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Since then the company has completed the acquisition of PharmaSource, a Netherlands-based distribution business that owns a number of medical device products in key therapeutic areas (fungal nail infections, wart removal and women's health). The products are distributed through retail pharmacies in the Netherlands and through key international distribution partners in the UK, Germany, the Nordics, Belgium and France.

Strategically, the acquisition broadens Venture’s product range, extends its global reach by providing additional retailers and distribution partners to boost the company’s existing network of over 100 distributors across 44 countries, and offers cross-selling opportunities. There is also potential for Venture to bring the manufacturing of PharmaSource’s in-house to its own facilities in Italy, thus improving the brand’s cost of sales.

Importantly, the deal is earnings accretive. PharmaSource is expected to report a 2019 pre-tax profit of more than €0.9m (£0.75m), up from €0.5m in 2018, on 38 per cent higher revenue of €2.5m. On this basis, Venture is paying around seven times PharmaSource’s pre-tax profit assuming a maximum earn-out. Moreover, even after funding the initial cash consideration of €5.23m (£4.4m) from Venture’s estimated 2019 closing net cash pile of £6.7m, the company still has surplus cash to meet the maximum deferred contingent consideration of €1.27m (£1.05m).

The other significant news is that the issues Venture had with its Chinese distributors last year – mainly concerning packaging issues with Dentyl (mouthwashes, toothpastes, tooth whiteners, and fresh breath beads) and a distributor stock overhang for its Lubatti skincare range – have now been rectified. Those issues explain why Cenkos’ 2019 pre-tax profit estimate of £1.2m on revenue of £21.9m, up from £0.7m and £18.8m, respectively, in 2018, is shy of forecasts, hence the share price reversal from 39p to 33p since I covered the half-year results (‘A venture worth backing’, 23 September 2019),

However, with the benefits of the PharmaSource acquisition, a higher contribution from China this year, and a higher gross margin, too, analysts expect Venture to lift 2020 pre-tax profits to £2.88m on revenue of £23.7m, the implication being that adjusted EPS more than doubles from 1.83p to 3.91p. On this basis, Venture’s shares are priced on a forward price/earnings (PE) ratio of 8, a modest rating for a cash-rich company targeting both an organic and mergers & acquisition growth strategy.

Chief commercial officer Sharon Collins certainly sees value in the equity as she splashed out £126,000 buying 354,000 shares at an average price of 35.6p in January to lift her stake to 2.02m shares, or 2.4 per cent of the issued share capital. I can see material share price upside, too, which is why I am maintaining the 60p target price I outlined in my May 2019 Alpha Report. Chief executive Jerry Randall has significant skin in the game, too, controlling 3.8m shares (4.5 per cent stake). Please note that his son has just turned 18, so the 141,000 shares the son holds in the company are no longer included (under Aim rules) in Mr Randall's stake. Buy.

Chairman checks into Checkit

Keith Daley, chairman of technology group Checkit (CKT:40p), has been on a massive buying spree, purchasing 4.5m shares (average price of 34.2p) in the past fortnight to lift his stake to 13m shares, representing 21 per cent of the share capital. In December, he purchased 750,000 shares (at 30p each) and exercised an option over 541,500 shares (at 29.5p each). True, Mr Daley realised £9.4m in cash from the two-for-three tender offer, at 65p a share, at the end of 2019 when the company returned £81m to shareholders from the disposal proceeds of Bulgin, a manufacturer of hermetically-sealed fail-safe circular connectors.

However, he didn’t have to spend almost £2m of his cash pile this way. I see the insider’s buying as a positive sign of the trading prospects for Checkit’s proprietary work management ‘software as a service’ (Saas) business. Designed to replace paper-based systems with a centralised, interactive cloud-based way of managing tasks that staff need to carry out on a daily basis, the business is being merged with Fleet-based Next Control Systems (NCS), a leader in high-end service-based temperature monitoring for healthcare and life sciences, and data-related building energy management system services. NCS was acquired by Checkit for £8.8m (14p a share) in May 2019.

Interestingly, the directors disclosed in their pre-close trading update that they have identified “several opportunities to improve profitability [of the merged business] and these are being implemented.” They also revealed that normalised sales for the core business increased by 8 per cent in the financial year to 31 January 2020, better than expected. Net cash of £14.3m (23p a share) was 10 per cent higher than analysts were forecasting, too.

The point is that if management can reduce cash losses faster than analysts are predicting, then there could be significant value here yet to be recognised by investors given that Checkit’s enterprise valuation of £11m (market capitalisation of £25m less net cash) is less than the £15m investment made in its SaaS business and ascribes no value at all to NCS. Ahead of the trading update, Paul Hill of Equity Development forecast a cash loss of £2.2m on revenue of £16.9m in the 2020/21 financial year, improving to a cash loss of £0.7m on revenue of £20.5m in 2021/22 as the business scales up. On this basis, Checkit’s enterprise valuation equates to 0.65 times 2020/21 forecast sales, representing a thumping 80 per cent plus discount to Aim software stocks.

The share price is slightly below the 44p entry point in my November 2018 Alpha Report, but you have a free ride given that the tender offer proceeds completely covered your initial outlay. I now feel it’s time to invest some of that cash again as it’s really not difficult to arrive at a 70p a share target price. Buy.

Pennant’s contract momentum building

Pennant (PEN:73p), an Aim-traded supplier of products and services that train and assist engineers in the defence and civilian sectors, has made an earnings accretive acquisition, won several new contracts and entered 2020 with a bumper three-year order book worth £33m.

Moreover, having announced new orders for the provision of additional training aids on a Middle East contract, and one with the Australian Defence Force, Pennant has just received a Statement of Intent on a contract with another long-standing customer in the Middle East. The potential award to supply a generic suite of training aids has a contract value of £5m. Assuming it is confirmed in the first half of this year then £3m revenue will be recognised in the second half of 2020.

On this basis, the 2020 order book will cover 85 per cent of analysts’ current year revenue estimate of £22.3m, up from £20m in 2019, which in turn underpins a two-thirds increase in this year’s underlying pre-tax profits (from £1.6m to £2.7m) and earnings per share (EPS) of 6.9p, up from 4.1p forecast in 2019. However, despite the raft of positive news flow, and an impressive conversion of the bid pipeline into confirmed contracts, Pennant’s share price has drifted since I last advised buying at 84p (‘Pennant’s growth back on track’, 4 November 2019).

As a result the shares are only priced on 10.5 times 2020 EPS estimates even though a chunk of this year’s profit growth is already underpinned by substantial cost savings made by the company after the start date on a contingent contract (worth £28m in revenue over three years) was pushed back to 30 June 2020. Please note that Pennant’s £33m contracted order book excludes any contribution from this contingent award for the design, build and delivery of training equipment to the Ministry of Defence (MoD), thus offering upside for outperformance.

Last month’s proposed acquisition of Absolute Data Group (ADG), a Brisbane-based software company, adds further weight to the investment case. It is highly complementary to Pennant’s existing Oracle-based software business that reduces the support cost of major capital equipment. Analyst Nick Spolair at house broker WH Ireland points out that “ADG’s software enables its client base (military aviation, commercial aerospace, and marine, rail, nuclear and automotive sectors) to manage vast quantities of maintenance and training data effectively, and is already being used as a dynamic extension to Pennant’s existing OmegaPS logistics product database.” This means that the combined business has a ready-made client base of new business targets, which already utilise one or the other of their systems.

Furthermore, two thirds of ADG’s revenues are derived from the US where the company has worked with government agencies such as the US Air Force Communications Agency, thus extending Pennant’s geographic reach as well as strengthening its Australian business. The £3.4m consideration, of which half is being paid upfront and the balance is subject to an earn-out, equates to a reasonable 7.3 times ADG’s pre-tax profit in the 2019 financial year.

From a technical perspective, a chart break-out above the 90p key resistance level would be a bullish signal and one that improves the chance of a move towards my 130p target price, albeit that’s below my original 180p target when I initiated coverage (Alpha Company Research: 'Pennant poised for a return to growth', 13 Aug 2018). Pennant’s heavily oversold shares rate a buy ahead of the annual results on 23 March 2020. Buy.

Titon warning hits share price

Although my 2018 Bargain Shares Portfolio has produced a 37.2 per cent total return (TR) since launch two years ago, during which time the FTSE Aim All Share TR index has shed 8.3 per cent of its value and the FTSE All-Share TR index is only 6 per cent higher, there have been losers among my 10 portfolio constituents. That’s only to be expected as investing is not a one-way street.

Clearly, it’s easier to take a hit when a portfolio is performing well, albeit it’s never a pleasant experience at any time. Indeed, a profit warning from Colchester-based Titon (TON:92.5p), a small-cap designer and maker of domestic ventilation systems, has more than trebled my 12 per cent loss on the holding.

The issues faced by Titon are multiple: sales of window and door hardware products in the UK have been lower than expected due to the economy’s weak fourth quarter and the impact of competition; activity levels in the Korean new-build market have declined as the government there has intervened to slow house price growth by restricting lending; and ventilation systems sales in Europe have softened due to the postponement of a number of projects in Germany, and lower demand as a result of customer over-stocking ahead of the original Brexit dates.

Titon’s management team have sensibly taken steps to realign the cost base by reducing headcount and is bearing down on all costs in the business. They can comfortably ride out the slowdown, too, as the company has a rock solid balance sheet. Tangible net asset value of £15.5m includes net cash of £4m, and a liquidity ratio of 3.1 times highlights a strong working capital position and ability to settle all liabilities. Also, the shares are now valued on a price-to-book value of 0.63 times, suggesting potential for reversion to a higher multiple as, and when, trading prospects improve.

Unfortunately, that could take quite some time to materialise. In the meantime, current year underlying pre-tax profits are likely to at best be half the level seen in 2018, implying the shares are priced on a forward PE ratio of around 10. True, a dividend yield of 5 per cent offers support, but I am cutting my losses. Sell.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, 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.