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Four small caps with upgrade potential

Our small-cap stock picking expert raises his target prices on two strong performers and highlights two more Ben Graham-inspired value plays
Four small caps with upgrade potential

Calculating share price targets is anything but an exact science. Perhaps I err on the side of caution, one reason why I regularly upgrade my targets. But these upgrades also take into account new information that comes to light after I have initiated coverage. For instance, earnings momentum is the major driver of share prices and the most common reason for changing a target. That’s what I have done for two companies in this week’s column, both of which have overdelivered and look primed to continue to do so.

Upgrades can also reflect valuation discrepancies, some of which result from information voids in my under-researched small-cap hunting ground. A good example is Aim-traded investment venture capital company TMT Investments (TMT:835¢) which I flagged up when the shares were offered in the market at 580¢ (‘Exploiting share price dislocations’, 7 December 2020). It proved well timed. TMT has since revealed that Bolt, a leading international ride-hailing and transportation company, had raised US$182m in a funding round at a 64 per cent premium to the US$22.1m (76¢ a share) carrying value of TMT’s 1.63 per cent stake. Investors have also reacted positively to an US$87m (300¢ a share) potential profit windfall on TMT’s 10.85 per cent holding in Backblaze, a cloud storage and data back-up company that is eyeing up an US$1bn IPO.

My quartet of small-cap companies this week includes two more Ben Graham-inspired value plays.

SigmaRoc’s earnings momentum underrated

  • New enlarged banking facility and placing to support acquisitions.
  • Major earnings beat for 2020.

SigmaRoc (SRC:64p), a company pursuing a buy-and-build strategy in the heavy building materials sector, has issued a major earnings’ beat, raised £12.4m in a placing and announced a new expanded £125m five-year banking facility.

The news has been well received as SigmaRoc’s share price has rallied 25 per cent since I covered the interim results (‘Below the radar small-caps navigating the Covid crisis’, 9 September 2020), and has now surpassed the 60p target price I outlined when I first suggested buying, at 46p (Alpha Report: ‘A General Election winner’, 12 December 2019). More importantly, there is scope for further share price upside, so much so that I am upgrading my target price to 80p for multiple reasons.

Firstly, following an 18 per cent profit upgrade, analysts at Peel Hunt now expect 2020 pre-tax profits to rise 31 per cent to £11.8m to deliver earnings per share (EPS) of 4.1p. This follows a 42 per cent earnings upgrade in September, highlighting ongoing strong momentum in the business and the fact that recent lockdowns have not materially impacted operations nor dented customer demand. The upgrade also highlights the operational benefits that are being derived from both management initiatives and acquisitions.

Secondly, SigmaRoc is a highly cash generative business and one that is generating an attractive free cash flow yield of 8.6 per cent. Forecast year-end net debt of £40m is £2m lower than at the start of 2020 even though SigmaRoc spent £15m on acquisitions including the purchase of the outstanding 60 per cent interest in South Wales quarrying group G.D. Harries (GDH). That acquisition was made on a reasonable enterprise valuation to cash profit multiple of 7.6 times. Factoring in a full 12-month profit contribution from GDH, Peel Hunt expects 2021 pre-tax profit and EPS of £15.5m and 4.7p, respectively, with the risk skewed firmly to the upside in my view.

This means that the shares are priced on a relatively undemanding forward price/earnings (PE) ratio of 13.5, a rating that fails to factor in potential for further earnings accretive acquisitions nor upside from a UK government funded infrastructure boom (as part of its Covid-19 recovery strategy) that is set to drive demand for SigmaRoc’s products even higher. The board clearly sees scope for further share price upside as no fewer than six directors purchased 374,000 shares in the placing. Buy.

