But this is exactly what is on offer from Aim-traded software company Sanderson (SND: 49p), a specialist in multi-channel retail and manufacturing markets in the UK. The company has been a favourite of mine for some time, having first advised buying the shares at 33.5p ('A valuable stock check', 18 Jul 2011) and reiterated that advice when they were priced at 40p ('An 'app' investment', 15 Oct 2012). I then upgraded my target price from 50p to 60p when the shares were at 51p (‘An 'app' online investment, 5 Feb 2013) and they subsequently peaked out a few weeks later at 58p, before retreating to the current price of 49p on profit taking.
In my view, this sets up yet another buying opportunity before a next trading update in late April ahead of the company's half-year results to the end of March 2013, which will be released a month later. It also highlights the important point that if you place shares on a watchlist then you can take take advantage of multiple buying opportunities throughout the year simply by adopting a patient waiting game in order to time your entry point.
Fast-growth areas
Established in 1983, Sanderson (www.sanderson.com) makes its money by offering customers software products and services that have the benefit of reducing costs or improving the efficiency of their business. For example, the company works in partnership with clients to deliver e-commerce software systems that 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.
It's a fast-growing segment of the retail market to be operating in. Analysts at IMRG, the industry association for e-retail, and Capgemini, a leading consultancy, estimate that UK online sales will grow 12 per cent this year, having grown by 14 per cent in 2012. There is also a large market to aim at since the internet still only accounts for less than a sixth of retail spend, but it is growing quickly and industry analysts expect £87bn-worth of online transactions to take place in the UK this year.
Importantly, Sanderson has the cash available to invest and meet growing client demand for e-commerce and mobile device software products. In fact, the small-cap company had net funds of £4.1m at the end of September 2012, equating to a fifth of its market value of £21m. It is also reassuring that recurring revenues of £7.8m accounted for 60 per cent of total sales of £12.8m last year and cover three-quarters of overheads.
E-commerce drives demand
Management's focus on the fast-growth areas of the retail market is evidently paying off since the order book in Sanderson's manufacturing and multi-channel businesses was up 40 per cent at the end of September. After the first four months of the current financial year, both sales and profit were well ahead of the comparative period of the previous year buoyed by demand from Sanderson's customer base of over 200 companies who sell via stores, mail-order catalogues and call centres, wholesale (B2B) and online. Clients include household names such as Hotel Chocolat, Thorntons, Thompson & Morgan, Mothercare and Toni & Guy. Sanderson's software is proving popular because it helps optimise and control supply chains; streamline fulfilment and returns; improves decision-making processes; and leads to more effective management.
There is every reason to believe the sales momentum will be maintained, too. For example, IMRG Capgemini notes that sales through mobile devices (including tablets) more than quadrupled last year and points out that "as mobile devices proved popular as gift choices at Christmas, it seems likely that we will continue to see strong growth throughout 2013". This can only create further demand for Sanderson' services from corporate customers wanting to develop their online and ecommerce offerings to tap into this fast-growing market. In fact, Sanderson's chairman Christopher Winn noted at the annual meeting a fortnight ago that: "The company continues to develop a range of mobile solutions across all of markets and businesses which are generating a strong level of interest from existing and new customers. Further growth opportunities are expected from the development of these mobile solutions across all our businesses."
Moreover, the growth in mobile applications and 'always on' mobile devices is benefiting Sanderson's manufacturing software business, which has over 160 customers. For instance, the company has an 'app' enabling its wholesale and cash-and-carry customers to access real-time information which has the tangible benefit of improving customer service, not to mention generating additional sales.
An attractive valuation
Analyst Derren Nathan at broker WH Ireland is forecasting pre-tax profit of £2.2m and EPS of 4.4p based on revenues of £14.2m in the 12 months to the end of September 2013. These estimates look conservative as they only factor in revenue growth of 6 per cent, which is hardly exacting considering the company's expansion into new areas such as cloud-based computing and mobile commerce. In fact, I believe there is scope for estimate upgrades as this year progresses.
But even if Sanderson only meets current earnings estimates, the shares are hardly overpriced on a prospective PE ratio of nine once you strip out a cash pile worth 9.3p a share. In my view, that is a rating worthy of a company producing flat earnings rather than one expected to lift operating profits by 15 per cent in the current financial year. Moreover, the valuation becomes even more compelling when you consider that analysts at WH Ireland and Charles Stanley Stockbrokers both expect operating profits to ramp up to between £2.4m and £2.5m in the 12 months to the end of September 2014, to produce EPS of 4.7p to 4.8p. On that basis, the forward PE ratio drops to a miserly eight net of cash and it could even be even lower given that Mr Winn confirms that "a number of small acquisitions (earnings enhancing) are being considered and it is possible that one of these will be completed during the current financial year".
The low earnings multiple aside, there is a dividend of 1.2p a share to produce a healthy yield of 2.4 per cent. WH Ireland expects the payout to rise to 1.4p in the current financial year and to 1.6p in 2013-14, which implies forward yields of 2.9 per cent and 3.3 per cent, respectively. For good measure, Sanderson's share price is bang in line with net asset value, so we're not even paying a premium to book value to buy the shares.
Catalyst for a re-rating
Sanderson's next trading update will cover the first half of the current financial year to the end of March and is scheduled for late April. Given the company is trading in line with analysts' estimates, it looks highly likely there will be some upbeat news in the pre-close statement. In the circumstances, I am very comfortable recommending buying the shares at 49p, targeting a return to my target price of 60p. If achieved, the shares would still only be priced on 11 times current year earnings estimates net of cash, falling to 10 times 2014 estimates.
MORE FROM SIMON THOMPSON ONLINE...
Since the start of this year I have written no fewer than 46 online articles, all of which are available on my homepage. These include articles on the following companies this week:
Spark Ventures (Spark a re-rating, 13 March 2013)
Netplay TV (Another roll of the dice, 12 March 2013)
Global Energy Development (Patiently waiting, 12 March 2013)
US equity market trade (Profit from St Patrick's Day, 11 March 2013)
