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Two lowly rated small-cap companies offer decent dividends, and re-rating potential
April 4, 2022
  • 2021 adjusted pre-tax profit up 25 per cent to £9.1mn, ahead of £8.75mn analysts’ forecast
  • Trading in January and February 2022 ahead of forecasts and March 2022 in line
  • Investment in advanced supplier payments and new freight forwarding system impact working capital position

Braintree-based international freight management services group Xpediator (XPD: 45p) beat analysts' profit estimates for 2021, and the positive momentum has continued into the first quarter of 2022 in spite of the Russian invasion of Ukraine.

Operating from offices in the UK and central and eastern European (CEE) countries, Xpediator offers freight forwarding, logistics and warehousing, and transport services to more than 14,000 clients. Its CEE exposure is a key structural driver, hence why last year's operating profit in freight forwarding surged 42 per cent, accounting for 70 per cent of group profit pre-central overheads, with operations in both Bulgaria and Lithuania outperforming. In addition, franchised pallet freight network Pall-Ex Romania increased average monthly pallet volumes by 18 per cent.

However, the directors are mindful that the geopolitical situation could disrupt the Lithuanian operations, which account for 30 per cent of group revenue of £297mn. Cost pressures need to be managed, too, albeit Xpediator is relatively protected as higher transport costs are borne by external hauliers and customers. That said, with driver shortages inherent in the industry, more working capital has been tied up in advanced payments to suppliers to secure hauliers. This factor and investment in a new freight forwarding system explain why net debt of £4.8mn declined from net cash of £6.8mn at the start of 2021. However, working capital build is forecast to unwind, so Zeus Capital forecasts year-end net cash of £2mn (pre-IFRS16 lease obligations) based on a flat pre-tax profit performance.

Although the directors have taken a cautious view on the 2021 annual payout (down from 1.5p to 1.1p) due to the ongoing geopolitical risks, they will look to pay a special dividend to make good the shortfall if the working capital impact remains small. The recent departure of founder and deputy chairman, Stephen Blyth, a non-executive director, and November’s exit of former chief executive Rob Ross mean that management needs to be rebuilt, too. Recruitment of a new chief executive is well advanced.

A 2022 forward price/earnings (PE) ratio of 11 and prospective dividend yield of 2.6 per cent offer scope for a re-rating – Panmure Gordon and Zeus have targets of 75p and 85p, respectively –  but I am taking a cautious stance until the board replacements are made and risks to trading disruption are reduced. So, having initiated coverage at 45p ('Profit from a Brexit winner’, 19 February 2021), I am downgrading my previous buy call (‘On the hunt for value’, 31 January 2022) to hold.

 

RBG’s attractive value proposition

  • 2021 adjusted pre-tax profit more than doubles to £10.1mn to produce EPS of 8.9p and support a dividend of 5p a share
  • Corporate finance and litigation finance arms have strong pipelines

RBG (RBGP:106p), a professional services group, flagged up its annual results in a pre-close trading update (Back a high yielder on the upgrade’, 28 January 2022).

More importantly, the new financial year has started well, adding weight to house broker Singer Capital Markets’ expectations of 22 per cent higher EPS of 10.9p and a 30 per cent hike in the payout to 6.56p a share. On this basis, the shares are priced on a forward PE ratio of 10 and offer a 6.2 per cent prospective dividend yield.

Corporate finance boutique Convex Capital has already completed two deals in 2022, generating £1.7mn of revenue, and has another 20 in the pipeline, six of which are going through due diligence. Litigation funding arm LionFish has entered a £20mn litigation investment arrangement with a large investment firm, thus giving the business a share of the returns made (above a high single-digit hurdle rate) beyond its own investments. The group’s mid-tier law firms continue to perform well, taking on more dispute resolution and contingent work. The pullback from February’s highs (137p) is at odds with the recent trading performance and outlook. Buy.

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