Small cap share tips: Matchtech, MTEC & Telford

By This Is Money
Updated: 11:41 EDT, 8 August 2008

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.

Matchtech – merits a re-rating

Recruiter Matchtech, which supplies high-quality engineering and technical staff for long-term projects ranging from Crossrail to the widening of the M25, has seen its market valuation reduce amid the de-rating of the recruitment sector.

However, like its AIM-quoted peer Morson, the company, a low cost concern operating from a single site near Southampton, represents a far more robust investment than the market gives it credit for, based on the long-term nature of its contracts in sectors where spend looks assured.

Established in 1984 and floated on AIM towards the back end of 2006, the company has grown entirely organically rather than through acquisitions, which may or may not add value. Moreover, a recent pre-close update – covering the financial year to July – highlighted another strong annual performance in the face of economic headwinds.

Matchtech enjoyed 20% plus growth in net fee income (NFI) in its core engineering, 'built environment' and support services operations and Adrian Gunn, the group's upbeat managing director, says investors can expect group NFI growth of 23% over last year's £26.9m – with the full year results to come in 'at the upper end' of expectations. Demand for contract and permanent staff, across a diverse array of clients and sectors, apparently remains strong.

Following the update, Arbuthnot Securities upgraded its July 2008 PBT forecast from £12.3m to £12.5m, whilst the '09 estimate of £13.1m remains. At current levels – the price has dropped from a 52-week peak of 471.5p – shares in this resilient, growing, dividend paying performer should have much further to go in fairer climes. Buy.

Ticker – MTEC
Share price – 267.5p
Market Cap – £62.14m
Recommendation – Buy

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Powerleague continues to score

Given the market's shunning of companies exposed to consumer-facing sectors, now is the apposite time to evaluate the investment prospects of companies operating in more resilient markets.

One such area is five-a-side football, to which hordes of players continue to flock. One of the leading commercial operators is Powerleague, which has just reassured its numbers for the year to June will meet forecasts – analysts have pencilled in pre-tax profits of £4.87m from £26.9m sales, ahead of £6.28m from a top line £33.86m for June 2009.

Alongside the trading missive, the company announced the acquisition of Soccer Sensations, a Stockton-on–Tees based centre complementing the portfolio of 43 UK centres. This follows February's acquisition of JJB Sport's 'SoccerDome' indoor centre for £17.4m cash, a deal that has integrated nicely with the acquired sites seeing the benefits of the group's systems and management's dogged focus on increasing pitch utilisation. Furthermore, the four new centres opened during the year – in Cardiff, Milton Keynes, Shrewsbury and central London – were also said to be performing well.

Powerleague, which inked a strategic partnership with investment fund Patron Capital Partners earlier this year, to assist with expansion and help unlock value from its property portfolio, has suffered share price disappointment in 2008. At current levels, the shares are trading on only 8.9 times 2009's 5.24p earnings forecast. However, for investors that are already on board, there is little sense in cutting losses now. A firm hold.

Share price – 46.75p
Market Cap – £38.25m
Ticker – PWR
Recommendation – Hold

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Wider sector woes tar Telford

Directors have recently been buying shares in Telford Homes, the residential developer focused on East London, whose shares have slumped on worries regarding the wider housing market.

Whilst understandable given prevailing investor sentiment towards the property sector, the de-rating of the shares – trading north of 400p earlier last year – ignores the fact that the company operates in a part of London undergoing regeneration ahead of the Olympics and where a large amount of committed spend is headed. Telford, renowned in the market for its regeneration projects, is also well positioned to capitalise on its strong links with affordable housing providers. Moreover, the company claims a more robust business model than most, with the business de-risked through the pre-selling of homes.

In a recent update chief executive Andrew Wiseman, keen to keep a tight reign on cash and flagging up strong support from the group's banks, said the company had continued to complete apartment sales in a worsening market, albeit at a slower rate.

Telford also has a strong recent track record, having served up a 31% pre-tax profit increase to £17.7m from turnover lifted almost 55% to £160.4m for the year to March – the total dividend was increased from 8.9p to 10p per share.

Though this sector is seriously out-of-favour with investors at present, shares in Telford could offer recovery potential for investors willing to brave the current turmoil. Existing backers of the business should sit tight.

Share price – 102p
Market Cap – £38.25m
Ticker – TEF
Recommendation – Buy/hold

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