There’s cheap; there’s very cheap; and then there’s just plain silly. The shares that I want to tell you about today are very firmly in the last category.
This company is very tiny, and it is quoted on Plus Markets. It has a wide dealing spread and probably limited trading liquidity – this is a true micro-cap so falls firmly into the very high risk category. But for anyone with an interest in ‘on the edge’ companies, this is certainly one hell of a story.
To whet your appetite, a few facts and figures. The stock market is valuing this company at £1.15m. So assuming you could get your hands on all the shares, you could buy the whole thing for just over a million. But in the current financial year, which ends on 31 May 2011, the business is expected to make $1.37m, or about £850,000. Can this be real?
I’ll tell you at this point that I met the guys who run the company last week, and they assured me that the business is on track to hit this number. Indeed, only this Monday the chairman said that: “We continue to make very strong headway… our project pipeline is robust… we recently reported record results… Asia is continuing to experience a period of extraordinary growth and we are ideally positioned to capitalise.”
So for £1.15m you get what appears to be a highly successful business that has the potential to pay you back about three quarters of your money within 12 months. But it is certainly not going to stop there.
An extraordinary surge out of debt
This company has plenty of repeat business, and is in one of the fastest growing areas of the global marketing industry. On the basis of what look like conservative forecasts made by Hybridan Research, it will report earnings per share of 1.1p in 2011/12. So at today’s 1.25p share price, the price/earnings ratio is barely more than one. That compares to the 10-15 times multiple accorded to others in the sector!
Even allowing for its minuscule size and a reasonable discount for its PLUS-market listing, this is extraordinary. But here is the icing on the cake: the business is very cash generative, and by May 2012 Hybridan forecasts that the company will have no debt and cash of almost £2m – £850,000 more than the value of the entire company today.
Have I made myself clear? This appears to be a seriously undervalued share – and all the more surprising because the business looks great!
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Mining cash-rich data in the East
The company is called Pulse group (PLUS: PGRP) and it is the biggest online market survey provider in Asia. Founder Bob Chua explained to me that Pulse has assembled a panel of 1.5m respondents based in sixteen Far and Middle Eastern countries. They are all prepared to give their feedback on the latest brand of shampoo or breakfast cereal. In return, they receive a small reward in the form of – for instance – a free music download.
Market research is nothing new, but it is unusually well suited to the impersonal online channel. Nobody wants to be stopped in the street by a man with a clipboard or, worse still, telephoned by a market researcher when half-way through dinner.
In contrast, online communication is not intrusive. While we might hesitate to admit how much we really drink to a stranger in the street, we need have no such inhibitions online. True, online surveys come with some potential drawbacks. Chua introduced me to some new terminology: ‘skimmers’ answer what should be a 20-minute survey in 60 seconds while ‘’straight liners’ simply pick the first answer to every multiple-choice question. Both are simply going through the motions.
However, the industry has learned to spot such patterns of delinquent behaviour and to refine results accordingly. It is also now embarking upon a new mission, called ‘buzz marketing’. As far as I understand it, this basically listens in to internet forums and picks up what people are saying and thinking about new products.
In any event, online market research is fast taking over from traditional methods. Growth is fastest in Asia and should accelerate as internet usage in the region catches up with the West. Advertisers are desperate to appeal to the Asian consumer. As well as acting directly for the likes of Standard Chartered, Pulse also works for other global agencies such as Nielsen and Omnicom.
The business is financially sound, is clearly trading well and is in a strong growth phase. How the share price has come to be languishing at such a low level is a mystery to me. And I’ll be following the progress of this company very closely in the months ahead.
• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
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