Small cap share tips

By This Is Money
Updated: 10:47 EDT, 29 January 2007

Our weekly review of the latest developments and hottest tips in the exciting world of the Alternative Investment Market is written by analysts at the UK's leading authority on fast-growing companies, Growth Company Investor.

Consultant Jelf's consolidation appeal

'We are in a cottage industry that is consolidating due to regulation,' enthuses Alex Alway, chief executive of acquisitive corporate and financial consultancy Jelf Group, which delivered a 148% pre-tax profits surge to £3.3m in a highly acquisitive year to September.

Turnover more than doubled to £25.1m, with acquisitions delivering £9.1m of the £13.6m sales rise, although growth also reflected new client wins and healthy levels of cross-selling. Despite all this investment, Jelf delivered a tidy 17% operating margin climb to 13.1%.

Alway announced 175% revenue growth within the insurance business, which provides commercial insurance broking services to corporate clients and now represents 42% of sales, with acquisitions including Goss (the company's biggest acquisition last year) enhancing the performance.

Healthcare, entailing the provision of advice on matters such as private medical insurance, posted 20% sales growth thanks to new corporate client mandates, while the employee benefits division, 'a real hot spot for us with employers looking to get more bang for their buck', enjoyed a 190% revenue rise.

In addition, Alway flagged up excellent 99% growth within the wealth management arm, with business boosted by the A-Day pensions legislation and the introduction of Jelf's own branded SIPP.

Alongside the results, Alway announced the £10m acquisition of specialist healthcare intermediary SPS WellBeing, 'a business with 2,000-plus corporate accounts' into which Jelf can cross-sell services.

For 2007, analysts are looking for profits of £5.9m and 16.8p of earnings, placing Jelf on a forward price/earnings of 14 – inexpensive given that earnings should grow by at least 35% this year. Existing investors might consider topping up holdings.

Share price – 237.5p
Market cp – £58.22m
Recommendation – Add

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Wynnstay Group worth adding to

Commencement of the EU Single Farm Subsidy Payment twinned with rising fuel and power prices halted agricultural supply business Wynnstay Group's profits growth for the first time in five years.

Wales-based Wynnstay suffered a drop in pre-tax profits to £2.53m (£2.87m) for the year to October, from continuing turnover of £102m (£101m). Chief executive Bernard Harris said the dip reflected flagging fertiliser sales and energy costs that hit 10-year highs.

Given the backdrop, the figures were 'creditable', demonstrating the strengths of diversification. Despite tricky trading conditions for the feeds and arable divisions, management continued to invest in stores and manufacturing capability.

December 2005 acquisition Quins Farm Supplies was successfully integrated and Wynnstay is shortly to launch its first stand-alone pet store under the 'Just For Pets' brand in Telford – plans are afoot for two more pilot stores this year.

Last August, Wynnstay completed its largest-ever acquisition, buying Glasson for £2.4m in a transaction boosting all three divisions and that should enhance earnings this year, from forecast Glasson sales of £38m.

Admittedly, profits retreated in 2006, yet Wynnstay remained resiliently profitable, its property development business had a strong year and the group remains a steady business with not insubstantial income appeal (the dividend was increased 5% to 5.25p).

This year, analysts are looking for improved profits of £3.1m and 17.6p of earnings, placing the shares on a forward price/earnings of less than 14. In our view, net assets of 244p underpin the valuation, with positive market and growth prospects an additional bonus. If you already own shares, consider adding to your holding. Add.

Share price – 245p
Market cap – £28.09m
Recommendation – Add

European patent and trademark attorney Murgitroyd Group pleased followers with an 85% profits surge to £1.19m for the half to November. The improvement reflected margin and economies of scale gains in the wake of last summer's sensibly priced Fitzpatricks acquisition.

Top-line growth was a more modest 18% at £11.2m, though gross margins rose to 65.8% (60.3%), reflecting an increase in low-turnover, higher-margin patent work, (as opposed to high-turnover, lower-margin trademark filing work), as well as a focus on fully billing for services rendered.

Chief executive Keith Young flagged up encouraging levels of growth in the patents and trademark market, with patent drafting in particular being buoyed by global economic strength as clients spend more on research and development.

He also said the group continues to recruit new trainees and expand across Europe. Offices in Milan and Edinburgh are to open shortly and business development moves are afoot in North America.

For the year to May, Hardman & Co envisages a sales rise from £18.8m to £23m and has upgraded pre-tax profit forecasts from £2.6m to £2.9m, with the earnings estimate upped to 24.1p (21.9p).

These numbers place the shares on a lofty looking forward price/earnings of 20.2. Nevertheless, the shares, dividend paying though rather illiquid, retain their appeal. Hold.

Share price – 487.5p
Market cap – £40.46m
Recommendation – Hold

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