Small Cap catch-up: Chemring, Strix, Topps and Watkin Jones

Chemring Group (LON:CHG) –certainly no flak from me

From 282p on Monday the shares of this aerospace, defence and security markets product manufacturer were nudging higher ahead of yesterday morning’s Trading Update news.

They closed 12p better on Wednesday night, at 302p.

Then the news, which was up to market expectations, kicked them higher to 322p, a good 10% move in a few days.

I have followed this group for years and years and its potential has not looked rosier.

The group’s current order book is firing away on all cylinders, some 39% higher at £678m at the 30 September, against £488m at the end of April this year, boosted by about £40m of foreign exchange translation from the US dollar.

We hear every day of the conflict in Ukraine, can you imagine the massive use of Chemring’s countermeasure equipment out there? The group’s missile defence and radar sensors kit must also have been in big demand.

For the year to end October consensus estimates are for the group to have sales of £439m (£393m) and to see pre-tax profits rise to £57.4m (£48.8m), lifting earnings up to 18p (14p) a share.

Next year those figures could easily be 10% higher again.

This company is a ‘class act’ and its shares deserve to be considerably higher.

(Profile 20.06.19 @ 177p set a Target Price of 300p*)

Strix Group (LON:KETL) – strategic purchase down under

The £38m acquisition of the Australian Billi group saw the kettle safety controls company need a quick £13m of new funds from investors.

The Placing at 115p was at a 10% discount to the overnight price when it was announced on Wednesday morning. The issue represented 5.5% of the issued shares.

The Billi group, which is a top Australian brand, supplies premium filtered and non-filtered instant boiling, chilled and sparkling water systems.

It looks to be a natural fit for Strix and expands still further its global reach, while adding another £44m to group revenues and pumping up an additional £10.2m in EBITDA.

The group has been suffering difficult trading conditions of late, but it should be faring a great deal better in 2023.

Analyst Andy Hanson at Zeus Capital rates the group’s shares as trading on a significant discount to its peers.

He is looking for £116.0m sales to end December this year (£119.4m), with adjusted pre-tax profits of £28.1m (32.2m), earnings of 13.5p (15.2p) and an increased dividend to 8.6p (8.4p) per share.

The group’s shares, after getting the Placing away, are currently trading at around 118.5p, at which level they look ready to boil again in the next few months.

I will now set a new Target Price of 150p.

(Profile 31.12.19 @ 196p set a Target Price of 250p*)

CentralNic Group (LON:CNIC) – ‘insiders’ adding to holdings

I am always glad to see ‘insiders’ buying more shares in their companies.

I note that Matthew Royde, a non-executive director of this global internet registration group, has added to his holdings and those of Kestrel Opportunities (in which he is a partner and shareholder) taking their combined holdings up to 63.17m shares, representing 21.88% of the group’s equity.

They are the biggest holders in the group’s equity. Together they have made big purchases of stock three times over the last two weeks.

In the next fortnight we should be getting the Q3 Trading Update from the group, which analysts have predicted will see revenues rise over 50% for the full year while profits could increase 84% plus. The results will be published in November.

That all means that Royde and Kestrel have a very tight window for their dealings.

The group has a 98% annual recurring revenue rate, as well as a compound annual growth rate of 72% over the last five years.

It has a total global spread and its ‘money machine’ is accounted for in dollars, thereby giving it even more attractions for the market to eventually latch on to in its assessments of CentralNic Group’s value.

No wonder Royde and Kestrel are ‘goers-on’ for the shares.

I do not need to repeat my enthusiasm for this group’s shares – which I consider are significantly undervalued at the current 120p.

I expect them to rise through their previous peak of 154p a share within months.

Remember Zeus Capital currently values the shares at over 210p each – that leaves a lot of price upside for fresh buying.

(Profile 12.07.21 @ 89p set a Target Price of 110p*)

Brickability Group (LON:BRCK) – could rise to 100p within six months

Paying just £11.6m for ET Clay Products, the UK’s leading brick factor, has expanded its service base yet again.

ETCP is involved in the supply of UK and imported clay facing bricks and clay roof tiles. It had a £44.3m revenue and a £3m EBITDA.

The earnings accretive deal helps to lift current year revenue estimates to end March 2023 to £612m (£520m) and £39.5m (£34.7m) of pre-tax profits, worth 10.6p (10.1p) in earnings per share.

For the coming year look for £650m sales, £42m profits, earnings of 11.2p and a dividend of 3.4p per share.

Considering that this group’s shares are trading at just 76p, that puts them out on a very low rating of 6.7 times 2023 earnings and a healthy 4.4% yield.

The shares are cheap at that level and allow nothing for further accretive acquisitions in 2023.

I look for them to rise to over 100p within the next six months or so.

(Profile 16.04.20 @ 39p set a Target Price of 55p*)

Volution Group (LON:FAN) – floating back up again

Yesterday morning’s announcement of its results to the end of July by the designer and maker of air quality solutions pleased the market.

