Join our community of smart investors
OPINION

Small Cap Wonders

Small Cap Wonders
January 11, 2013
Small Cap Wonders

The obvious consequence of making so many recommendations is that there is a constant stream of corporate news to react to and offer updates to all readers who decided to follow the initial advice. Yesterday, was a case in point when both chip maker IQE (IQE) and Aim traded investment company, Trading Emissions (TRE) served up some very positive announcements (A tech share worth buying, 10 January 2012). The latter was one of the 10 shares I selected for my 2012 Bargain share portfolio and today there have been updates from two more constituents, Stanley Gibbons (SGI) and housebuilder and land developer MJ Gleeson (GLE). Both pre-close trading updates are worthy of further comment especially as shares in both companies have reacted positively to the latest news.

Bargain shares ramping ahead

Stamp collecting may not be to everyone's taste but it is proving a highly profitable business for Stanley Gibbons (SGI: 235p) - 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 management has been embracing the digital age. For instance, the company's internet sales from from its core website, www.stanleygibbons.com, increased by 55 per cent last year, having risen by 67 per cent in 2011. 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 bought a US-based online collectibles trading platform, bidstart.com, to accelerate its online presence. It was 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 was sensibly priced, too, 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 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. In fact, the trading update reveals that at the end of 2012 the company was sitting on £7m of cash and a substantial stockholding of top quality rare collectibles which, according to analyst Charles Hall at brokerage Peel Hunt, are in the books at £20m and “worth £50m at retail prices.” Those stamps alone are worth 174p a share and the cash pile a further 24p a share. In other words, with the shares priced at 235p, stamps and net cash alone provide backing for over 80 per cent of the current share price. It also means that Stanley Gibbons has enough stock in order to meet the undoubted growing global demand for this alternative asset class. In fact, the GB250 Stamp Price Index – which provides a definitive measure of the performance of the UK rare stamp market – showed growth of 11 per cent in 2012 despite the weak economic conditions in the UK.

It’s worth noting, too, that the company is making significant progress expanding its footprint overseas to tap further into this demand. The new office in Hong Kong, which opened in September 2011 and is very profitable, has helped generate substantial new business in the Far East, so much so that the company plans to open further overseas offices in 2013. This makes sense since the growth in sales of rare stamps from China is clearly benefiting from Stanley Gibbons' ability to source suitable stock through Hong Kong and meet the strong demand for this lucrative area of the philatelic market.

Stanley Gibbons has also been tapping into the collectibles market, a move which looks strategically sound since chief executive Martin Bralsford expects “the current heightened interest in collectibles as an alternative asset class to increase further in 2013, evidenced by the size of our current order book, as the economic climate results in a desire for investors to allocate more capital into tangible assets". He also adds that the higher demand should “underpin the prices of top quality rare collectibles whilst providing investors with attractive returns and a hedge against inflation”. So the backdrop appears favourable for this part of the business.

The good news is that all these positive growth drivers are yet to be fully reflected in Stanley Gibbons' valuation even though the share price is up a third since I advised buying 11 months ago. On the basis that Peel Hunt expects pre-tax profits to increase from £5.1m to £5.5m in 2012 this will produce EPS of around 18.4p and easily support a rise in the full-year dividend from 6p to 6.5p a share as Mr Hall predicts. In other words, the shares currently trade on a modest 12.8 times earnings and offer a prospective yield of 2.8 per cent. True, the dilutive effects of the placing and the investment in bidstart mean that profit and earnings growth will be held back in 2013; Peel Hunt expects profits to edge up from £5.5m to just £5.7m on a rise in revenue from £37.1m to £39.8m. But the potential upside from this bidstart deal could transform the company's business model if it can penetrate the online US stamp market in a meaningful way and I continue to rate Stanley Gibbons' shares, trading on a bid-offer spread of 232p to 237p, an attractive buy ahead of its full-year results at the end of March.

Built on solid foundations

Shares in housebuilder and strategic land specialist MJ Gleeson (GLE: 178p) have rocketed 60 per cent since I recommended buying in February last year, but still trade 8 per cent below net asset value of 190p, which is an attractive valuation given that the majority of the UK-listed housebuilders are rated on premiums to book value.

I can see the half year results, scheduled for Thursday 28 February, acting as a catalyst to push the shares to a premium to net asset value. That’s because chief executive Jolyon Harrison has just revealed that: "The performance in the first half of the financial year to end December of both Gleeson Homes and Gleeson Strategic Land is encouraging, with profits expected to be significantly ahead of last year. Although the housing market remains challenging, the group remains on track to deliver a strong and sustained improvement in its performance." He has reasons to be bullish because Gleeson Homes sold 164 private development homes during the six month period, an increase of 53 per cent year-on-year. Total sales, comprising reserved, contracted and completed homes, rose two thirds to £33.2m, helped by government initiatives such as the FirstBuy scheme, which provides support to first time buyers by way of a 20 per cent equity loan on their purchase and has proved popular with the company’s customers. Gleeson has just secured an additional allocation of £2m of FirstBuy funding, which will provide assistance to about 170 first time buyers, and is clearly positive for future sales.

The company has been boosting its land holdings, too, and added 331 plots in the trading period which means the total landbank now comprises 2,099 plots owned plots with a further 1,530 plots conditionally purchased. Combined, that equates to 10 years supply at current build rates. Despite this investment net cash at the end of December was £10.4m, or the equivalent of 20p a share.

There was good news, too, from Gleeson Strategic land division which is enjoying strong demand for green field residential land in the South of England from the major housebuilders. The unit sold three sites, with a combined acreage of 13 acres, in the six month period. Contracts were also exchanged for the sale of the first phase of a 77 acre site in Thanet, in which Gleeson has 50 per cent interest, and planning permission was achieved on a 133 unit site at Grove, Oxfordshire and an 18 unit site at Hunston, West Sussex. Both sites will be marketed for sale this year. Moreover, agreements were entered into regarding six new sites, comprising 126 acres, to replenish the land bank.

So with good newsflow in the bag when the company reports results in seven weeks time, and housebuilders competing to buy land off Gleeson to support their own development pipelines, I anticipate Gleeson's shares running up further ahead of what will clearly be upbeat first-half results. In light of this I can see the shares, priced on a spread of 176p to 180p, trading at a premium to book value before too long. My immediate target price is now 200p and the Gleeson shares rate a short-term trading buy.

Happy capital returns

It is not just Trading Emissions that has decided to return a chunk of cash to shareholders. Aim traded investment company, Spark Ventures (SPK: 13.5p), will be returning between 2p to 2.5p a share later this month which is good news if you followed my advice to buy the shares ('The spark for a re-rating', 10 July 2012) when the shares were trading at 9.5p or four months later when the share price had drifted down to 11.25p (Time to spark a rerating, 8 November 2012).

If you followed that advice then you will now have decide whether to opt for the ‘B’ or ‘C’ shares to receive your bumper dividend ahead of company’s general meeting on Friday, 18 January. The ‘B’ shares will be treated as a capital gain for UK tax purposes whereas the ‘C’ shares will be deemed as income so will be liable to income tax. If you are a lower rate tax payer and have already used up your capital gains tax allowance for the 2012/2013 tax year I would opt for the ‘C’ shares. If you are a higher rate tax payer and have not used up your capital gains tax allowance then it makes sense to opt for the ‘B’ shares. Clearly, the decision on which option you take will depend on your individual tax situation although you can take a mixture of both the ‘B’ and ‘ C’ shares to minimise the tax liability.

Once the return of cash is approved by shareholders at the general meeting next week, it is expected that CREST accounts will be credited, or cheques despatched, in respect of the tender offer for the ‘B’ Shares (by the company’s broker finnCap) and the special dividend on the ‘C’ Shares, by 28 January.

Finally, my next column, Stock-picking Marvels, will appear online at 12pm on Monday 14 January.

Simon Thompson's 2012 Bargain Shares Portfolio update

Company

TIDM

Opening offer price on 10 February 2012

Bid price on 11 January 2013

Dividends paid (p)

Total return (%)

Telford Homes (see note 5)

TEF91.72003.5121.9%

Molins (see note 2)

MLIN1071675.2561.0%

MJ Gleeson

GLE110176060.0%

Stanley Gibbons (see note 1)

SGI1782326.2533.8%

Indigovision (see note 3)

IND3253558033.8%

Trading Emissions

TRE25.2531022.8%

Bloomsbury Publishing (see note 6)

BMY1151185.257.2%

Mallett

MAE737300.0%

Rugby Estates (see note 4)

RES4333300-9.6%

Eurovestech (see note 7)

EVT9.36.751.32-13.2%
Average31.8%

FTSE All-Share

304432015.2%

FTSE Small Cap

30513572

17.1%

FTSE Aim index

794736-7.3%

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

4. Rugby Estates purchase price adjusted for 7:3 share consolidation and capital return of 250p a share (through B and C shares) in June 2012

5. Telford Homes paid a dividend of 1.5p a share on 20 July and 2p a share on 11 January 2013 (ex-dividend: 12 December).

6. Bloomsbury paid a dividend of 4.31p a share on 25 September and 0.94p a share on 30 November

7. Eurovestech paid a 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.