With half-term approaching, I’ve promised to take my daughter to
Alton Towers. She’s only nine and is keen to tackle The Oblivion, which
I’m told is the UK’s scariest dive-coaster. But I’m taking heart from the fact that, as far as vertigo and trepidation go, it can’t be much worse than micro-cap investing. Typically, the smaller the firm, the higher the risk. For those who can stomach it, the small-cap sector offers rich opportunities, especially if you invest selectively and closely monitor performance. This principle has been reflected in my selections for ‘Gamble of the week’ (see below). Since starting the column on 2 June, I’ve recommended 19 such firms, which have generated an average return of 12%. This compares favourably to a fall of 12% on Aim and a rise of 8% for the FTSE All Share index over the same period.
The standout ‘gamble’ so far has been Tenon (Aim: TNO), which, following successful restructuring, has doubled in value. The biggest faller has been Inion (IIN), 47% down on the tip price. Clearly, if, like myself, you decide to invest in these riskier assets, then I would recommend that you do so as part of a well-diversified portfolio.
Gamble of the week: Vindon Heathcare (Aim: VDN, 18.5p)
Vindon is the UK’s leading provider of environmental control products and services to the pharmaceutical, life sciences and food sectors. Its storage suites (40 in total) allow customers to deposit (say, for up to five years) their drugs and other ingredients for clinical trials in climate-controlled rooms. Pharmaceuticals represent the largest segment of the firm’s business, as VDN’s services are a mandatory part of bringing new drugs to market. The product range includes storage chambers, blood banks, refrigerators, freezers, ovens and plant-growth labs. GlaxoSmithKline, Smith & Nephew and Pfizer are already established customers and VDN won quality awards in 2005 from Smith & Nephew and Procter & Gamble.
Growth is being driven by new regulations, which require that healthcare companies widen the scope of their trials to cover not only final drugs, but also test raw materials and semi-finished products. Furthermore, Vindon has also seen strong interest in its new disaster recovery and NHS blood-bank services. In order to satisfy demand, Vindon is constructing nine more storage rooms by the end of the year. This extra capacity is being completed on the back of increasing orders from healthcare companies, which are prepared to commit to long-term contracts.
What I particularly like about Vindon is its leading position in a growing and highly profitable niche sector. Indeed, once capital expenditure has been incurred, variable costs will be relatively low and the firm should generate attractive gross and operating profit margins of roughly 60% and 30% respectively. Moreover, as the business expands, substantial economies of scale will be created, thus enhancing VDN’s competitive advantage and further building barriers to entry. The house broker, WH Ireland, is forecasting sales of £3.7m and earnings per share of 0.88p for this year, rising to £4.2m and 1.04p in 2007. Moreover, at last month’s interim results, the board reiterated its encouraging outlook by commenting that “the market potential for Vindon’s services remains very strong and we expect the significant initiatives that are in place to bring substantial future benefits”.
At 18.5p, the shares trade on p/e multiples of 21 and 18 for this year and next. Clearly, this is not cheap, but in my opinion, the shares still represent good value. In fact, with strong growth predicted on the back of good earnings visibility and a buoyant market, I would not be surprised to see broker forecasts being upgraded as 2006 draws to a close. As word of caution, however, note that liquidity in the stock can be tight. If you do decide to buy, I would recommend drip feeding any purchases into the market (up to a maximum of 20p), thus avoiding the risk of artificially bidding up the price.
Recommendation: BUY at 18.5p (market cap £15m)