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On the hunt for value

Our small-cap expert highlights two lowly rated companies: an international freight management services group, and a manufacturer and distributor of products for the self-care markets.
On the hunt for value

The spike in share price volatility has been a feature of financial markets since the start of this year, and no more so that in my small-cap hunting ground. However, investors have been indiscriminately selling off shares even when the fundamental case for investing is sound, and valuations are attractive.

A good example is Braintree-based international freight management services group Xpediator (XPD: 56p). Having initiated coverage at 45p (Alpha Report: 'Profit from a Brexit winner’, 19 February 2021), and seen the share price almost hit my upgraded 85p target last summer, I feel that the subsequent de-rating represents a repeat buying opportunity.

A modest 2022 enterprise valuation of 5.6 times cash profit (28 per cent discount to peers), price/earnings (PE) ratio of 12.5 (14.5 for peers) and 3 per cent prospective dividend yield (2.7 per cent) shout value. Moreover, the board has just announced that it will comfortably meet its 2021 profit guidance, having already raised pre-tax profit guidance by more than 10 per cent to £8.5mn last summer. Zeus Capital now expects annual profit of £8.75mn on a third higher revenue of £298mn. On this basis, expect 14 per cent higher EPS of 4.45p and a 11 per cent hike in the payout to 1.7p a share.


Xpediator’s sound fundamentals

  • 2022 free cash flow of £10mn to wipe out net debt and provide additional funds for acquisitions
  • Freight forwarding volumes benefiting from strong performance from Balkan countries
  • Romanian palletised freight distribution network boosts warehousing profits

Operating from 38 offices in the UK and nine central and eastern European (CEE) countries, Xpediator offers more than 14,000 clients integrated freight management within the supply chain logistics and fulfilment sector in three main areas: freight forwarding, logistics and warehousing, and transport services

Strong increases in freight forwarding revenues (around 80 per cent of group revenue and 60 per cent of operating profit) have been driven primarily by CEE markets, higher sea freight volumes and an uplift from UK customs clearance work post Brexit. Lithuania and Bulgaria were significant contributors.

Xpediator’s Pall-Ex (Romania) franchise, a fast-growing palletised freight distribution network offering 24-hour delivery, contributed to double-digit growth in both forecast revenue and operating profit from the group’s logistics and warehousing division (17 per cent of group revenue and 22 per cent of operating profit). It’s worth flagging up that the benefits of the integration and additional space from Xpediator’s newly constructed 200,000 sq ft facility at Southampton are expected to be realised in 2022.

Despite the reduction in road transportation due to the pandemic, increased freight movement and expansion into the Balkans has helped drive a recovery in Xpediator’s Affinity brand. This business provides bundled fuel and toll cards and transport services (ferry bookings, insurances and VAT refunds) to 2,000 Eastern European hauliers and 14,500 lorries.

True, advanced payments to secure key supplier performance and costs associated with a new freight forwarding operating system in the UK resulted in closing net debt of £4.9mn (pre-IFRS16 lease liabilities), or three times the level at the half-year results. However, working capital should ease through this year, so much so that Zeus expect annual free cash flow of £10mn and closing net cash of £1.8mn by the year-end.

Reassuringly, a focus of interim chief executive Wim Pauwels is to maximise organic growth potential. He replaced former incumbent Rob Ross last autumn and has been on Xpediator’s board since November 2019, so he knows the business well. Pauwels has the requisite industry experience, having previously been chief regional officer for Yusen Logistics Europe (annual turnover of €1bn). The directors highlight “several acquisition targets” which would materially increase the activity and capability of the group, too. Buy.


Penny drops with Venture Life

  • Share price rises 36 per cent following pre-close trading update
  • Order book significantly ahead of the same time last year

The recovery at Aim-traded Venture Life (VLG:51p), a developer, manufacturer and distributor of products for the self-care markets, is gathering traction.

A pre-close trading update for the year just ended was in line with my financial analysis three weeks ago when I made the case to buy the shares, at 40p (Venture Life’s recovery potential revealed’, 10 January 2022). Of more importance is news that the order book is “significantly ahead of the same time last year”, shipments with new China distribution partner have started, and two UK health and beauty retailers will be launching Venture’s lesser known in-house brands (for rosacea, women’s intimate gel, and wart & varruca pen) under their own labels. The group is also progressing an aggressive expansion plan for prostrate cancer management product Pomi-T.

Priced on a forward PE ratio of 11 for 2022, I maintain my 100p target. Buy.


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