Small-cap investing is never for the faint-hearted and amid the coronavirus panic, it is a brave individual indeed who piles into what, on paper, are attractive value plays. The latest small-cap pick from Simon Thompson is another great analysis of a business that, without the crisis, would be primed to re-rate due to unrealised asset value and a progressive dividend supported by free cash flow.
This latest Alpha report contains the full investment case and factors that Simon considers may mitigate the impact of coronavirus and help this company ride out the turmoil facing the global economy. But the situation with Covid-19 and the assessment of how much disruption it may cause has moved swiftly.
With simultaneous shocks to supply and demand in the world economy, as whole countries go into lockdown, industrial companies like this are likely to be placed under severe stress. This business is cash generative and has managed its working capital position well. These traits will hold it in good stead, but it is possible that cash earmarked for dividends and paying down debt will be needed elsewhere in tougher times ahead.
Ultimately, this company could still prove a very exciting opportunity but even the most intrepid investors would be wise to wait before acting in case profits guidance is revised down. A key subsidiary is due to open a plant in Germany in April, which is integral to the investment case; it’s just common sense to wait and see if this could be delayed. Furthermore, by the end of May, finance agreements need to be renegotiated.
The business is well managed and governments and central banks are making huge efforts to support companies, but investors have nothing to lose holding out for better news on the fight against Covid-19 and the economic outlook.
Normally, it can be difficult to buy in at a good price with less liquid small-cap stocks. With a small free float, market makers have been unwilling to sell the shares of this company below the offer price and have dropped the bid price to shake out weaker sellers. This means it is possible to deal within the spread but that’s no reason for investors to try to rush in right away. This certainly isn’t a seller’s market and it is unlikely to be for some months yet, so there is plenty of time to be patient and maybe some of the market makers themselves will have been shaken down in a few months.
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