Simon Thompson's Alpha Small-Cap Reports (March 2019 to December 2020)
DateCompanyOffer price on publication (p)Latest bid price or exit at target price  (p)Dividends paid (p)Total return (%)Target price (p)Last recommendation
18 March 2019Urban Exposure70691.671.0%78Repeat buy at 69p ('Ben Graham recovery plays', 5 October 2020).
18 April 2019LMS Capital48.8480-1.6%naSold at 48p ('Taking stock and profits', 9 December 2019)
17 May 2019Venture Life4593.50107.8%130Raised target to 13p ('Simmering up for a strong second half, and beyond', 24 September 2020)
21 June 2019Sanderson1221401.516.0%naTakeover at 140p ('Sanderson cash bid sets up potential bidding war', 19 August 2019)
23 July 2019IXICO33850157.6%85Raised target price hit ('Aim-traded shares that hit the mark', 17 February 2020). Current price 105p.
15 August 2019SRT Marine Systems36.455051.1%55Target price hit 2 January 2020. New buy recommendation at 28p ('Targeting value plays', 16 March 2020). Current price 42p. Last recommendation: Repeat buy at 37p ('Below-the-radar small-caps navigating the Covid crisis', 8 September 2020)
27 September 2019CIP Merchant Capital51480-5.9%72Repeat buy at 50p ('Bull market pointers', 1 September 2020)
25 October 2019Alternative Income REIT72.5605-10.3%85.5Repeat buy at 57p ('In search of value opportunities' 8 August 2020)
15 November 2019Frontier IP5765014.0%100Repeat buy at 67p ('Technology stocks for the new normal', 26 October 2020)
12 December 2019SigmaRoc4662034.8%60Repeat buy at 51p ('Below-the-radar small-caps navigating the Covid crisis' 8 September 2020)
21 February 2020Circle Property2081774.5-12.7%285Repeat buy at 150p ('Three companies that remain buying opportunities', 28 September 2020)
19 March 2020Hargreaves Services2062544.525.5%320Repeat buy at 209p ('Targeting value plays', 8 August 2020)
30 April 2020ThinkSmart14723.35438.2%94Repeat buy at 62p ('Bargain shares buying opportunities', 14 December 2020)
04 June 2020RBG Holdings67.7580-14.3%140Repeat buy at 68p ('Priced for profitable outcomes', 8 October 2020)
02 July 2020LoopUp138840-39.1%300Repeat buy at 84p ('A quartet of value opportunities', 30 November 2020)
30 July 2020Allied Minds38.5330-14.3%55Repeat buy at 38.5p ('Technology winners with a huge margin of safety', 19 October 2020)
04 September 2020MTI Wireless Edge4074085.0%70Buy at 40p ('Tapping into climate change technologies', 4 September 2020)
05 October 2020Arcontech17518505.7%220Buy at 167p ('A software winner for lockdown', 5 October 2020)
27 October 2020Inspiration Healthcare758209.3%100Buy at 75p ('Profit from a medical technology winner', 27 October 2020)
11 December 2020Arix Bioscience185215016.2%230Buy at 175p ('Exploit Arix Bioscience's huge margin of saftey', 11 December 2020)
Average total return performance of shares:43.1%  
Source: London Stock Exchange and Investors Chronicle


Hargreaves Services exits coal market

  • Speciality coal inventory sold off to de-gear balance sheet.
  • Five-year major contract win with Drax.

Hargreaves Services (HSP:270p), a diversified industrial services group and brownfield land developer is reaping the upside from a strategic transformation over the past four years, culminating in the cessation of UK coal mining and the sale of its coal stocks.

The group has just sold off all its speciality coal inventories for £24m and expects to have no material coal inventory by its financial year-end (31 May 2021). HMRS, the German metals trading subsidiary in which Hargreaves owns a 49.9 per cent stake and which contributed a net profit of £2.1m in the 2019/20 financial year, is the counter party to the transaction. Hargreaves will market and arrange for the sale of the coal stock on a commission basis on behalf of HMRS, thus enabling HMRS to establish new commercial trading relationships with major UK purchasers while at the same time enabling Hargreaves to pay off all its bank debt.

The directors also reiterated full-year earnings guidance with analysts at joint house broker N+1 Singer maintaining expectations of a sharp rebound in pre-tax profit from £4.9m to £7m to deliver EPS of 18.6p. Moreover, with bank debt eliminated, and HMRS now able to repatriate dividends to its parent following completion of a carbon pulverisation plant, the board anticipates declaring a special dividend of 12p a share in the 2020/21 financial year. On this basis, analysts expect a 20p a share full-year dividend, rising to 20.5p in 2021/22 and 21p in 2022/23, the generous pay-out supported by a thumping free cash flow yield of 15 per cent for both financial years.

