The fact that order intake soared by 20 per cent to £12m, including over £3.8m of business from new customers, and the year-end order book is up over a quarter year-on-year, gives credence to the board's assertion that since the Brexit vote "there has been no loss of confidence from both existing and prospective customers".
The company's cashflow performance was eye-catching: having paid out a total of £2.8m in shareholder dividends and deferred consideration on previous acquisitions, Sanderson still closed the financial year with net funds of £4.3m, a sum worth almost 8p a share, down by only £310,000 on the same stage 12 months ago. Bearing this balance sheet strength in mind, the board "remains keen to strengthen the business by selective acquisitions". I understand that "a number of opportunities are currently under consideration", although the priority remains focused on delivering shareholder value through organic growth and 'on target' results, thereby ensuring higher earnings and dividend returns to shareholders.
Analysts at brokerage GECR predict that Sanderson will deliver a 10 per cent increase in adjusted EPS to 5.6p in the year just ended to support a hike in the payout from 2.1p to 2.3p a share. On this basis, the shares are priced on less than 11 times cash-adjusted earnings, offer a dividend yield of 3.4 per cent, and on a price-to-book value of 1.4 times. That's an attractive rating for a company that has seen no discernible negative impact from the Brexit vote and whose enterprise software business has clearly returned to growth. Moreover, Sanderson offers a high-growth digital business, and specifically one offering a cloud-based technology that integrates existing back-office systems to optimise a retailer's applications. This division now accounts for around 30 per cent of the company's annual sales, and continues to benefit from "the rapid growth in the digital retail market".
Admittedly, although Sanderson's share price has doubled since I initiated coverage at 33.5p ('A valuable stock check', 18 Jul 2011), it's fallen back from the 85p level when I last updated the investment case ('Sanderson's order book surges', 9 Jun 2016). In my opinion, this de-rating can be largely attributed to investor concerns that businesses will curtail investment plans in light of the uncertainty caused by the results of the EU Referendum, rather than a reflection of the company's financial performance which has been strong. Third-quarter UK economic growth of 0.5 per cent, and the latest retail spending figures, suggest that investor caution has been overdone. Furthermore, the company's suite of software products and services has tangible benefits for customers as they typically lead to cost savings, often within 12 months of implementation, something worth considering in the event of a slowdown and pressure on companies to cut costs.
The bottom line is that I feel that Sanderson's shares offer significant upside potential, and the potential for corporate activity and the release of the company's forthcoming full-year results on Wednesday, 30 November 2016, are likely catalysts for a much deserved re-rating. I maintain my target price of 95p and continue to rate the shares a buy at 67p.
Entu warns again
I have been in the fortunate position of being able to report a raft of good news from small-cap companies on my watchlist this year, but investing in the stock market is never a one-way bet. The share price performance of Aim-traded Entu (20.5p), a UK supplier and installer of windows, doors, solar panels and other energy efficient products, is a stark reminder of the risks involved.
When I last rated the shares a hold for recovery at 68p ('A trio of small-cap plays', 2 Feb 2016), analyst Tom McColm at house broker Zeus Capital expected Entu's revenues to rise by 5 per cent to £104m in the 12-month period to end October 2016, but underlying pre-tax profits to decline from £8m to £7.5m. On this basis, he expected EPS of 9.1p and a maintained dividend of 5.3p based on a flat performance in both Entu's home improvement division, accounting for 75 per cent of revenues and half of its profits; and its repair and renewals cover plan division which has been earning Entu around £2m a year in profits.
The company has missed those targets by a mile and, in hindsight, I should have bailed out when the burden of the on-going cost base resulting from Entu's discontinued solar business led to a hefty earnings downgrade in the summer. To compound matters, the board has just guided the market to expect cash profits to decline to a range between £3.6m to £4m, implying pre-tax profits of £3.4m and EPS of 4.1p, reflecting weakness in Entu's home improvement division. Subsequent to that update, Entu has sold off its exterior wall insulation and specialist cladding business, Astley, for nominal consideration, the effect of which is to reduce likely pre-tax profit and EPS from ongoing operations even further to just £2.2m and 2.7p, respectively, for the year just ended. A final dividend of 1p a share is expected to be declared by the board to make a total of 1.5p for the financial year, a massive shortfall on the 5.3p payout that analysts had forecast at the start of the year.
True, a restructuring programme is expected to yield an annualised benefit of £2m in the financial year ending October 2017, and additional cost savings targeted will be reinvested in the business to strengthen management, the balance sheet and to improve controls and processes. However, the company's sales visibility remains poor and even though analysts expect a recovery in the new financial year I am not convinced. Sell.
Marwyn's share offer
Shares in Marwyn Value Investors (MVI:143p), a closed-end investment company listed on the Specialist Fund Market of the London Stock Exchange, have been de-rated sharply since the company raised £50m of new equity at 220p a share at the tail end of last year by issuing 22.7m new shares, or 40.1 per cent of its share capital. The net proceeds have been used to invest in new quoted portfolio companies targeted by Marwyn Value Investors LP, an open-ended Master Fund domiciled in the Cayman Islands, which was launched in early 2006 with backing from more than 60 leading institutions and alternative funds including Marwyn Value Investors.
The share price de-rating is in part down to a lacklustre investment performance this year - the company's net asset value per share has fallen by 11.3 per cent to 212p since the start of January - but is also down to a doubling of the share price discount to net asset value. The shares were priced 17 per cent below book value when I rated them a buy at 190p ('Undervalued, cash-rich investment, 18 Feb 2016), but are now priced a hefty 33 per cent below book value.
Marywn's share price underperformance has not been helped by the market turbulence post the Brexit vote which negatively impacted the share prices of three of its largest holdings: a 25.8 per cent stake in Zegona Communications (ZEG:117p), a small cap company that acquired Telecable de Asturias, the leading quad play telecommunications operator in Asturias, north-west Spain; a 2.38 per cent shareholding in BCA Marketplace (BCA:180p), Europe's largest car auction operator; and a 93.2 per cent holding in unquoted Marwyn Management Partners, a company that owns the Le Chameau premium footware and accessories brand.
At the current share price, Marwyn's shares offer a 5.8 per cent dividend yield based on the quarterly ordinary payout of 2.064p a share (payable in January, April, July and October), and clearly one that non-executive director Ronald Hobbs finds attractive as he has splashed out over £102,000 buying shares at 143p in three transactions since early October. The 33 per cent share price discount-to-book-value also fails to recognise the fact that since inception a decade ago, the company's net asset value has grown by 173 per cent, massively outperforming the 24.3 per cent rise in the FTSE All-share index in the same period.
Of course, a recovery in the share prices of BCA Marketplace and Zegona, holdings which accounted for 55 per cent of Marywn's net asset value at the end of September, will be needed to get the company's net asset value moving upwards again. Some corporate activity at Gloo Networks (GLOO:120p), an Aim-traded cash shell that was listed in August 2015 in order to acquire consumer brands in the media sector that appeal to attractive socio-economic groups, is needed too. Marwyn holds a 34.9 per cent stake in Gloo Networks accounting for 6.2 per cent of its net asset value. It also has just made a new £10m investment in Marwyn Specialty Chemicals (MSM), a private company focused on the specialty chemical and industrial sectors. MSM is seeking to acquire a business with an enterprise value of between £250m to £1.5bn and intends to seek a listing around the time of the acquisition. The stake in MSM accounts for 5.85 per cent of Marwyn's net asset value.
Anonamously priced
The upshot is that with all of the company's net asset value backed by the stakes in BCA Marketplace, Zegona, Gloo Networks and MSM, then effectively other assets worth 70p a share are being attributed a nil value in Marywn's share price. Or put it another way, after adjusting for cash on Marywn's balance sheet, the current price implies a thumping 40 per cent discount on the open market value of the holdings in both Zegona and BCA and a 50 per cent discount on Marwyn's remaining assets.
That's an incredibly harsh valuation which may explain why Marwyn has just published details of a realisation share offer where shareholders can elect to re-designate their ordinary shares as realisation shares. The investment policy of the company and the Master Fund in respect of the realisation pool will be managed with a view to maximising investment returns, realising investments and making distributions as realisations are made. Upon a disposal, the assets will be divested on a pro-rata basis between the ordinary shares and realisation shares.
However, there are strings attached: the portfolio will not be realised on an accelerated basis compared with the assets attributable to the ordinary shares; realisation shareholders will not receive any quarterly dividends as the ordinary share distribution policy will not apply to the realisation shares; and the realisation shares will remain invested in Marywn's current five investments and will only be entitled to returns relating to investments attributable to the realisation pool. In addition, there is no guarantee the new realisation shares will be quoted, and even if they are liquidity could be an issue. I would therefore not re-designate your shares as I anticipate greater upside from the ordinaries, and you receive a dividend too.
And there are near-term catalysts to correct this pricing anomaly including the deployment of capital to fund acquisitions for both Gloo Networks and MSM. I would also flag up the positive operational performance of Zegona and BCA Marketplace: Zegona's recent half-year results highlighted ongoing progress at Telecable which is on track to meet 2016 guidance of mid-single digit revenue and double-digit cashflow growth; and BCA is expected to deliver 20 per cent earnings growth in the current financial year, and is using its paper to good effect, having completed the acquisition of Paragon Automotive, a leading UK provider of outsourced vehicle services to automotive manufacturers and fleet operators.
Needless to say, I rate Marywn's high yielding anomalously priced shares a buy at 143p.
My next column will appear on my home page at 12pm on Monday, 7 November.
