Has anyone recently tried shopping at Aldi, the hard-line discount supermarket? What struck me was how popular it’s become as cash-strapped families flock to its stores to snap up bargains. This is no surprise as consumers are now demanding much greater value for money during their weekly shops.
Swallowfield plc (Aim:SWL)
One such beneficiary from this belt-tightening trend should be Swallowfield. From its low-cost factories in Britain and the Czech Republic it supplies hundreds of different types of cosmetics and toiletries – such as own-label deodorants, aerosols, shampoos and moisturisers for retailers, along with branded skincare products for the likes of PZ Cussons.
While these everyday items aren’t immune to a recession, I suspect that as conditions deteriorate, more households will choose cheaper options such as those manufactured by Swallowfield.
So how is the business performing? Judging by the year-end results in September, this bird definitely seems to be flying in the right direction. Sure, turnover was flat at £44.8m, but profit margins improved to 3.5%, delivering an adjusted earnings per share (EPS) of 9.2p. Cash flow was also strong, in turn halving net debt to £2.4m as at the end of June.
House broker Blue Oar forecasts more of the same this year, with turnover, EPS and the dividend rising to £49.5m, 10.9p and 7.2p respectively. So at 81p, the share trades on a frugal p/e ratio of only 7.4, pays a tasty 9% yield and is priced at less than 75% of net tangible assets (108p a share). So far, so good – but what are the dangers? First, there are the usual risks of being a relatively small firm operating in a competitive global industry. Next, as conditions get harsher, Swallowfield will also need to combat margin pressure and longer payment terms from its bigger customers. Lastly, the £2.6m pension deficit, together with foreign-exchange fluctuations, need to be watched, while on occasions the stock can also become illiquid. All the same, at current levels the firm looks a good play for the more adventurous investor.
Recommendation: speculative BUY at 81p (market cap £9m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.