Importantly, Hargreaves is winning new contracts which are strongly supportive of EPS rising to 26.4p in 2021/22 as analysts predict. These include a five-year materials handling and maintenance contract at the Selby plant of power generator Drax commencing in April 2021. In addition, Hargreaves' specialist earthworks subsidiary is a strategic partner to the consortium (Kier/Eiffage/BAM/Forrovial) constructing the Chiltern Tunnels to Brackley section of the new HS2 railway. 

Shareholders can also expect an active second half of land deals as Hargreaves completes the sales of land parcels at Blindwells, East Lothian. The group’s joint venture, Unity, which is developing a 618-acre site surrounding the former Hatfield Colliery near Doncaster, is expected to complete the £25m sale of 32 hectares of land to a national retailer for construction of an 800,000 square feet distribution centre by the middle of this year.

Hargreaves share price has rallied by 31 per cent since I initiated coverage at 206p (Alpha Report: ‘A high yielder offering significant hidden value’, 19 March 2020), but still trades on an unwarranted 33 per cent discount to a conservative net asset value (NAV) of 403p (land is in the books at cost). A chart break-out above the December 2020 high of 278p looks firmly on the cards to set up a likely rally to the January 2020 high of 320p. That former high water mark is also my target price. Buy.


CIP Merchant Capital’s value proposition

  • Portfolio outperforms FTSE All-Share in 2020.
  • Holdings in CareTech and EKF Diagnostics performing strongly.

CIP Merchant Capital (CIP:52p), a Guernsey-based closed investment company that predominantly invests in listed equities by adopting a private equity style approach, is the laggard in my 2020 Bargain Shares Portfolio even though the company’s NAV per share has only declined from 84p to 80.4p in the past 11 months, far better than the fall in the FTSE All-Share Total Return index.

Moreover, CIP’s investment managers have been making some decent calls lately, hence the reason why NAV is heading back in the right direction. For instance, a couple of months ago they invested a further £2m at 452p a share in CareTech (CTH:522p), a heavily asset-backed provider of social care services with a £590m market capitalisation. It’s one of the largest companies listed on London’s junior market and a favourite of mine. Shares in Caretech have since rallied 15 per cent which means that CIP’s 1.23 per cent stake in the company is now worth £7.25m (13p a share).

CIP’s managers also made a smart call investing £1.1m in EKF Diagnostics (EKF:67p), a £289m market capitalisation point-of-care business. EKF has achieved meaningful growth thanks to its capability to manufacture and deliver novel Coronavirus testing equipment across the globe. Following earnings upgrades in mid-November, EKF is now expected to deliver 2020 EPS growth of 176 per cent, implying the shares are rated on a PE ratio of 18. CIP’s stake is now worth £1.35m.

Shares in Orthofix Medical (US:OFIX), a $831m (£610m) market capitalisation Nasdaq-quoted medical devices company, have been flying, too, rising by 50 per cent since late September. CIP’s holding is currently worth £3.6m.

The point is that I estimate CIP currently holds £18m in cash (33p a share) so effectively the rest of its £28.6m market capitalisation is backed up by the stakes in Caretech and Orthofix alone. That gives you a free rideon  £15.6m (28p a share) of other holdings which include listed stakes in automotive services firm Redde Northgate (REDD), Milan-based digital marketing company Alkemy S.p.A, (IT:ALK) and Aim-traded global procurement software provider Proactis (PHD).

The holding in CIP has reduced the total return on my market beating 2020 Bargain Shares portfolio by 1.5 percentage points to 40.5 per cent and a narrowing of the unwarranted 35 per cent share price discount to NAV is well overdue. Buy.

CIP Merchant Capital portfolio breakdown (prices at 4 January 2021)
HoldingAsset classSectorNet asset value 
AlkemyListed equitySoftware/Technology£2.42m
Brave BisonListed equitySoftware/Technology£0.72m
CareTechListed equityHealthcare£7.25m
Coro EnergyListed equityOil & Gas£0.65m
Coro EnergyEurobondOil & Gas£3.16m
EKF DiagnosticsListed equityHealthcare£1.35m
Happy FriendsUnlistedHealthcare£4.00m
Orthofix MedicalListed equityHealthcare£3.60m
ProactisListed equitySoftware/Technology£1.28m
Redde NorthgateListed equityTransport£1.79m
Total  £26.22m
Cash and short dated government bonds£18.00m
Net asset value  £44.22m
Shares in issue  55.0m
Net asset value per share 80.4p
Source: CIP Merchant Capital RNS filings. Quoted investments priced at latest market prices on London Stock Exchange, Nasdaq (Orthofix Medical) and Luxembourg MTF Market (Coro Energy Eurobond). Unlisted assets valued at 30 June 2020. 


Simon Thompson's 2020 Bargain Shares Portfolio Performance
Company nameTIDMMarketOpening offer price 07.02.20 Latest bid price 04.01.21 DividendsPercentage change (%)
XaarXARMain 42p170p0.0p304.8%
Metal Tiger (see note two)MTRAim11.8p23.5p0.0p99.2%
Anglo Eastern PlantationsAEPMain570p582p0.4p2.2%
Cenkos SecuritiesCNKSAim56p56p0.0p0.0%
Chenavari Capital Solutions (see note one)CCSLMain61.4p35p0.0p-1.0%
Brand ArchitektsBARAim 160p135p0.0p-15.6%
CIP Merchant CapitalCIPAim57p48p0.0p-15.8%
Average      40.1%
FTSE All-Share Total Return index7,7967,173 -8.0%
FTSE Small-Cap Total Return index9,2749,858 6.3%
FTSE AIM All-Share Total Return index1,0991,333 21.3%
Note 1. Chenavari Capital Solutions made a compulsory capital redemption of 34.73 per cent of the share capital at 85.72p a share in March 2020, and subsequent compulsory capital redemption of 21.9 per cent of the share capital at 72.93p a share in July 2020. The total return takes into account the capital redemptions. The company delisted its shares from AIM on 30 September at a closing bid-price of 35p. Approximately 17.9 percent of each holding was then redeemed on 9 November 2020 at 65.26p per share. The board plans to make further compulsory capital redemptions in due course.
Note 2. Metal Tiger shares consolidated on the basis of one share for every 10 shares previously held on 1 July 2020.
Source: London Stock Exchange. 


MTI share price hits record high

  • Robust end market demand.
  • Double-digit profit growth expected in 2021 and 2022.

Shares in Israeli-based MTI Wireless Edge (MWE:76p) have increased 85 per cent in value on an offer-to-bid basis since I initiated coverage (Alpha Report: ‘Tapping into 5G and climate change technologies’, 4 September 2020), and have surpassed my 70p target. I would resist banking profit. That’s because investors are likely to continue to warm to MTI’s strong investment case given that its technology businesses operate in market segments that are displaying attractive structural growth: demand for next generation 5G networks; global warming and climate change; and increased defence budget spending.

Specifically, MTI sells 5G backhaul antennas to support mobile phone operators to roll out their 5G networks, helping to transfer the data from mobile users to the operator’s network; and wireless water control and management systems that address water scarcity by using Motorola's IRRInet state-of-the-art communication technologies. The military segment also provides a reliable income stream and enables MTI to reapply the technology developed in commercial markets. Robust customer demand is not only delivering contract wins, but robust earnings growth, too.

Indeed, house broker Allenby Capital expects 2020 pre-tax profit to increase by 25 per cent to US$4.3m on revenue of US$40.7m to produce EPS of 2.9p and support a 25 per cent dividend hike to 2.5¢ (1.9p). Analysts also forecast double-digit EPS growth to be maintained in 2021 and 2022, pencilling in EPS of 3.39p and 3.79p, respectively. The 2022 dividend is expected to be 20 per cent higher than in 2020. The directors can certainly afford to maintain their progressive dividend policy as MTI’s net cash has increased by 75 per cent in the past two years and is forecast to rise a further 25 per cent to US$9.5m (8p a share) by the end of 2022. On this basis, MTI shares are priced on a forward cash-adjusted PE ratio of 17.5, a rating that’s still not too punchy for a dividend paying technology company operating in market segments displaying material market growth.

In the circumstances, I am upgrading my target price to 90p based on an enterprise valuation to 2022 cash profit multiple of 15. Buy.


■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].

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