Small cap share tips: Cape, Cohort, Wynnstay
Our regular 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.
Cap
Following a positive 'pre-close' update, energy sector support services star Cape has earned earnings upgrades from analysts. Cape said calendar 2007 final figures, set for release in March, will beat City forecasts with record levels of business seen in the first half of last year having continued in the second half.
Significant sales growth was seen across all regions last year – Cape's main markets are the UK, the Middle East, the CIS, the Far East and Australasia – and three recent Australian acquisitions made positive contributions to the figures. Affirmations regarding management's firm focus on cash and a prediction regarding a 'sustained period of strong organic growth' buoyed the share price.
Cape, whose fortunes have been restored under respected chief executive Martin May, offers growth twinned with good defensive characteristics. Global energy demand is growing and Cape's energy-producing clients need to extend the life of assets. Its large customers are increasingly looking to outsource non-core services and work with safe suppliers. The blue-collar services Cape provides aren't sexy, but they are essential, ranging from access scaffolding, insulation and fire protection to specialist cleaning.
Francesca Raleigh at Numis Securities has selected Cape as one of her small-cap tips for 2008. Setting a 366p target price for the shares, she has upgraded her 2007 forecast earnings figure by 10% to 23p, from pre-tax profits of £33.5m, following the upbeat trading update.
For 2008, investors should at least expect profits progression to £42.9m and 25.5p of earnings, although those numbers are likely to receive further upgrades once full-year results are confirmed. Trading on modest prospective multiples of 10.9 and 9.8, Cape is a strong buy.
Share price – 248p
Ticker – CIU
Market Cap – £282.89m
Recommendation – Strong buy
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Coho
Cohort, floated on Aim in March 2006 at 123p, is a cash-generative and dividend-paying counter on a consolidation mission in the fragmented defence technical services market. Offering technical advice and services to clients including BAE Systems and the MoD, recent interims to October caught the eye, even though the second half-year is stronger.
Pre-tax profits were lifted 42% to £1.5m, on revenues up 55% to £20.9m, with original business SCS posting 30% sales growth to £12.7m, though flat profits at SCS reflected programme 'slippage' and investment spend. Contributing £8.2m to turnover and £900,000 of operating profit was maiden acquisition MASS, a defence and aerospace systems house bought in August 2006 for up to £13m with skills in managed services, electronic warfare and secure communications.
Meanwhile, systems engineering and software business SEA, acquired on 31 October for a maximum £25.4m, operates mainly in the defence sector yet also boasts divisions focused on the space, transport and offshore sectors. SEA boosted the group order book by £13.7m to £56.1m, of which almost £23m is deliverable in the stronger second half. The acquisition means that Cohort has reached a degree of critical mass, leaving it well placed to win bigger contracts both domestically and in export markets.
For April 2008, analysts see profits growing from £3.2m to £5.6m, with earnings rising to 11.9p (8.9p), placing the shares on a fairly undemanding forward multiple of 13.5. Cash generative, dividend paying (the interim dividend was increased by 12.5% to 0.45p) and on an intriguing consolidation mission, Cohort could prove a winner in the long term.
Share price – 160.5p
Market Cap – £64.89m
Ticker – CHRT
Recommendation – Buy
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Wynnstay wins Hatton's hand
Agricultural sector consolidator Wynnstay Group has acquired specialist distributor John Hatton (for an initial £237,000) in a deal complementing the £2.4m 2006 takeover of Glasson. Lancaster-based like Glasson, John Hatton distributes animal health products, feed and supplements as well as dairy hygiene products. The deal boosts the group's market share in a key livestock region.
A 'rural retailer', Wynnstay is keen on increasing its presence in the country stores market. It has outlets in Wales and England's border counties and is hoping to improve returns at its acquisitions. In December, another two stores, selling 'agricultural requisites', gardening, equine and pet products, and clothing to farmers and other rural dwellers, were acquired.
Towards the end of 2007, Wynnstay managed to farm £1.28m from institutional investors at 260p in a funding move to help finance further deals as well as organic growth. Though Wynnstay has encountered challenges within its markets, it's nicely balanced spread of businesses have enabled its financials to progress. Pre-tax profits of £1.96m were cultivated for the half to April '07, representing a rise of 39%, on near-53% sales growth to £79.9m, with Glasson performing 'excellently'. The interim dividend was raised from 1.75p to 1.875p, with net assets increasing to £26.83m (£24.45m).
Shares in Wynnstay, a robust concern offering progressive dividends and a valuation underpinned by net assets, are worth holding.
Ticker – WYN
Share price – 243.5p
Market Cap – £31.64m
Recommendation – Hold
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