Being listed on the Alternative Investment Market (Aim) can provide many advantages for small-cap firms. Development capital can be raised quickly without the need for expensive rights issues and regulation is less onerous. But one drawback is that Aim stocks can’t be put into Isas, and many institutions are precluded from owning them. So if firms decide to shift from the main to the junior (Aim) market, as machine-tool group 600 has recently done, it can trigger a hefty sell-off, especially during periods of poor liquidity – such as the summer holidays. On the flip side, this creates opportunities for the fleet-footed.
600 manufactures and distributes machine tools, such as lathes (39% of sales), precision-engineered components (20%) and mechanical handling equipment (27%). It also produces specialist laser-marking equipment (14%), whose growth is being driven by the need for traceability, anti-counterfeiting measures and tighter environmental legislation. The group’s machines etch unique identifiers onto cars, medical implants and airplane components. This helps customers keep track of whether the parts they are buying come from recognised sources or have been copied.
Encouragingly, in July the board reported revenues up 11% to £50.6m, with an expanding order book and underlying earnings before interest, tax and amortisation of £1.2m (as opposed to £1.1m of losses in 2009/2010). CEO David Norman, who has steered the ship through a tough two years, including factory closures and redundancies, said he is looking forward to expanding the top line. “What we would like to see is a buy-and-build strategy and aerospace companies would be an area that’s interesting for us.” The goal over the next two to three years is to double sales to north of £100m. He’s already started – in November the company bought a machine tool manufacturing facility in Tarnow, Poland, for €1m. Five months later it raised £1.76m via a placing at 30.5p to expand capacity.
600 Group (Aim: SIXH)
Finncap, the house broker, is pencilling in turnover and earnings per share of £54.1m and 3.1p respectively for the year ending March 2012, rising to £56.9m and 4.2p in 2012/2013. That puts the shares on a mean earnings multiple of 7.5 (largely ignoring its net tangible assets of 32p a share). Instead, I value the group at 60% of sales. After adjusting for the £4.8m of net debt and £1.9m pension deficit, that generates an intrinsic worth of about 36p a share.
There are a few dangers. As a relatively small operator it could be squeezed by larger rivals. Another severe slump in the world economy would affect demand for its products. But with a solid order book and rising margins, the firm looks an attractive bet for the adventurous.
Finncap has a price target of 42p.
Rating: SPECULATIVE BUY at 23p (market cap £15m)