Paul Scott’s Small Cap Snapshot – 24th March 2016
A few more of Paul’s stock thoughts to enjoy over Easter.
Results season is in full swing, so Paul is scrutinising the accounts of dozens of smaller companies each week. We offer below a few interesting stocks that caught his eye.
Paul Scott, the ‘UK’s most prolific small cap blogger’, provides research for Fundamental’s Small Cap Value Portfolio Service.
Laura Ashley (ALY) 24p
Results for the year ended 31 Jan 2016 were a tad disappointing, although delving into the detail revealed that the core UK retail business actually had quite a good year, with profits up. The fly in the ointment was Japan – a big earner for the overseas, franchised operations. Also a £1.3m loss was incurred from the insolvency of Laura Ashley’s Australian franchisee.
Despite this, the business remained remarkably cash generative, and has maintained a dividend payout (for the 5th year running) of 2.0p per share. That equates to a stonking yield of about 8%. Moreover, the business generated enough cash to finance this generous dividend, and it has a relatively strong balance sheet too.
So a very attractive proposition for income seekers. Mind you, we cannot be certain the big dividends will continue, as after all the payout is a policy decision by management. The dominant Malaysian shareholders are certainly not disadvantaging minority shareholders by paying such generous dividends -–long may it continue!
Focusrite (AIM:TUNE) 174p
I had not looked at this company before, but on an initial review a few days ago, I liked the look of it. This is another company with a dominant major shareholder. The company makes innovative electronic equipment for musicians. The organic growth since 2009 is highly impressive. The balance sheet is solid, with £6.2m in net cash.
The only thing I don’t like about this share is the price – at 174p the rating is quite high, at a PER of 18.5x August 2016 estimates. That said, sometimes you just have to pay up for quality. I’ll do some deeper research on this company over time. I find the research process is an ongoing thing – you get to know companies gradually, and build on your knowledge, rather than it being a one-off procedure.
Synety (AIM:SNTY) 82p
This is definitely not one for widows or orphans! Synety is a very speculative share, which has disappointed in the past – management over-optimism meant that they misjudged the amount of cash required, ending up doing a deeply discounted Placing at 90p last year.
However, the new Chairman, Peter Simmonds, seems to be having a very positive impact on strategy. He of course successfully built up DotDigital, so knows a thing or two about SaaS businesses.
I feel Synety has just reached a tipping point, where it is clearly now funded to breakeven, as set out in the recent results statement narrative. Organic top line growth is running at 103%, which together with cost cutting, means that cash burn has now reduced to approximately £200k per month, and falling. So it should reach breakeven in mid-2017, and has adequate cash + loan facilities, to get there.
Therefore I see potential for a step change in the way this company is valued. Once investors stop fretting about the cash running out, and instead begin to calculate the returns that 100% top line growth, combined with gross margins of nearly 80% can do to the bottom line, then it could get interesting.
That said, the company is not out of the woods yet. If current trends continue, and management sounded confident in a webinar this week, then there could be exciting upside here I think.
Eclectic Bar Group (AIM:BAR) 60p
Not really a sector that I want to invest in – nightclubs and bars often make very poor investments. However the interesting aspect here is that highly respected businessman Luke Johnson got involved last year, buying a stake personally, and becoming Exec. Chairman. Interim results this week show that the company is beginning to turn around, with a loss last year turning into a small profit this year.
So again a very speculative idea, but I like turnaround situations, and might possibly have a small dabble in this one. Although note that the share is horribly illiquid.
Disclosure: Paul holds personal long positions in Laura Ashley, and Synety.