 1.9p, so that's a good start. Underlying profitability is up 9.3% from £10.7m to £11.7m, but the tax charge is getting back to normal, after a nil charge last year (due to utilisation of prior year losses), hence EPS being flat against prior year at 1.9p.

So at 16p the shares are on a distinctly undemanding now historic PER of 8.4 . As was demonstrated in the excellent Charles Stanley note in Mar 2013, its peers are on ratings of about double that, so it remains a puzzle why the market is so pessimistic in its valuation of Norcros.

The final dividend has been raised by 8.9% to 0.305p per share, which together with the interim dividend of 0.155p gives a total for the year of 0.46p (up 9.5% vs. prior year) yielding a helpful 2.9% at 16p per share.

The most interesting bit in the results is the announcement of their new growth strategy, where they are targeting "a faster and focused growth strategy to scale up the size of the Group organically and by acquisition should be pursued".

There is also clarity on the pension fund. Whilst the deficit has increased (as expected, due to exceptionally low discount rates due to low Bond yields), to an accounting basis of £30m, and a higher actuarial basis of £62.4m, which sounds scary but the bottom line is that the overpayments are agreed at £2m p.a. So I view this as a drag on cashflow of about 10% of EBITDA, which is hardly the end of the world, although clearly should be taken into account when valuing the company by perhaps shaving 1 or 2 off the PER, or whatever alternative method you prefer.

 

The market has opened now, and I see that there's another fairly hefty sell-off in the FTSE 100, down about 100 points to 6,209 at the time of writing (08:15). That's quite a big correction in the past month, where we got to about 6,850 not long ago, a drop of nearly 10%. Although as I said at the time, markets felt too frothy, and a correction was both necessary and healthy in my opinion. It's barely affected good quality small caps though, and most of my portfolio is largely unscathed.

The drop in Norcros (LON:NXR) this morning doesn't make any sense, as the results were better than expected, and the only new information is positive (the faster growth strategy). So if they come off any more, I shall be buying more.

 (although as flagged by Shanklin in the comments section below, the Outlook section does point to slower UK markets, and 75 redundancies being made at Johnson Tiles UK, resulting in an exceptional charge of £1.5m this year. So on reflection, perhaps this should have tempered my bullishness somewhat. Although remember that the Vado acquisition will kick in from H1 of this year, so that should offset any softness in the other UK businesses).

Please do feel free to join the discussion below - you don't need to be a paying subscriber to comment, there is the option of a free account on the sign-up page (see the link just below the paying subscription sections).

 

 

Next, I've been looking at Clean Air Power (LON:CAP) . They put out a mixed trading update today, which sounds positive on the longer term prospects, and indeed on orders taken for 2013 (which are now close to total sales in 2012). However there seem to be problems with their European OEM manufacturer.

This clobbered the shares first thing, so I nipped in and bought some more at 6p. At this level, the market cap is only just over £10m, which strikes me as cheap for a potential multi-bagger with very interesting technology that allows diesel-engined HGVs to operate largely on natural gas. Given the explosion in shale gas, this is likely to be very big business in the future, especially in the USA, where CAP are close to prototype launch, and full market launch in 2014.

It is a speculative share, and another fund-raising may be required, but it looks good value to me, as a speculative high risk, high reward basis - like many investors, I like to have one or two higher octane things in my portfolio, whilst carefully managing the position size so that it won't hurt too much if they are a 100% loss.

 

 

Utilitywise (LON:UTW) has announced a small Placing to raise fresh cash of 5m shares at 100p, so £5m which is being used to part-fund a £15.5m acquisition of Energy Information Centre Ltd. The other money is coming from the issue of £5m new Utilitywise shares (if I've read the announcement right), and £10.5m in cash (of which I'm presuming £5m is coming from the Placing).

It all looks fine, in that the discount to the current share price is only 7%, which is reasonable, i.e. it does not disadvantage existing holders to any significant extent. Bear in mind the existing market cap is £65m, so this deal is a sensible size given the size of Utilitywise before the deal is done.

The other point with this deal is that existing shareholders (management) are Placing a large chunk of their own shares, 17.2m also at 100p. I've got mixed feelings about this. On the one hand it's good to see demand for founders' shares, and the shareholder base widening. On the other hand, large Director sells always make me really nervous. By definition Directors know more than we do, so if they are big sellers it does make you wonder if the big gains have already been made?

On balance I don't like the business model enough to make me want to buy shares in it, even though the valuation looks reasonable on a PER basis.

 

 

That's it for today, so see you same time tomorrow morning.

Regards, Paul.

(of the companies mentioned today, Paul has long positions in NXR and CAP, and no short positions)