We have made some spectacular quick-fire profits on numerous small-cap plays including my punt on Goals Soccer Centres, which succumbed to a bid from Ontario Teachers' Pension Plan as predicted (A bid target worth punting on, 28 May 2012). The deal netted us a 12-13 per cent net gain in less than two months. Or, to put it another way, make that kind of gain six times a year and you would double your money. And with rival bidder Patron Sports Holdings having been set a Takeover Panel deadline of 13 August to make its intentions clear, then there could be further upside in store. My advice is to sit tight.
The spark for tech gains
Last month's advice to buy into technology investment company Spark Ventures at 9.5p proved timely, too, as the shares surged 25 per cent to 12p at one point (The spark for a re-rating, 10 July). It also looks fully justified after the company announced last week that proceeds from the sale of chip designer, Aspex Semiconductor, will now be in excess of the carrying value of the stake and "the board expects another substantial return of cash to shareholders will be made during the autumn". Priced 30 per cent below book and underpinned by a cash-rich balance sheet, Spark Ventures' shares (TIDM: SPK) continue to rate a medium-term buy on a spread of 11p to 11.25p.
That sort of gain is not a one-off, either, as my advice to buy into carbon emissions investment company Trading Emissions at 19.5p (Time to capitalise on LMS, 25 June 2012) proved the right call as the shares subsequently rallied 25 per cent to 24.5p. Undoubtedly, the shares (TIDM: TRE) will continue their rollercoaster ride; equally, though, there is clear value on offer as I have explained in previous articles. So, if you have the patience and stomach to ride out the short-term volatility, you can realistically expect significant upside - and, at 23p, I remain a buyer.
Indigovision in the picture
Edinburgh-based Indigovision, a pioneer in internet protocol network-based security surveillance systems and a company I selected as one of my 10 Bargain shares this year, has reported a bumper pre-close trading statement ahead of releasing results for the financial year ending 31 July 2012. Sales growth in the second half of that 12-month period has been above 10 per cent and, with margins ahead of the prior year and costs well under control, underlying operating profits are expected no lower than £2.6m, more than double last year's total. This will give EPS of around 25p, treble the 8.4p reported in 2011.
Moreover, there should be a further profit uplift in the financial year to July 2013 when the operational gearing of the business really kicks in. Broker N+1 Brewin is predicting a modest 3 per cent rise in forecast revenues (from £30m to £31m), but this will drive pre-tax profits up by a quarter to £3.4m and produce EPS of 32.4p. On that basis, the shares (TIDM: IND - 350p) are trading on a modest 11 times next year's earnings estimates, a rating that is even more attractive when you consider that Indigovision is sitting on net cash of just under 100p a share. To put that into perspective, net of cash the shares are being priced on 7.5 times estimates for the year to July 2013. Add in a prospective yield of around 3 per cent, and they are a stand-out buy at 350p ahead of those results on Thursday 27 September.
Callbusters rings up gains
Netcall, a small-cap company offering software to make telephone call-handling more efficient, also continues to rings up the gains. In fact, if you bought on my original recommendation at 13.25p (Queuebusters, 17 Jan 2011) you have now doubled your money with the shares at 26p (TIDM: NET). I also reiterated my buy advice at 19.5p ahead of what proved to be bumper half-year figures in March (Three undervalued small caps, 30 Jan 2012).
The company's latest trading statement, ahead of next month's release of results for the 12 months to 30 June, has been ringing the right notes, too. In particular, Netcall has been generating some pretty impressive cash flow, with net cash rising a further £1.3m to £8.5m, the equivalent of 7p a share, since the end of last year. In my view, this not only indicates strong conversion of trading profits into cash, but underlines the quality of Netcall's revenue stream and one that is providing strong profit growth, too. In fact, when the company reports its full-year results on Tuesday 25 September, analysts expect adjusted pre-tax profits to have increased by over 25 per cent to £3.3m to produce EPS of 2.2p.
It's worth noting that if you strip out net cash, the company is in effect being valued on a modest 8.5 times earnings. For a business in an earnings upgrade cycle, and one that is benefiting from cross-selling opportunities across its product range and showing strong momentum in its order book, that rating is hardly exacting. So I am maintaining my 30p a share target price and buy advice ahead of next month's results on Tuesday 25 September, but have a strong feeling this could prove conservative.
*Some readers have raised the issue that some weeks my column is absent from the magazine. This probably requires some clarification. As much as I would like to write a column, there are time constraints and the most significant is the corporate reporting calendar. This is when I have the task of making sure the investment case stacks up on the hundreds of results that our dedicated team of financial journalists cover. Rest assured I always endeavour to produce a column when time allows.
