However, that is the tantalising prospect that Aim-traded software company Sanderson (SND: 51p), a specialist in multi-channel retail and manufacturing markets in the UK, offers investors. And it's not just a profitable business, but one that is exposed to a high-growth segment of the software market: e-commerce and mobile devices.
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 analysts at IMRG, the industry association for e-retail, and Capgemini, a leading consultancy, forecasting that UK online sales will grow 12 per cent this year, having grown by 14 per cent in 2012. There is also a large market to aim at since the internet still only accounts for less than a sixth of retail spend, but it is growing quickly and industry analysts expect £87bn-worth of online transactions to take place in the UK this year.
Importantly, Sanderson has the cash available to invest and meet the growing 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 last year, the small-cap company had net funds of £4.1m at the end of September 2012, equating to a fifth of its market value. It is also reassuring that recurring revenues of £7.8m account for 60 per cent of total sales of £12.8m in that financial year and cover three-quarters of overheads.
Booming e-commerce demand
This new focus is evidently paying dividends since the order book in Sanderson's manufacturing and multi-channel businesses was up 40 per cent year on year to £1.9m at the end of September. In fact, order intake for the multi-channel retail division almost doubled to £1m in that 12-month trading period and Sanderson now has over 200 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, Mothercare and Toni & Guy. The company's software is proving increasingly popular because it not only 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 full-year results, as operating profits from the multi-channel retail division soared 23 per cent to £1.1m, driven by demand from customers operating in online sales, e-commerce and catalogue markets. In fact, revenues from this segment rose 15 per cent to £2.4m and now accounts for a third of the total sales from the multi-channel retail division.
There is every reason to believe the sales momentum will be maintained given the technological advances we are seeing and the impact this is having on the way companies do business. For example, analysts at IMRG Capgemini estimate that sales through mobile devices (including tablets) increased by over 300 per cent in 2012 and they note "as mobile devices proved popular as gift choices at Christmas, it seems likely that we will continue to see very strong growth throughout 2013". This can only create further demand for Sanderson' services from corporate customers wanting to develop their online and ecommerce offerings to tap into this fast-growing market.
Moreover, the growth in mobile applications and 'always on' mobile devices is evidently benefiting Sanderson's manufacturing software business, which has over 160 customers. For example, the company has 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. Other apps developed enable furniture manufacturers with retail outlets to process real-time customised orders on iPads and help food producers to more cost-effectively comply with food hygiene and legislation.
An attractive valuation
Analyst Derren Nathan at broker WH Ireland is forecasting pre-tax profit of £2.2m and EPS of 4.4p based on revenues of £14.2m in the 12 months to the end of September 2013. I think these estimates look very conservative as they only factor in revenue growth of 6 per cent, which is hardly exacting considering the company's expansion into new areas such as cloud-based computing and mobile commerce. In fact, analysts at Charles Stanley Stockbrokers believe that there will be scope to upgrade estimates if the momentum in the business in the second half of last year is maintained.
That's well worth noting because with Sanderson' shares being offered in the market on a spread of 49p to 51p, they are currently trading on a modest PE ratio of 12 even though operating profits are conservatively forecast to grow by 15 per cent this year. Moreover, that prospective PE ratio drops to only 9.5 once you strip out a cash pile worth 9.3p a share.
Now that rating would be justified if Sanderson's earnings were expected to flatline next year. But that is clearly not the case as analysts at WH Ireland and Charles Stanley Stockbrokers all expect operating profits to ramp up to between £2.4m to £2.5m in the financial year to September 2014, to produce EPS of 4.7p to 4.8p. On that basis, a forward PE ratio of 10 for the 12 months to September 2014 drops to 8.8 net of cash.
Moreover, having raised the payout by 60 per cent to 1.2p last year, Sanderson's share price is supported by a healthy yield of 2.4 per cent. WH Ireland expects the dividend to rise to 1.4p in the current year and to 1.6p in 2014, which implies forward yields of 2.8 per cent and 3.2 per cent, respectively. For good measure, Sanderson's share price is priced a modest 10 per cent above book value of 46p a share, so we're paying a modest premium to net assets to buy the shares.
Catalyst for a re-rating
Sanderson's annual meeting is scheduled for Thursday 28 February when the company will update investors on trading in the five months since the September year-end. Given the positive growth drivers mentioned above, and the bumper order intake, it is only reasonable to expect further good news from the company in three weeks time. And we will not have long to wait, either, for the next trading update; we can expect in late April a pre-close statement for the first half of the current financial year to the end of March 2013.
Target prices
Sanderson has been a favourite of mine for some time and the share price is now up 50 per cent since I first advised buying at 33.5p in the summer of 2011 ('A valuable stock check', 18 Jul 2011). The shares have also risen 20 per cent since I reiterated that advice when they were priced at 40p ('An 'app' investment', 15 Oct 2012). My previous target price was 50p which has now been reached and, with upbeat trading news expected in the coming weeks, I am comfortable upgrading my target price to 60p. Realistically, this could be achieved in the next three months to provide us with a further 20 per cent upside. On a bid-offer spread of 49p to 51p, Sanderson's shares are a buy.
■ Finally, my 2013 Bargain share portfolio will be published online on my home page at 7am on Friday 8 February. Also, I will be taking a four-week break during April to complete a book on 'Profitable stockpicking', my follow up to Trading Secrets: 20 Hard and Fast Rules to Help You Beat the Stock Market. The book will be published in early summer.
MORE FROM SIMON THOMPSON ONLINE...
Since the start of this year I have written no fewer than 21 online articles, all of which are available on my homepage. These include articles on the following companies or investment strategies:
Future (Decision time after a bright start, 5 February 2013)
Aurora Russia ('Time to play Russian Roulette', 4 Feb 2013)
BP Marsh & Partners ('Hyper value gains', 31 Jan 2013)
Bellway ('Profit from the London property boom', 30 Jan 2013)
Telford Homes, MJ Gleeson, Mallett, Rugby Estates ('Taking profits after a winning streak', 28 Jan 2013)
Market timing ('Lessons to learn', 24 Jan 2013)
Communisis, Netcall ('Bumper trading gains', 23 Jan 2013)
Crystal Amber, API, Sutton Harbour ('More upside to come', 22 Jan 2013)
PV Crystalox Solar ('Seeing the light', 21 Jan 2013)
Bloomsbury Publishing ('A publisher for the digital age', 18 Jan 2013)
Housebuilders first-quarter effect and performance table on all my recommendations from the final quarter of 2012 ('Stockpicking Marvels, 16 Jan 2013)
Eros ('A share firmly in the picture', 15 Jan 2013)
Netcall ('Jumping the gun: take two', 15 Jan 2013)
Moss Bros, Communisis ('Jumping the gun', 14 Jan 2013)
Stanley Gibbons, MJ Gleeson, Spark Ventures ('Small cap wonders', 11 Jan 2013)
IQE, Trading Emissions ('A tech share worth buying now', 10 Jan 2013)
S&P 500 portfolio of dog shares ('Dog shares barking back', 8 Jan 2013)
Air Partner ('A share ready to take off', 7 Jan 2012)
FTSE 100 traded options strategy ('Highly profitable options', 3 Jan 2012)
Telford Homes, MJ Gleeson, Molins, Noble Investments ('Rampant bargain shares', 31 Dec 2012)
