Small Cap Value Report (6 Jan 2014) - STAF, CRAW

Good morning! It looks as if everyone is back at their desks today, as my monitor is showing volumes back to normal, and a number of early risers from things that have been tipped over the holiday period in newspapers, magazines & tipsheets. I can't help feeling that this looks a very frothy market at the moment - in many cases valuations are becoming stretched in growth companies, with momentum seemingly having taken on a life of its own in many stocks. That makes me very worried about a sharp correction being overdue in a lot of these fashionable stocks. The market is rewarding a lot of people who are making fundamentally bad decisions at the moment, and this really does remind me of 1998-1999 in flavour - people are buying into attractive stories rather than attractive valuations.

 

 

 

Recruitment & staff outsourcing group, Staffline (LON:STAF) issues a trading update today, for the year ended 31 Dec 2013. It all sounds good, with a nice clear statement saying;

 

The Board today confirms that earnings for the full year will be in line with market expectations with good levels of growth in activity being seen across all divisions of the business driven by continued strong demand for Staffline's services.

 

That's a good example of how less is more with trading updates. No ifs or buts, just trading in line with expectations, and good growth in activity. I like it. Looking at valuation, it seems fairly reasonable.

Stockopedia shows EPS broker consensus forecasts of 40.6p for calendar 2013, and 45.4p for this new year. So at 546p the shares are not expensive on an earnings multiple of about 12. See the usual traffic lights graphic for valuation on the right.

The dividend yield is forecast at 1.93%, not terribly exciting, but for a growth company not too bad - as the dividend has been rising at about 14% p.a. in the last 2 years (and was doubled the year before that).

So this is a good example of how a growing company grows into its valuation.

There might still be some lingering worries over a recent TV documentary that apparently showed the company in a bad light (I didn't see it). I also have some concerns over agencies that supply low paid staff to companies, as the overall economic effect of a race to the bottom on pay is extremely damaging. It helps companies profits, but what's the point if people don't have enough money to live on, and therefore a low-paid underclass is created that becomes permanently dependent on working tax credits & housing benefit? Those people have no money to spend, therefore how can the economy grow? So there has to be some political risk here at some point, although maybe not immediately.

 

 

 

AIM-Listed butchers Crawshaw (LON:CRAW) has issued another very positive trading statement. Remarkably, their like-for-like (LFL) sales growth has accelerated from the 18% reported in the seven weeks to 14 Nov 2013, to 21% LFL sales growth for the 7 weeks to 29 Dec 2013. That's really impressive!

Gross margins are also up, and "costs very much under control", so they conclude that;

 

we now expect the out turn for the full year to end January 2014 to be materially higher than the current market forecast.

 

Stockopedia shows the current year (ending 31 Jan 2014) EPS broker consensus forecast at 0.5p, increasing to 0.7p next year. So if they achieve say a 50% increase on forecast, that would take this year to 0.75p. So at 19.6p the shares would be on a PER of 26, which looks pricey to me.

However, if such strong trading performance is sustainable, then there would be a follow-on benefit to 2014/15 figures, to say 1p or more EPS. The shares still wouldn't look cheap even then, so I wonder if the valuation might now be up with events? It's impossible to say without seeing detailed forecasts, but certainly a rise from 4.25p to 19.6p in just six months is a remarkable result for investors, so well done to those of you who spotted the opportunity.

 

EDIT: I have since seen revised forecasts for Crawshaw from broker WH Ireland, who today said;

 

...we raise our FY 2014E PBT expectation by £0.3m to £0.8m and given the positive progress that has been made, in combination with the restoration of the opening programme, we raise our FY 2015E PBT forecast by £0.5m to £1.1m. We maintain our Buy recommendation and raise our share price target to 25p (from 15p) to reflect the actions that have been taken, the reinstatement of the opening programme and the momentum being demonstrated.

 

So if they make £1.1m profit in 2014/15, then taking off say 23% Corp Tax, that's earnings of £0.85m. With 57.8m shares in issue, that works out at EPS of just under 1.5p. Therefore at 19.5p the shares would be on a forecast PER of 13, which is looking a much more sensible valuation in my opinion.

 

 

I've had a look through a few other news items about contract wins, etc, but none look particularly significant. So I'll leave it there for today. I hope people are enjoying these buoyant markets, but remember it won't last forever, and the share prices that are detaching from reality in terms of valuation are storing up the biggest risks for the future.

On the other hand, the forward-looking economic data is looking good, and PMIs all over the world are much better now than they were a year ago, so there's reason for optimism on the outlook I think. There again one never knows what shocks to the system might come from nowhere - when will the credit bubble in China blow up? What happens when the next sovereign default occurs? Can the USA keep going without there being a panic on its massive borrowing? Who knows, there are certainly still plenty of risks out there, and I'm not prepared to chase valuations up to racy levels, so might end up moving more into cash in the coming weeks. That said, there are always opportunities to be had somewhere in the market.

 

See you from 8 a.m. tomorrow.

Regards, Paul.

(of the companies mentioned today, Paul has no long or short positions)