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Below-the-radar small-caps navigating the Covid crisis

Two lowly rated small-caps are navigating the Covid-19 crisis far better than the market is giving them credit
September 8, 2020

SigmaRoc (SRC:51p), a company pursuing a buy-and-build strategy in the heavy building materials sector, is navigating the Covid-19 crisis far better than analysts had predicted, prompting a round of earnings upgrades following a robust set of interim results. I flagged up the potential for upgrades when I last suggested buying the shares, at 41p (‘Targeting value plays’, 3 August 2020).

Acquisitions helped boost first-half revenue by 83 per cent to £54.5m, but the key for me was that like-for-like revenue matched the prior year and on higher profit margins, too, despite Covid-19 disruption. Importantly, the recovery is gathering pace in some areas. For instance, Poundfield, a maker of pre-cast concrete products, reported record revenue in both May and June, and CCP Building Products, a supplier of concrete blocks and aggregates, has seen demand return to normal levels. Analysts at brokerage Peel Hunt have taken note, upgrading their full-year pre-tax profit and EPS estimates by 42 per cent to £10m and 3.3p, respectively.

The acquisition of the outstanding 60 per cent interest in South Wales quarrying group G.D. Harries (GDH) is a smart move. SigmaRoc can implement operational improvements by using its quarry management and concrete expertise, source lower cost materials (especially cement), and expand the customer base eastwards towards Cardiff. Consolidation in local asphalt production looks set to continue into aggregates, thus offering scope for improved profitability within the industry. GD Harries controls around 14 per cent of asphalt production in South Wales.

SigmaRoc has bought out GDH for an enterprise valuation of £26.5m, equating to a reasonable 7.6 times annual cash profit. Factoring in GDH’s contribution, and the stronger recovery, Peel Hunt upgraded its 2021 pre-tax profit and EPS estimates by 7 per cent to £15.5m and 5p, respectively. On this basis, the shares are priced on an undemanding forward PE ratio of 10, prompting me to tweak my target from 60p to 65p, having first suggested buying, at 46p (Alpha Report:A General Election winner’, 12 December 2019). Buy.

 

SRT charters highly profitable waters

Aim-traded SRT Marine Systems (SRT:37p), a global leader in AIS, an advanced identification communications technology used to track and monitor maritime vessels, has reported a small annual underlying cash loss of £0.3m on revenue down 8 per cent to £18.9m. This was due to Covid-19 enforced delays which prevented work being carried out on major contracts as I pointed out (Deep value plays’, 13 July 2020).

Of more importance is that SRT has restarted work on its £31m flagship Philippines project that involves the installation of monitoring systems, coast stations, vessel transceivers and satellite data feeds. When fully commissioned in 2021, it will be the most sophisticated national fisheries monitoring and management system in the world. SRT’s validated sales opportunity pipeline encompasses 17 systems projects valued at £550m, highlighting the opportunity for its technology.

I am also encouraged that three awards with customers in The Middle East, worth £62m in revenue over a two-year implementation period, are now progressing towards contract, having been delayed due to the Covid-19 shutdown. One contract with a Middle East Coast Guard for the supply of a monitoring system and transceivers will result in £3.9m of work on an existing contract being bundled into a new one worth £11m. Accounting niceties led to an impairment on the existing contract, but there are no cash implications. Importantly, SRT is funded to deliver on all these projects, having received £8.5m on the Philippine contract and raised £1.8m in a placing since the March year-end. Net debt is currently around £3m, well within SRT’s banking facilities of £12.5m.

House broker finnCap notes that SRT could generate revenue of £50m in the 12 months to 31 March 2021 to deliver pre-tax profit north of £10m, a reflection of the high gross margin (40 per cent) on system projects and operational gearing once fixed overheads of £7m are covered. It also highlights the undervaluation of the £60m market capitalisation company. Buy.

 

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Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.