Small-cap wonders

There is only one word to describe the full-year results of Netcall (TIDM: NET, 30p), a small-cap company offering software to make telephone call-handling more efficient: stunning. On an underlying basis, adjusted pre-tax profits rose by almost a third to £3.3m on 7 per cent higher revenues of £14.6m and, with the pipeline from new and existing customers as strong as ever and over two-thirds of sales recurring - these exceed Netcall's cash operating costs and capitalised R&D - then we are in for another bumper year ahead.

Analyst Andrew Darley at broker FinnCap certainly thinks so as he is forecasting a 15 per cent rise in pre-tax profits to £3.8m in the 12 months to June 2013 based on an 11 per cent rise in revenues to £16.4m. Even that could be conservative as Netcall is making good use of its cash-rich balance sheet - net cash swelled from £5.9m to £8.4m, the equivalent of 7p a share - by splashing out to buy Serengeti, a supplier of enterprise content management to over 40 major public sector organisations.

It looks a rather good deal both strategically and operationally as Serengeti reported revenue of £1.6m and profit before tax of £300,000 in the year ended 30 November 2011 and the £2.9m cash consideration includes a £0.9m earn-out based on the performance of the business this year and next. It also means that the total consideration is less than the £3.2m of free cash flow that Netcall generated from its operations last year, so the company is in effect recycling its cash to boost profits and EPS. In fact, it would be no surprise to see further deals being made, but even without them the shares remain attractively priced.

That's because finnCap's conservative looking forecasts imply adjusted EPS will rise 15 per cent to 2.3p in the current financial year so net of the cash pile and the upfront £2m payment for Serengeti, the shares are only trading on 10 times earnings estimates. But since £300,000 of the £500,000 profit uplift in finnCap's profit forecast comes from Serengeti then, from my lens, the risk to estimates looks firmly on the upside. It's worth pointing out that the dividend was raised by a quarter to 0.5p a share (ex-div: 12 December), so there is a modest yield, too.

So although the shares have more than doubled since I first advised buying at 13p (Queuebusters, 17 Jan 2011), and are up over 50 per cent since I reiterated that advice at 19.5p in my follow-up article at the end of January this year (Three undervalued small caps, 30 Jan 2012), I am not recommending banking a profit. On the contrary, having seen my 25p target price achieved several months ago, and my subsequent 30p target price hit on Monday 1 October, I am raising my fair value estimate to 36p - a valuation which would be in line with Netcall's peer group and one that is more than warranted. It goes without saying that with a further 20 per cent upside to my new target price I continue to rate the shares, at 30p, a buy.

A chic performance

High-street retailer Moss Bros (TIDM: MOSB 48.5p) has turned in a very chic performance in the six months to end July and looks dressed up to deliver a sharp rise in profits in the next couple of years. In the period, like-for-like sales rose 5.7 per cent and have been growing at 3 per cent in the seven weeks since the start of August, a performance that must be the envy of the retail sector.

Store refits are helping as 12 of the 132 stores were spruced up in the period and a similar number are earmarked for the second half. On average the refurbished units see a sales uplift of around 8 per cent. The plan is to refit 90 stores at a cost of £11m in the next five years. Interestingly, around 45 per cent of the estate is facing lease expiries in the next three years, which is playing into the company's hands given the weak retail environment. In fact, of the stores facing expiry this year the average reduction negotiated by Moss Bros on the rent bill has been around 17 per cent and that's after management has stipulated break clauses at five or even two years on new leases. And if landlords don't want to play ball, management play hard ball, too, and simply relocate stores.

Moss Bros is also finally moving into the digital age having recruited its first director of e-commerce in May. A new integrated web platform will launch just before Christmas and a hire transactional website is scheduled for the first quarter of 2013. These are exciting developments because it will enable Moss Bros to tap into its huge database of customers in a smarter way, which should boost cross-selling opportunities, generate incremental sales and offer customers a 'click and collect' service on the hire side.

This progress has not been lost on investors as shares in Moss Bros have soared 25 per cent to 48.5p since I advised buying at 39.5p (Dressed for success, 20 February 2012). However, strip out a healthy £26.2m cash pile from the company's £49m market value and the business is being valued on a miserly 3.5 times broker Peel Hunt's current-year cash profit estimate of £6.8m, which factors in 9 per cent growth on the prior year. In my view, that gives ample scope for the re-rating to continue and I am maintaining my fair value estimate of 60p to provide us with a further 25 per cent of potential share price upside.

Bargain shares ramping ahead

My 2012 Bargain share portfolio is now storming ahead of the market, rising by over 12.5 per cent since mid-February against a near 11 per cent fall in the FTSE Aim index and a flat performance from the FTSE All-Share in the same eight-month period. No fewer than six of the 10 companies in the portfolio are showing double-digit gains, including Edinburgh-based Indigovision (TIDM: IND, 440p), a pioneer in internet protocol network-based security surveillance systems.

How Simon Thompson's 2012 Bargain Share Portfolio has performed

Shares in Indigovision surged last week after the company reported bumper pre-tax profits of £2.7m in the 12 months to end July - more than double the prior year's total - and a trebling of EPS to 25p. And with cash generation strong, net funds have risen from £5m to £6m, the equivalent of 80p a share. So with surplus cash on the balance sheet, the board is returning 70p a share to shareholders as a special dividend (ex-dividend: 31 October) and has raised the normal payout by a third to 10p a share including a final dividend of 5p a share.

Moreover, we can expect a significant profit uplift in the current financial year to July 2013 when the operational gearing of the business really kicks in. Broker N+1 Brewin is predicting an 8 per cent rise in revenues (from £30.3m to £32.5m) to drive pre-tax profits up by a quarter to £3.4m and produce EPS of 32.7p. Interestingly, the broker notes that upgrades are likely if "current momentum is maintained" so these estimates could prove conservative.

Investors have clearly noted the bullish trading and Indigovision's shares are now up 35 per cent on my advised buy-in price of 325p. However, strip out dividend payments of 75p - in effect the cash on the balance sheet - and the shares are trading on a modest 11 times current-year earnings estimates. Add in a prospective yield of around 2.7 per cent based on a raised normal payout of 12p a share in the current financial year, and the share price looks poised to make further headway towards what I consider conservative analyst targets around 500p. With at least a further 15 per cent upside on the table I remain a buyer.

Golden opportunity

Azerbaijan gold, silver and copper miner Anglo Asian Mining (TIDM: AAZ, 51p) released interim results after my column was published last week ('Golden nuggets', 24 September 2012) which sparked some very volatile trading in the company's shares. Although profits dipped in the six-month trading period, I am not at all concerned for the simple fact that this reflected a shortfall in production due to the harsh winter in the country and the company expects to ramp up gold production from 21,641 ounces (oz) in the first half to between 27,350 to 29,350 oz in the second half of this year.

It's worth noting that the realised average gold price on the 18,135 oz sold in the period was $1,644 whereas the current spot price is $1,780 an oz, so fourth-quarter gold sales are going to be make at least $135 an oz more profit than in the first half. Moreover, around 3,500 oz of the first-half production was not sold in the first half, so will feed through to second-half profit and revenues.

In fact, if this output had been sold it would have added $3m to operating profit with the resulting $2m profit shortfall simply down to reduced production due to the harsh winter. In any case, this will largely be recovered in the third and fourth quarters when the company will also benefit from a much improved gold price environment.

I should add that analyst John Meyer of brokerage Fairfax notes that: "Anglo Asian's operations are expected to ramp up in the second half, with total production moving towards management's guidance of 49,000-51,000 oz. This should cut cash costs and provide operating cash flow to cut outstanding debt. The team has also paid down an additional $4.5m in the post-reporting period and debt repayable in less than one year now stands at $6.5m, which should be comfortably covered by operating cash flow (before movements in working capital and tax) of around $50m in 2012. Moreover, operating cash costs are estimated to come down towards normal levels in the second half and average $520 an oz for the year."

Or to put it another way, the profit margin Anglo Asian Mining will be making in the second half is likely to increase significantly and, with output rising sharply and the gold price surging, second-half profits and earnings are likely to ramp ahead.

I continue to rate the shares, at 51p, a strong buy trading on only 5.5 times earnings (12 months rolling) and would point out that Mr Meyer's 69p target price could prove very conservative and I retain my 80p target price.

Tech rally bumper gains

Finally, if you followed my advice to buy Royal Bank of Scotland Nasdaq covered call warrants, RK28, when the index was trading at 2722 (online exclusive: Benefit from bond bonanza, 14 August 2012), you will have racked up massive gains. To recap, I advised running your profits to expiry of the warrants on Friday, 21 September when the Nasdaq futures had risen to 2861 - a level that also coincided with the high point of the rally. And because RK28 was geared around 13 times to movements in the underlying index the 5.1 per cent rise in the Nasdaq 100 translated into a 70 per cent increase in the covered warrant price in little over five weeks.