A recovery in the UK is good for small caps

A recovery in the UK is good for small caps which also perform better over the longer term. In the past ten years, The Numis Smaller Companies Index (the smallest 10% of companies), returned 281% which compares with 133% from the FTSE 100.    

Sunday Times   

 

Last week …

markets took courage from the evidence that monetary policy may not imminently change. The FTSE 100 rose to 6375 up by 2.6%, the FTSE 250 improved 3.4% while the Aim All Share at 703 rose 1.7%. The best UK news was the increased PMI for Services up to 56.9, followed by  the fastest raising House Prices since the crash, while the BOEs new Governor’s no-change  monitory policy sounded sincere. The pounds weakness may become of inflationary concern. Elsewhere, China’s Manufacturing PMI fell to 48.2, while US Employment might have been strong enough not to need QE.

This week …

of moderate interest will be UK Manufacturing Production on Tuesday. The focus of investors attention is likely to be back on China and the Eurozone where newsflow seems to be on a downward trajectory. In the US the Fed will publish Minutes from the last Monetary Policy meeting. Our guess is for a flat week.

                                                                                      

Company Reports

SWEETT (CSG) – £15m at 22.25p

Debt doubts licked?

The finals to March from this Asia Pacific and global focused infrastructure and property group reported a jump to a profit of £1.8m from losses. The first year of a three year strategic programme on cost control, integration of services and margin improvement seems to have been successfully implemented. Sweett aim to provide global know how with local delivery of services; include building surveying, dispute resolution,  cost management, programme and project management, strategic advisory and PPP/PF2/P3 consultancy services. Turnover improved 11% to £80m and the order book is up 10% to £100m and the Asia Pacific region remains the Group’s largest single growth market with revenue in China and Southeast Asia up by 20%. Elsewhere property is recovering in the Middle East and Europe where even Retail where Sweett claim some market leadership is also recovering. Growth is to be organically generated from building on the existing global platform. The profits forecast for 2014 are £2.8m which gives an EPS of 3.3p so a prospective P/E of 6.7x while yielding 4.3%.

Financials

The NAV is £27.9m of which £16.3m is good will and net debt was down from £10m to £7.1m although banking facilities with the Bank of Scotland are to be renewed by the year-end. Cash flow from Operating actives improved substantially and refunding arrangements in Asia are being considered.

 

600 Group (SIXH) – £9.6m at 11.25p

Re-engineering Growth

The first half turned around into a strong second half at this machine tools and laser marking supplier. As 600 Group reported better than expected figures for the year to March 2013 with turnover, from continuing operations improving 11.2% from £37.6m to £41.8m. The EU and Australia are tough markets but there is scope for growth in the US. The underlying loss of £420k was turned into a profit of £390k. If the interest on the closure of the pension fund is included there is an exceptional profit of £3.5m. Machine tools sales were higher, with lead times reduced, but laser marking revenues were lower as  a new  range of products  is about to be launched.   Operating margins jumped from 0.6% to 2.3% with further room for recovery. The key strengths are in metal turning machine tools, precision engineered components, and laser marking equipment.  In each of these activities, the group has strong products and brands with significant market share. There is diverse geographical spread and robust manufacturing and supply chains supported by reliable distribution partners. Orders are increasing, particularly in the UK and US. 2014 on-going activity profits are forecasts to jump to £1.9m for an EPS of 2.2x so a prospective P/E of 5.2x.

Finance

The £1.5m fund raising at 7.5p a share, the property sales and the cash from the disposal of the South African operations has helped to improve the net debt from £8mto £5.4m. The NAV improved to £21m from £7m due to the closure of pension scheme.

 

Omega Diagnostics (ODX) – £16.6m at 15.25p

CD4 for growth

Omega Diagnostics reported a fall in profits to March 2013, but new product launches mean that profit should increase significantly. Revenues were 1% higher at £11.3m but underlying profit fell 20% to £780k due to increased development and marketing and weak trading in Europe. The Indian distributor has rebuilt sales and it is out-performing the previous distributor.  Omega is an allergy, food intolerance and infectious disease diagnostic products supplier and are launching the CD4 test for immune status of HIV patients. Omega should be in a position to launch 40 allergen assays for the iSYS system next March. They can then be marketed to existing users of the iSYS automated system. The CD4 test for HIV is a low cost and easy to use as a finger prick blood sample can provide a result in 40 minutes. Field trials of the CD4 test should commence soon and commercial sales could start before the end of this financial year. It is not until next year when CD4 should be a large contributor to revenues and profit. Manufacture is outsourced. The unit cost is estimated at £1.12 and the selling price is expected to be around £3.20. Profits for March 2014 are forecast to recover to £1.1m on £12.2m turnover before jumping to PBT of£4m in 2015 for a P/E of 12x falling to 4x.

Finance

Net debt rose to £0.7m for the March Year-end but a placing in May at 17p raised £4m which should finance the organic growth.

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