Small-cap bargains

Small-cap bargains

Returning from a two-week break in the sun, I find myself urgently needing to update a number of my share recommendations. This is hardly surprising as I have offered advice on no fewer than 32 individual companies in the first half of this year and a similar number over the course of last year, so there is always constant newsflow from these companies.

Walker Greenbank on a roll

Interior furnishings company Walker Greenbank has announced another upbeat trading statement, posting 8 per cent underlying sales growth in the 17 weeks since the January year-end, despite being up against some strong comparables and challenging consumer markets in the UK. Investments in manufacturing and new collections - including Morris & Co's 150th anniversary year range and Harlequin's Momentum collection - are helping drive growth as are sales in overseas markets. The latter increased 13 per cent in the period and now account for a third of total sales.

This means that, with analysts only looking for a conservative 5 per cent rise in adjusted pre-tax profits to £5.3m in the 12 months to January 2012, Walker Greenbank looks primed for some earnings upgrades when it reports half-year results to end-July. Even without these, the shares are too lowly rated, trading on a modest seven times Arden Partners' EPS estimate of 6.8p based on a full tax charge.

Moreover, with annual operating cash flow around £4.3m and net debt only £1.8m (balance sheet gearing is 8 per cent), this supports the 15 per cent hike in the dividend to 1.1p a share analysts are forecasting. It's worth pointing out, too, that due to substantial brought forward corporation tax losses of £16.2m, the company will not pay UK corporation tax for some time yet, so the shares are in effect trading on 5.3 times earnings estimates based on the actual tax charge.

If you followed my advice to buy the shares at 22p (Luxury at a bargain price, 8 February 2010), a recommendation I reiterated when they were at 30p (Happy Anniversary, 20 September 2010), I would continue to run your profits. The shares remain a strong buy at 50p and I am maintaining my year-end price target of 75p, which, if met, would value the shares on a more realistic 10 times earnings and a further 50 per cent share price upside.

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