Unlocking value in Sanderson
Software and IT services business Sanderson, a specialist in multi-channel retail and manufacturing markets in the UK, has announced the sale of its electronic point-of-sale solutions business to Torex Retail in a deal valuing the division at £11.75m. After repaying borrowings this will leave the company with a cash pile of £4m, which will be channelled into its online sales and e-commerce product offerings. It looks a smart move because order intake in Sanderson's manufacturing and multi-channel businesses is currently 10 per cent ahead of this stage last year, buoyed by a number of new customer wins in online sales. It's worth pointing out that Sanderson's ongoing businesses are highly profitable, too, generating £1.9m of underlying operating profit in the 12 months to 30 September 2011.
Moreover, adjusting for the disposal, which was priced £8.2m above book value, Sanderson's pro-forma net asset value (NAV) of £26.7m is significantly more than its market value of £15.5m. Strip out that net cash pile of £4m, and in effect a business making £1.9m of annual profit is being valued at a bargain basement £11.5m. It is also one that is cash generative, so there is scope for another hefty dividend rise following on from last year's 25 per cent hike in the payout.
Trading on a 42 per cent discount to pro-forma NAV, yielding 2 per cent and rated on 8.5 times post-tax earnings net of cash, Sanderson's shares are priced for a re-rating at 36.5p (TIDM: SND) and one that should reward readers who followed my advice to buy at 33.5p (A valuable stock check, 18 July 2011). The company's insiders are clearly thinking along the same lines as non-executive directors David Gutteridge has just purchased 100,000 shares at 35p and Phil Kelly bought 30,000 shares at 34.5p ahead of the next trading update on 15 March. I have raised my fair value target price to 50p a share and rate the shares a strong buy.
Broking for a re-rating
Shares in small-cap stockbroker and asset manager WH Ireland are on the move after investors belatedly realised the significance of the purchase of 105,000 shares by chief executive Paul Compton ahead of full-year figures at the end of this month. This takes his holding to over 5 per cent of the share capital. It also means that at 70p (TIDM: WHI), the shares are a couple of pence above the price I advised buying at last summer (Broking for success, 1 Aug 2011).
To recap, WH Ireland is focused on three core activities: providing high-quality investment advice to the UK private client market; corporate broking advice and equity fund-raising for the UK smaller company market; and asset management. It is a business mix that is working well and one that delivered revenues of £11.4m, underlying pre-tax profits of £1.48m and EPS of 6p in the six months to 30 May 2011. If the company manages to repeat that performance in the second half, then the shares are in real bargain territory at 70p.
Let's not forget, either, that WH Ireland has a rock-solid balance sheet that includes £6.2m of property and £0.5m of net cash. Combined, this equates to around half the company's NAV of £14.1m, which in turn is about the same as the company's market value. On any basis, the company is undervalued and Mr Compton's lead is well worth following. I retain a 100p target price.
Queuebusters
Netcall, a small-cap company offering software to make telephone call-handling more efficient, continues to ring the right note and, at 19.5p (TIDM: NET), the shares are close to my 23p target price. It is also one that is looking conservative following a trading update that revealed that underlying earnings are well on course to hit analysts' estimates of 1.8p a share in the 12 months to June 2012, up from 1.57p in the previous year.
And with net cash up from £5.9m to £7.2m - equating to 5.9p a share - in the six months to the end of December, there should be good news on the dividend, too. We have already banked a 0.4p a share maiden dividend last month, and with cash generation strong, the company bought back almost 1m shares at an average price of 17p in the fourth quarter of 2011.
Trading on 7.5 times earnings estimates net of cash and underpinned by strong earnings momentum and a buy-back programme, the shares are still too lowly valued even though they have already risen 50 per cent since I advised buying at 13p (Queuebusters, 17 Jan 2011). I have raised my fair value target price to 25p and continue to rate Netcall shares a buy.
Food for thought
Shares in small-cap food producer Zetar (AIM: ZTR) have fallen below my buy-in price of 223p (Appetising returns, 25 Jul 2011), after the company warned that orders for the all-important Easter trading period are down on last year.
This prompted analysts at brokerage Liberum to cut their underlying pre-tax profit forecast from £7.1m to £6.6m for the 12 months to the end of April 2012. As a result, adjusted EPS is likely to be flat at 38.7p, which means the shares, at 192p, are rated on 5 times earnings. They are also priced at half book value even though net debt has been cut from £26m to £24.4m and borrowings are expected to unwind in the second half after their seasonal peak. Gearing of 52 per cent hardly makes the balance sheet stretched, either. Clearly, the profit downgrade is disappointing, but on a medium-term basis the shares continue to offer value and I remain a holder.
