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OPINION

A solid buy

A solid buy
March 15, 2016
A solid buy

Firstly, Aim-traded Somero Enterprises (SOM:150p), a Florida-headquartered company that specialises in the design, assembly, and sale of patented, laser-guided concrete levelling equipment for commercial floors, has posted full-year results ahead of even the upgraded estimates following a bullish pre-close trading update (‘Four small caps value plays’, 11 Jan 2016).

On the back of a strong operational performance in the final quarter, during which time sales hit an all-time high in December, the company reported a 18 per cent hike in annual revenues to $70.2m. So with gross margins moving up too, and operating costs under control, this resulted in cash profit margins rising by four percentage points to 29 per cent to drive up cash profits by a third to $20m and deliver EPS of 23.3 cents, or 16.3p at current exchange rates.

The key to this performance was the North American market which accounts for 70 per cent of Somero’s total sales. Cement consumption from non-residential building construction increased by 14 per cent in the region, and benefited from customer demand for replacement machines, fleet additions, and technology upgrades too. When combined with new product introductions, price increases and a shortage of skilled labour in the concrete contractor industry, this contributed to a near third increase in annual sales in North America.

Similar drivers were seen in Europe which continued its positive trajectory with a solid year of growth. Sales increased by over half to $ 5.7m in the region to account for 8 per cent of the total. The UK, Spain, Poland, Italy, and Germany were all stand-out performers. Given this geographic split, it’s worth flagging up that Somero’s chairman Larry Horsh remains bullish, pointing out that “the underlying non-residential construction market fundamentals in the US remain strong, evidenced by lengthy project backlogs for our customers that extend well into 2016. This gives us confidence in our growth prospects for 2016”. He also adds that “in Europe, we are seeing similar carryover of momentum into 2016 which highlights a continued, steady recovery from the recessionary low point in 2010-2011. And in the Middle East, coming off extraordinary growth in 2015, we expect to continue to see significant opportunities in 2016”. In other words, regions accounting for around 82 per cent of last year’s turnover are all demonstrating positive sales momentum.

Furthermore, with cash generation strong – net funds almost doubled to $12.6m, a sum worth 15.6p a share – shareholders are being rewarded with a better than expected 25 per cent hike in the dividend to 6.9 cents (4.8p). On this basis, the shares are rated on a very modest 8.3 times last year’s post tax earnings after stripping out net cash on the balance sheet, and also offer a dividend yield of 3.2 per cent.

Of course, the heightened investor risk aversion this year, and US recessionary risk, are key reasons why the shares are being conservatively valued. But these risks seem at odds with what Somero’s senior management team are reporting on the ground and their comments are being backed up by a strong order backlog. These trading trends lead analysts to believe that the company can deliver revenues of $75m this year to lift cash profits by 5 per cent to $21.1m and deliver a 7 per cent hike in pre-tax profits to almost $19m.

From my lens at least, the investment risk remains to the upside. So having initiated coverage on the lowly rated shares at 140p ('On solid foundations', 22 Apr 2015), and last recommended buying at 139p two months ago ahead of this month’s results (‘Four small caps value plays’, 11 Jan 2016), I remain positive on the investment case and maintain fair value at 185p. On a bid-offer spread of 148p to 150p, I rate the shares a buy.

Please note that I have written five columns today, all of which are listed below.

MORE FROM SIMON THOMPSON...

I have written articles on more than 90 companies this year:

Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew Holdings: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)

Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)

Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)

Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)

GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)

LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)

Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)

32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)

Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)

Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)

KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)

Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)

Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)

Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)

easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)

Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)

Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)

Equity market strategy ('Bear Market signals', 25 Jan 2015)

STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)

Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small-cap plays', 2 Feb 2016)

Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)

Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)

Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)

Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)

AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)

IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)

32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)

BP Marsh & Partners : Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)

Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)

Bloomsbury Publishing: Buy at 150p, target range 175p to 185p ('Book into a trading play', 11 February 2016)

PV Crystalox Solar: Speculative buy at 8.2p ('Lights brighten at PV Crystalox Solar', 11 February 2016)

Alpha Real Trust: Buy at 80p, target 105p ('High yield property play', 15 February 2016)

LMS Capital: Buy at 68p; Leaf Clean Energy: Await news on Invenergy; Eurovestech: Sell at 7p ('Investment company watch', 16 February 2016)

GLI Finance: Buy at 31p ('GLI Finance review offers potential for gains', 17 February 2016)

Trifast: Buy at 112p, target 140p ('Engineered for a higher rating', 17 February 2016)

600 Group: Sell at 10p ('600 Group warns', 17 February 2016)

Marwyn Value Investors: Buy at 190p ('Undervalued, cash rich investment, 18 February 2016)

Henry Boot: Buy at 220p; Moss Bros: Buy at 102p, target range 120p to 130p; Creston: Sell at 103p; Minds + Machines: Buy at 8.5p ('Changing places', 22 February 2016)

CareTech: Buy at 245p, target price 300p ('Asset backed, lowly rated property play', 23 February 2016)

WH Ireland: Buy at 90p, medium-term target 120p ('WH Ireland hit by FCA fine', 23 February 2016)

Stanley Gibbons: Sell at 44p ('Stanley Gibbons rescue equity raise', 23 February 2016)

Gresham House: Buy at 325p ('Gresham House spruces up forestry deal', 24 February 2016)

Avation: Buy at 140p ('Aircraft deliveries mask Avation's lift off', 24 February 2016)

Tristel: Take profits at 125p ('Investors spooked by bugbuster's sales slowdown', 24 February 2016)

Town Centre Securities: Buy at 305p, target price 350p ('Property income play with capital upside', 25 February 2016)

Capital & Regional: Buy at 60.25p, target 66.5p to 70p ('Short-term trading buy', 29 February 2016)

Cambria Automobiles: Buy at 83p, target 95p; Vertu Motors: Buy at 71.75p, target 85p to 90p ('Lowly rated car dealers motoring back', 7 March 2016)

Sanderson: Buy at 80p, target 90p ('Tapping into cloud based profits', 8 March 2016)

H&T: Buy at 195p ('A golden opportunity', 8 March 2016)

Software Radio Technology: Buy at 25p, target 40p ('Software Radio surges on huge contract win', 9 March 2016)

STM: Buy at 55p, target 80p ('Lowly rated, cash rich pensions play', 10 March 2016)

Plethora Solutions: Take profits at HK$0.079 ('On the takeover trail', 14 March 2016)

Somero Enterprises: Buy at 150p; target 185p (‘A solid buy’, 15 March 2016)

32Red: Run profits at 150p (‘32Red in the money, 15 March 2016)

Communisis: Sell at 44p (‘Patience running short at Communisis’, 15 March 2016)

Global Energy Development: Sell at 27p (‘Global Energy plays waiting game’, 15 March 2016)

Raven Russia: Sell at 30p (‘Raven Russia battens down the hatches’, 15 March 2016)

■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking