Since the credit crunch has bitten, there’s been a huge shift to more defensive assets. Consequently, large caps have handsomely outperformed their smaller brethren. But this trend is now breaking down. In fact, over the past month, the FTSE Smallcap index has beaten the FTSE 100 by 3%, due to the former’s valuation reaching almost rock-bottom levels. If I’m right and the tide is turning, now could be an excellent time for more adventurous investors selectively to jump back onboard. Take this stock:
Belgravium Technologies (Aim:BVM)
Belgravium Technologies supplies, installs and maintains real-time data-capture systems, such as bar-code readers, for warehouses, petrochemical delivery systems, mobile retailing and proof of delivery applications.
It has sold more than 100,000 terminals to blue-chip customers, such as Grattan, Wincanton, Shell, GNER and KLM. It also acquired Touchstar – the petrol-delivery monitoring systems – in October 2005 and Novo, which makes mobile retail systems on aircraft, in January 2006. These acquisitions have helped boost profitability and driven top-line growth.
At the interims in November, turnover increased a credible 5% to £5.2m, with operating profit margins widening from 16% to 21%, reflecting a greater emphasis on software sales on top of cost synergies. Encouragingly, cash generation at £1.3m was also strong, enabling the dividend to be lifted 8%. But while the bid pipeline remained robust, executive chairman John Kembery prudently said that due to the uncertain economic climate, new orders in the second half may be delayed.
In response to this cautious outlook, the shares duly dived and now trade at bargain-basement levels. House broker Landsbanki is forecasting 2007 sales and adjusted earnings per share of £11.1m and 1.4p respectively, putting the shares on a p/e of only 6.2. Year-end net debt is expected to be a comfortable £1m, thus allowing a 0.5p dividend to be paid – equivalent to a more than 5% yield.
In a show of confidence, two directors have recently added to their positions at prices ranging from 10p to 11p each. Lastly, on 27 January the company issued an upbeat trading statement confirming that 2007 performance would be in line with City expectations.
OK, but what are the dangers? Well, being a small company operating in a competitive industry could result in Belgravium being squeezed by its larger rivals (such as Psion or Intermec) – particularly if demand softens. Further out there could also be some impact on bar-coder sales if radio frequency identification technology does eventually catch on. But even so, the sell-off looks overdone. Final results are due out on 6 March.
Recommendation: SPECULATIVE BUY at 8.63p (market cap of £8.7m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments