So far, 2008 has been brutal for most investors. After an awful January, followed by a bear market rally in February, the major indices all plunged again in March – with the FTSE 100 and FTSE small-cap benchmarks registering painful losses of 15% and 12% respectively in the first quarter so far. Yet despite the obvious uncertainties, I’m starting to feel cautiously optimistic about future returns.
Clearly, if there is a total collapse in the banking sector, then all bets are off. But assuming this Armageddon scenario is avoided, there appear to be tasty morsels out there for the adventurous investor.
Delcam (Aim:DLC)
Delcam is one such opportunity. It is a leading developer of CAD/CAM software for the design and manufacture of complex parts and machine tools – with particular strengths in the ‘mould and die’ sector. The software is used by more than 16,000 organisations worldwide – ranging from multi-national corporations to independent designers and toolmakers – and across a wide range of industries, including aerospace, automotive, white-goods and jewellery. Last year the company also added footwear design to its product portfolio by buying Crispin, a software house for the shoe industry.
With regard to the numbers, the firm had a mixed 2007. Although turnover rose by 11.2% to £29.7m, driven by organic and acquisitive growth, adjusted profit before tax fell to £2.3m from £2.8m in 2006. This was due largely to a £0.5m hit from dollar weakness and higher operating expenses. But cash generation was strong, the dividend was raised 5% to 5.25p (1.9% yield) and net funds at the period end were a robust £5.3m – equating to 67p per share.
Going forward, Brewin Dolphin forecasts sales and underlying earnings per share of £30.6m and 29.9p respectively for 2008, rising to £31.6m and 32.1p in 2009. As such, the shares currently trade on miserly p/e ratios of 9.2 and 8.6, which to me seems stingy for such a niche hi-tech business. Moreover, if the dilutive effect of the cash was stripped out, the 2008 earnings multiple would fall below nine.
So far so good, but what are the potential pitfalls? Well, clearly Delcam wouldn’t be totally immune to a severe recession (especially given its exposure to the automotive sector). Reassuringly, though, chairman Peter Miles said last week that “2008 had started well” and that to date the company had experienced minimal impact from the credit crisis in terms of customer demand. Moreover, 27% of revenues are generated by ongoing maintenance contracts that should help underpin future performance.
The other risk is that more than 50% of sales are in dollars, so there is ongoing foreign exchange exposure. Even so, in the unlikely event that management did not deliver, I suspect that either Renishaw – who bought a 20% stake at 400p in March 2007 – or one of its rivals might be tempted to bid at these down-trodden levels.
Recommendation: BUY at 260p (market cap £16.1m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments