Established in 1983, Sanderson (www.sanderson.com) makes its money by offering customers software products and services that have the tangible benefit of reducing costs or improving the efficiency of their business. For example, the company works in partnership with clients to deliver e-commerce software systems that underpin their online operations and enable them to cross and upsell products, offer a '3D' secure payment process and integrate online offerings with other parts of their business.
It's a fast-growing segment of the retail market to be operating in, with IMRG Capgemini forecasting that UK online sales will grow 13 per cent this year. There is also a large market to aim at since the internet still only accounts for 12 per cent of retail spend, but it is growing quickly as over 32m people purchased goods online last year, accounting for 66 per cent of UK adults, up from 62 per cent in 2010. Importantly, Sanderson has the cash available to invest and meet client demand for e-commerce and mobile devices software products. In fact, having banked £11.75m by selling off the company's electronic point-of-sale solutions business to Torex Retail in January, the small-cap company is now debt-free and had net funds of £3.6m at the end of March. It is also reassuring that recurring revenues cover almost 80 per cent of the company's overheads.
E-commerce driving growth
This new focus is clearly paying dividends since order intake in Sanderson's manufacturing and multi-channel businesses was 10 per cent ahead of the prior year by the end of August. In fact, order intake for the multi-channel division had already exceeded that of the whole of the previous financial year by the end of July and Sanderson now has over 220 customers who sell via stores, mail-order catalogues and call centres, wholesale (B2B) and online. Clients include household names such as Hotel Chocolat, Thorntons, Thompson & Morgan and Mothercare. The company's software is proving popular partly because it helps optimise and control supply chains, streamline fulfilment and returns, but also because it improves decision-making processes and leads to more effective management.
The buoyant demand Sanderson is enjoying for its products and services was clear to see in the company's half-year results, as operating profits from the multi-channel retail division soared 25 per cent to £500,000 in the six months to the end of March and the order book more than doubled to £1.27m. There is every reason to believe the momentum will be maintained given the technological advances we are seeing and the effect this is having on the way companies do business. Moreover, the growth in mobile applications and 'always on' mobile devices is now benefiting Sanderson's manufacturing software business, which has over 160 customers.
For example, Sanderson has launched an 'app' enabling its wholesale and cash-and-carry customers to access real-time information which has the tangible benefit of improving customer service, not to mention generating additional sales. The company has also developed other apps to enable furniture manufacturers with retail outlets to process real-time customised orders on iPads and food manufacturers to more cost-effectively comply with food hygiene and legislation.
So, with order intake strong, and the board recently noting the business is "trading ahead of expectations for the year to September", we could be in for some upbeat trading news when the company releases a pre-close update in a few weeks' time ahead of results in late November. One thing is for sure, analyst earnings estimates are in the bag which significantly mitigates risk. What's more, even without factoring in any upgrades there is a strong case to be made that the shares are seriously undervalued.
A compelling valuation
Stripping out the contribution from the above disposal, analyst Darren Nathan at brokerage WH Ireland is forecasting pre-tax profit of £1.8m and EPS of 3.5p based on revenues of £13.1m in the 12 months to the end of September. So, with Sanderson shares being offered in the market at 40p, this implies a modest PE ratio of 10.5. But it's worth noting that the cash pile is worth 8.3p a share of the company's net asset value of 45.5p a share, so in effect the PE ratio drops to only nine net of cash. Now that would be justified if Sanderson had gone ex-growth. But that is clearly not the case as analysts at WH Ireland, Charles Stanley Stockbrokers and Brokerlink all expect profits to ramp up to £2.2m in the financial year to September 2013, to produce EPS of 4.2p. On that basis, the forward PE ratio is only seven net of cash.
Moreover, having raised the payout by two-thirds to 0.5p a share, the board have committed to a 60 per cent increase in the full-year dividend to 1.2p, so the share price is supported by a healthy yield of 3.3 per cent. For good measure, Sanderson's share price is 10 per cent below book value so we're not even paying a premium to net assets to buy the shares.
Share price break-out looms
Interestingly, the share price chart is forming a bullish ascending triangle formation and looks poised to imminently pressure the 45p resistance level that has capped previous rallies and which coincides with a previous major support level that held for two years until late 2007. In my view, Sanderson's shares are worth 50p on any basis and arguably far more given the business is thriving on the high demand for software to service the fast-growing online, mobile and multi-channel retail channels. The shares are also outperforming the market, having risen 20 per cent since I first noted their potential 15 months ago ('A valuable stock check', 18 Jul 2011), which compares rather favourably with a 19 per cent decline in the FTSE Aim index. Trading buy.
FOR BEST RESULTS - READ ONLINE!
My track record of small-cap stock picks has not gone unnoticed in the City. Since the start of last year, this column has appeared on the IC website at noon on Mondays, often prompting immediate sharp increases in the prices and trading volumes of companies mentioned.
A good example was last week's buy recommendation on publisher Future (FUTR) ('A bright future', 8 Oct 2012), which clearly caught the attention of our online subscribers. By the end of trading on Monday 8 October, over 2.8m shares had been traded in 116 bargains in only four-and-a-half hours, which resulted in the company's share price moving up from an opening offer price of 13.5p to close on a spread of 15.75p to 16.25p.
This was not an isolated case, as the share price of Azerbaijan gold, silver and copper miner Anglo Asian Mining (AAZ) has surged by 25 per cent to 56p on massive turnover after I reiterated my buy advice three weeks ago when the price was around 45p ('Golden Nuggets', 24 Sep 2012). Readers who followed my original recommendation ('A golden opportunity', 19 Jun 2012) have now made a profit of 50 per cent in less than four months. The share price of international rare coin, banknote, medal and stamp dealer and auction house Noble Investments (NBL) also re-rated sharply from 167p to 200p given the weight of money invested by online subscribers ('A noble investment', 17 Sep 2012).
First-mover advantage clearly paid dividends for online subscribers who bought shares in chip designer Imagination Technologies (IMT) after I highlighted the potential for a very sharp re-rating ('Tech calling', 9 Aug 2012). Within a month they had hit my 620p to 640p price target, providing gains of upwards of 18 per cent for those who followed the advice to buy around 540p. Staying with the tech sector, my online exclusive to buy Royal Bank of Scotland Nasdaq covered call warrants, RK28, when the index was trading at 2722 ('Benefit from bond bonanza', 14 Aug 2012) also racked up impressive quick-fire gains for our internet subscribers. In fact, the Nasdaq futures had risen to 2861 by the time the call warrants were cash settled on 21 September, which meant we made a 70 per cent profit on these leveraged warrants in little over five weeks.
Online subscribers have also done incredibly well by being able to buy early shares in all of my star stocks picks this year. To name a few, these include: software company Netcall (NET), clothing retailer Moss Bros (MOSB), marketing services provider Communisis (CMS), security camera specialist Indigovision (IND), stamp dealer Stanley Gibbons (SGI), housebuilder Telford Homes (TEF) and food manufacturer Zetar (ZTR). These are a fairly diverse range of small-cap companies, but they have one thing in common: their share prices have risen by at least 25 per cent and upwards of 50 per cent-plus in some cases following my buy recommendations this year.
A major benefit of publishing my weekly column on the internet before the magazine hits the newsstand on a Friday is that online subscribers can react in real-time to my advice and act on what can be very time-sensitive information. This gives internet subscribers a real edge and one with potential to make bumper profits from. For example, returning from holiday in early July, I noted that investors had failed to grasp the full implications of the financial update from Aim-traded investment company Spark Ventures (SPK) ('The spark for a re-rating', 10 Jul' 2012). This offered us a low-risk trading opportunity to profit from the valuation anomaly on offer. My article caught the attention of like-minded value investors and, on huge turnover, Spark Ventures' share price soared 18 per cent from 9.5p to 11.25p on the day the article was published online with 2.5m shares traded in the four hours after publication. The price subsequently peaked at 12.875p in mid-September.
Given the success I have been enjoying, a growing number of investors clearly value the extensive research I put into my equity analysis and follow my recommendations avidly as a result. However, this also means that not everyone will be able to buy shares in all the companies I write about. This is hardly surprising when you consider that those recent articles featuring Noble Investment and Anglo Asian Mining were read by over 8,000 online subscribers in a 48-hour period. That said, it is now crystal clear that internet subscribers stand a much better chance of being able to buy into my recommendations at the stated price in my articles than magazine subscribers who receive the article four days later.
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