The idea is to identify companies which are trading well below book value; rated on an earnings multiple under 10; have modest gearing or preferably net cash on the balance sheet; offer a decent yield or have a progressive dividend policy; and have positive share price momentum. I will then use my stock picking skills to select a small number of companies which, in my opinion, offer the best risk-reward ratio to form a portfolio which you can buy.
So far, I have identified some very attractive investments opportunities. As all stock screeners must, I have also turned down a large number of companies that, while on the face of it meet my investment criteria, don't stand up to further scrutiny. Once I delve into the finer details of the company's annual report and accounts, and quiz management and analysts, it is apparent that these companies are lowly rated for a very good reason. The feature will be published in the issue Friday 13 August, but it is clear that for some companies the value on offer is likely to disappear well before then, as other stock market miners uncover these golden nuggets. Sanderson Group, an Aim-traded software supplier to the retail and manufacturing sector, is a prime example. I expect the company's shares to be sharply re-rated in the coming months.
Non-executive director Mr David Gutteridge is certainly bullish on the company's prospects as he purchased 45,000 ordinary shares at a price of 29.83p on 14 July, having previously bought a total of 75,000 shares in June at prices between 32p and 33p. It is not difficult to understand why.
Established in 1983, Sanderson (www.sanderson.com) makes its money by offering customers software products and services which have the tangible benefit of reducing costs or improving the efficiency of their business. For instance, the company works in partnership with clients to deliver e-commerce systems which 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.
Simon Thompson
Sanderson's retail software has a wide range of applications including use in 'voice picking' in warehousing and distribution or monitoring stock levels in real-time. Tony Hammond of high street retailer Tie Rack points out: "Not only has Sanderson's EPOS (Retail-J) software increased the accuracy of our stock checks, but it has also removed the need for overtime - a double benefit. Once the data is in the system, we can see stock levels for any one product line across our whole estate within a matter of seconds." Sanderson has also developed a product specifically for the hospitality sector which enables customers to use wireless or tablet technology to achieve savings in catering management. Clients here include Salford Royal NHS Foundation Trust and Bradford Teaching Hospitals NHS Trusts.
The company's offering is clearly attracting customer loyalty, too, with over half of revenues now recurring, and growing, and the order book at the end of March was up 10 per cent year-on-year. In the six month trading period, large orders were won from a number of existing clients, including Wilkinson, Lakeland and English Heritage, and 11 new retail customers - average order £111,000 - were added to the clientele.
The key financials are moving in the right direction, too. The business generated £1.7m of operating cash flow in the half year to 31 March which has allowed net debt to be reduced by 20 per cent to £7.2m and analyst Peter McNally at Charles Stanley stockbrokers expects borrowings to fall even further, to £6.4m at the September year-end. On this basis, gearing will be a modest 33 per cent of estimated year-end net assets of £19.1m, or 44p a share, offering scope for the board to raise the full-year dividend by a third to 0.8p a share as analysts forecast. Mr McNally also expects a further 25 per cent rise in the payout to 1p a share in the 12 months to September 2012 which means the yield rises from 2.4 per cent to 3.0 per cent.
The progressive dividend policy is certainly affordable as prospective underlying full-year pre-tax profits of £2.4m, up from £1.9m in the 12 months to September 2010, will produce adjusted EPS of 4.74p, so the payout is covered more than five times over. It also looks sustainable as the positive sales momentum is expected to continue as new products are launched and Charles Stanley predicts a 4 per cent rise in revenues to £28.5m in the financial year ending September 2012 to produce adjusted pre-tax profits of £2.8m and EPS of 5.4p.
Trading on a forward PE ratio of around six and 25 per cent below book value, I firmly believe that shares in Sanderson (AIM: SND) are priced for a re-rating. I have set a six-month target price of 47p which would put the shares on a more realistic 10 times this year's earnings and offers us a potential 40 per cent share price upside. It is worth noting that as a small-cap company valued at £14.5m, the bid-offer spread on the shares is 31-33.5p, a factor I have taken into full consideration when making this recommendation.
■ Netcall, a small cap company offering software to make telephone call handling more efficient, has announced a bullish trading update. Cash profits for the financial year to 30 June will exceed analyst forecasts reflecting improved gross margins, earlier than expected realisation of cost-savings from the Telephonetics acquisition and an ongoing focus on cost management. The company's cash pile has also risen from £4.8m to £5.9m, the equivalent or 4.8p a share. I advised buying the shares at 13p (Queuebusters, 17 January 2011) and they continue to rate a buy at 20p, on a modest 11.5 times earnings pre-upgrades. My target price remains 23p.
