Join our community of smart investors
OPINION

A stamp of authority

A stamp of authority
November 5, 2012
A stamp of authority

It's no fluke either, because once I realised the significance of the European Central Bank's decision to offer a €489bn line of cheap funding to the eurozone's banks at the end of 2011, I made the conscious decision to focus on the riskier end of the equity market to play a likely 'risk on' rally and one where small caps would outperform large-caps. The subsequent actions of the US Federal Reserve and ECB to offer further monetary stimulus in the autumn has only fuelled the rally in this segment of the market.

I outlined the rationale behind my decision in some detail earlier this year ('Bulls in charge', 27 February 2012) but, to recap, my strategy is to identify hidden value plays in the small-cap sector that the market has missed. That's because other investors are far more likely to pounce on such mispriced gems - and so trigger the necessary share price re-ratings - in the current risk-tolerant environment. The other benefit of this approach to investing in small caps is that we have not suffered too badly when trading performances have failed to live up to expectations given the tail wind behind this particular segment of the market. Moreover, the gains on my winners this year far exceed the losses, so we should all be ending this year in a far healthier financial position than when we started. With this thought in mind, some more companies in my 2012 Bargain Shares portfolio require updating.

 

Stanley Gibbons embraces digital age

Stamp collecting may not be to everyone's taste but, in these uncertain times, it is proving a highly profitable business for Stanley Gibbons (SGI: 217p) - the most famous name in stamps and a company that has been around for 155 years.

That's not to say that the business is stuck in some bygone age as Stanley Gibbon's accomplished management team has been embracing the opportunities offered in this digital age. For instance, in the first half, the company's internet sales increased by 90 per cent to £1.3m, equating to 9 per cent of turnover. However, the market has huge potential as chief executive Michael Hall points out that eBay has an online stamp market in the order of $268m (£172m).

So to tap into this lucrative area, Stanley Gibbons is acquiring a US-based online collectibles trading platform, bidstart.com, to grow its online presence far more quickly. It looks a smart deal because Bidstart is mainly focused on the stamp and postcard market and has sold more than 3.5m items since inception. Moreover, of the 6.4m items on the site, around 3m are stamp lots. Commission fees accounted for annual revenues of $300,000 (£186,000) from the site, but the real opportunity for Stanley Gibbons is to use its own expertise, brand, network and financial strength to create a much bigger collectibles trading platform for bidstart.

It looks a sensibly priced deal, with the initial consideration around £415,000 in cash and shares. Equally sensible, Stanley Gibbons raised £6m at 195p a share last week through a placing to fund the purchase and a planned significant investment in bidstart's technology, marketing and staff. The equity-raising also means the company has the flexibility to pursue other growth opportunities in its own business. True, the dilutive effects of the placing and the investment in bidstart mean that profit and earnings growth will be held back next year; broker Peel Hunt expects pre-tax profits to edge up from £5.5m to just £5.7m. However, the potential upside from this deal could transform the company's business model if it can penetrate the online US stamp market in a meaningful way. Trading on 12.5 times earnings estimates, I continue to rate Stanley Gibbons' shares an attractive buy.

How Simon Thompson's 2012 Bargain Shares Portfolio has performed

CompanyTIDMOffer price, 10 February  Bid price, 1 November Dividends paid (p)Total return (%)
Telford Homes (see note 5) TEF91.71471.561.9%
Indigovision (see note 3)IND3254108050.8%
MJ Gleeson  GLE110150036.4%
Molins (see note 2)MLIN1071305.2526.4%
Stanley Gibbons (see note 1)SGI1782106.2521.5%
Bloomsbury Publishing (see note 6)BMY115125.55.2513.7%
MallettMAE737300.0%
Rugby Estates (see note 4 and text)RES433330250-9.6%
Eurovestech (see note 7)EVT9.36.751.32-13.2%
Trading EmissionsTRE25.25210-16.8%
Average .  17.1%
FTSE All-Share 30443043 0.0%
FTSE Small cap index 30513259 6.8%
FTSE Aim index794700-11.8%
Notes    
1. Stanley Gibbons paid a dividend of 3.5p a share on 21 May and 2.75p on 1 October 
2. Molins paid a dividend of 2.75p a share on 11 May and 2.5p on 11 October
3. Indigovision paid a dividend of 5p a share on 19 April and 75p a share on 30 November (ex-div: 31 Oct)
4. Rugby Estates made a capital return of 250p a share (through B and C shares) in June 2012 and then consolidated shares on a 7:3 basis
5. Telford Homes paid a dividend of 1.5p a share on 20 July
6. Bloomsbury paid a dividend of 4.31p a share on 25 September and a dividend of 0.94p on 30 November (ex-div: 31 Oct)
7. Eurovestech paid an E share dividend of 1.32p a share on 21 September. Shares delisted from Aim on 24 September and trading is now on the Matched London Facility.

 

Rugby's wind-up

My investment in Rugby Estates (RES: 345p), a small-cap property company in the process of winding itself down, has not gone as planned. That's because a tough secondary market in commercial property is making it difficult to realise the value of the company’s assets close to book value, a fact I underestimated when I advised buying in February. Latest guidance is that investors will receive a further return of capital of between 370p and 470p a share, with a return nearer the bottom of that range likely. To put this into perspective, this is equivalent to a range of 410p to 450p per share before Rugby returned 250p a share of cash in June (through an issue of ‘B’ and ‘C’ shares) and had a three-for-seven share consolidation. That said, it's far from a disaster.

For instance, let's say you purchased 700 shares in the company at 433p, a price freely available when my Bargain Shares Portfolio was published on Friday 10 February, at a cost of £3,031. So post the share consolidation, you will be holding 300 shares, which can be sold in the market at 330p, or a total of £990, and have received 700 ‘B’ or ‘C’ shares, which were redeemed for £1,750. In other words, your £3,031 investment is currently worth £2,740. However, if Rugby does return 370p a share to investors, £120 of that £291 paper loss will be recouped. So with the bid price of the shares below the 370p lower end of guidance for the eventual capital return, I have decided to hold out for the sale of Rugby's remaining property assets.