Its shares leapt 27.5p to 334p on the news that it was delivering strong growth.

Its revenues were up 12.9% at £307.7m (£272.6m) while its adjusted pre-tax profits were 14.5% better at £60.9m (£53.2m), earnings were 14.3% up at 24.0p (21.0p), while the dividend was the best performer up 15.9% at 7.3p (6.3p) per share.

CEO Ronnie George stated that:

“We have again achieved a strong performance, with good organic revenue growth across all three of our geographies and maintaining our operating margin in the face of challenging operating conditions. We further increased the Group’s product and geographic diversification in the year, with non-UK customers now representing 61.6% of our revenue.”

When commenting upon the group’s outlook he stated that:

“The new financial year has started well, delivering revenue and profit ahead of the same period last year. Whilst we are mindful of macroeconomic challenges, the regulatory, air quality and energy efficiency agenda throughout Europe has never been more supportive.”

“With our excellent levels of customer service, agile manufacturing and supply chain capability and strong balance sheet position, coupled with significant geographic revenue diversity, we are well placed to make further progress in the year ahead.”

Analyst Charlie Campbell at Liberum Capital reckons that the group has extended its track record. Rating the shares as a Buy, looking for a price objective of 450p, he is going for £322m of sales this year to end July 2023, giving £63.5m profits, 24.5p earnings and a 7.5p dividend per share.

The group’s shares, now at around 331p, look very capable of an early break through the 350p, then the 375p price levels.

(Profile 23.05.19 @ 174p set a Target Price of 250p*)

(Profile 25.01.21 @ 301.5p set a Target Price of 350p*)

Vertu Motors (LON:VTU) – is the motor sales business getting any better yet

The interim results to end August for this automotive retailer saw strong trading, with sales rising 3.9% to almost £2.00bn (£1.93bn), however adjusted pre-tax profits almost halved at £28.2m (£51.8m).

Basic earnings per share collapsed from 10.36p to 6.19p.

Analysts Sanjay Vidyarthi at Liberum Capital rates the shares as a Buy, with a price objective of 100p.

He is looking for the full year to the end of February 2023 to show sales of £3.95bn (£3.61bn), profits of £38.5m (£80.7m) and 8.4p (17.2p) per share in earnings, covering a 1.9p (1.7p) dividend.

He states that the current rating is just too cheap for a business that is so well-positioned to consolidate the market.

Over at Zeus Capital, their analyst Mike Allen has very similar estimates. He notes that the tangible net assets of the motors sales group now stand at 71.2p per share.

He states that despite the economic challenges for the group the outlook remains encouraging.

Astoundingly his valuation for the group’s shares has been raised to 104.7p (100.2p).

Demand and supply constraints don’t convince me that the shares of Vertu Motors are worth as much as Zeus Capital might consider.

Even so at the current 45.5p they must have some recovery potential.

(Profile 12.10.20 @ 30.5p set a Target Price of 40p*)

Topps Tiles – hopes for a positive statement in November could hold up the shares

The fourth quarter Trading Update this week shows that the UK’s leading tile specialist has finished the year with record sales, while the profits will be close to market expectations.

Sales for the end September year could come in at around £247m (£228m) while pre-tax profits could ease slightly to £13.8m (£15.3m), dropping earnings down to 5.6p (6.0p) but covering a slight increase in dividends to 3.3p (3.1p) per share.

The group remains strong in the balance sheet with £15.9m cash and no borrowings.

That all looks fairly steady, however it would be best to assume another fallback in results for the current year.

Although analyst Adam Tomlinson at Liberum Capital rates the shares as a Buy, with a 10% lowered price objective to 100p per share.

Much as I would love to see the shares getting more popular, I have to say that for a while I find it difficult to see them up at any more than 55p, compared to the current 43p.

Hold tight for a more positive statement in November when the group declares its finals.

(Profile 09.05.19 @ 75p set a Target Price of 100p)

Watkin Jones (LON:WJG) – the shares could bounce to about 120p

Last Tuesday’s Trading Update from this student flats build-to-rent development group hit the company’s shares for six.

The profit warning wiped about a third off the group’s share price, falling almost 55p to 101p on the news.

Despite good demand and a better operational performance in its second half year the group was smashed by higher pricing issues and a withdrawal by buyers on two leasehold assets.

Pressure on the group’s margins saw analysts cutting pre-tax profit estimates for the year to end September down to £49m (£51.1m) which was some £6m below previous estimates.

Furthermore, hopes for a much better year to the end of September 2023 have now been drastically reduced from a hoped-for £75m to just £50m profits – hence the slashing of the group’s share price.

I do think that the wipe-out in price has been excessive and that the shares could easily settle around this price before bouncing back up again to around the 120p level.

(Profile 16.05.19 @ 225p set a Target Price of 300p)

(Asterisks * denote that Target Prices have ben achieved since Profile publication)