Bargain shares 2009 update

Mallett (MAE)

Share price: 69p, Market capitalisation: £9.5m

Website: www.mallett.co.uk

Antique dealer

As expected, a dearth of Americans buying Mallett's traditional product - 18th century English furniture - knocked the company's results last year. However, Mallet was quick to take action, reducing staff numbers by a fifth and cutting marketing spend.

And the economic downturn is actually working in Mallett's favour, sending arch rival Partridge Fine Arts into administration last summer and tempting other competing dealers into retirement. So, when demand revives, Mallett should have a bigger share of the London dealers market. And there was some evidence of a modest trading upturn in November's trading statement when the board said that the company's cash position had improved since June and that it was taking advantage of some excellent buying opportunities while maintaining stock levels.

The shares reacted to the news by surging from my 50p advised buy-in price in February last year to a high of 93.5p by late September, a gain of 87 per cent. At this point I advised top-slicing a third of the holding ('Seeking Alpha - and finding it', 28 September 2009), having previously advised banking profits on half the holding in late May when the price was 59p ('Taking Stock', 26 May 2009). The shares are currently 71p.

This means that if you had, for instance, invested £1,000 buying 2,000 shares at 50p in February 2009 you would have recouped £900 of this sum by top-slicing your holdings by following my subsequent advice, while still retaining 666 shares which are now worth £472. This gives a net return of 36 per cent on the original £1,000 investment, which is admittedly four percentage points less than that achieved by a buy-and-hold investor, but importantly this top-slicing strategy has reduced the risk to our capital since we have banked profits on 90 per cent of our original investment.

I would be inclined to retain that shareholding, as at this level Mallett trades on a hefty 55 per cent discount to its last reported NAV of 145p a share and now looks well poised to benefit from any upturn in its markets. Moreover, at the current share price its market value is only £9.5m, so we are getting all the company's fixed assets of £6.6m for free and a further £4.2m of its £13.8m stocks of antiques are also in the price for nothing. There are no funding issues to worry about, either, as the company is lowly geared, carrying net debt of £750,000 on its balance sheet at the end of June, equivalent to less than 4 per cent of its net assets of £20m.

Trafficmaster (TFC)

Share price: 33p, Market capitalisation: £45.1m

Website: www.trafficmaster.co.uk

Satnav & vehicle tracking services

I adopted the same top-slicing investment strategy with shares of satnav and vehicle tracking services company Trafficmaster, advising banking profits on half the holdings in May and September when the share price was 30.25p and 37.5p, respectively. So if you had made a £1,000 investment by buying 6,250 shares at 16p last February, then you would have sold shares worth £1,726 and would still retain 2,083 shares now worth £687. This gives a 141 per cent return on the original investment, which is far better than the 106 per cent return from a buy-and-hold investor.

That said, even after these stellar share-price gains there are sound reasons to believe that the company's shares could now regain those 12-month highs around 41.5p a share. First of all, last month Trafficmaster released a positive trading update and announced the acquisition of Fleet Management Solutions (FMS), a fast-growing provider of satellite-based tracking services. The initial consideration is £4.4m with a further contingent payout of £3.7m based on the business's performance in 2010 and 2011. That's a price worth paying as broker Panmure Gordon expects FMS to generate operating profits of £1m on sales of £6.1m this year, so the deal will boost Trafficmaster's earnings per share.

FMS should also prove a strong strategic fit with Trafficmaster's existing US fleet tracking business and brokers have been upgrading their numbers as a result. For example, analyst Nick James at Panmure Gordon now expects EPS to rise from around 4p in 2009 to 5.38p in 2010, reflecting an increase in the company's revenues from £58.5m to just under £70m and an improvement in net margins. On this basis the shares only trade on six times these upgraded forecasts. But as FMS is the preferred provider of tracking solutions to the US Department of Homeland Security (DHS), there is scope for even more earnings growth in the years ahead. Panmure Gordon expects FMS to equip 4,500 of the DHS's vehicles this year, but that is just 10 per cent of the total fleet. Helped by this deal, Trafficmaster's shares have more fuel in the tank even after their 100 per cent rise in the past year.

BATM Communication (BVC)

Share price: 54.25p, Market capitalisation: £220m

Website: www.batm.com

Broadband & telecom systems

Shares in BATM, a designer and producer of ethernet and metropolitan telecom systems, were our star performers last year, rising from 24p to 54.25p, a gain of 126 per cent. Admittedly, if you followed my advice and top-sliced your holdings at 31.25p in May and 46.25p in June, then you would have recouped £972 of the £1,000 original investment and would now be holding shares worth £754. Still, that gives an impressive net return of 72.6 per cent.

After this stellar run the shares now trade on 14.4 times 2009 earnings estimates of 6.2¢, based on forecasts from broker KBC Peel Hunt. This drops to a forward PE ratio of 13.7 assuming BATM delivers EPS of 6.5¢ in 2010. True, this is below its peer group average PE ratio of 18, and BATM does have a conservative balance sheet holding net cash of $68.7m (£42.1m) at the end of October, equating to around 10p a share. However, the shares are no longer the bargain they were 12 months ago and for the share-price momentum to continue we need to see rising data volumes and telecom operators capital expenditure budgets reinstated in the US and Europe. Given the risk/reward on offer, I would bank the remaining profits.

French Connection (FCCN)

Share price: 39p, Market capitalisation: £37.4m

Website: www.fcuk.com/investorrelations

General retail

Our investment in French Connection proved a fashion victim when the company announced widening half-year losses in September as both sales and gross margins came under pressure. And the company's cash pile took a hit, falling from £38.4m in January to £15.4m by October, although this was mainly due to stocking ahead of the critical Christmas trading period. As inventories are turned into cash that sum will have increased significantly since then, but the financial performance was still anything other than dashing and the advice to take profits on half the holding at 66.5p in May and top-slicing it again at 50p in September has been the right one. In effect, if you had invested £1,000 at 48p a share in February you would have realised cash proceeds of £865 and still retain 694 shares worth £270. That gives a net return of 13.5 per cent over the year which compares favourably with the 19 per cent loss a buy-and-hold investor would now be sitting on.

So, with the turnaround yet to prevail and better investments on offer elsewhere, I would sell the remaining holding and crystallise that 13.5 per cent net gain.

Trikona Trinity Capital (TRC)

Share price: 47p, Market capitalisation: £101m

Website: www.trinitycapitalplc.com

Investment company

It's also time too to bank profits in India investment company Trikona Trinity Capital, even though the shares, at 47p, still trade on a massive discount to NAV of 121p. However, the chances of that discount narrowing any time soon look remote after the board decided to end its relationship with Trikona Advisers Limited (TAL), which acted as fund manager for the investment portfolio.

To complicate matters, Trikona is also on the receiving end of legal claims from Immobilien I and/or Immobilien II, partners on five of the company's development projects in India. This is starting to look messy and, although Trikona will resist the claims, this latest twist dents sentiment further towards a company that is sitting on an illiquid investment portfolio and currently has no appointed portfolio manager.

Fortunately, we have already booked profits at 52p in May and 55.25p in September, so if you had invested £1,000 at 34p a share in February you would have realised cash proceeds of £1,035 and still retain 980 shares worth £460. That gives a net return of almost 50 per cent over the year which compares favourably with the 38 per cent return a buy-and-hold investor would have made. My advice is to take profits on the balance of that shareholding.

Bargain Portfolio Update 2009