4 Value Small Caps That Could Really Motor

Published in Company Comment on 13 July 2011

These small caps are worth a much closer look.

I like small caps because they can really go some if you get it right. But you need to be aware of the risks, too. So don't invest in them unless you're prepared to lose your stake.

At least by making sure the companies have a few value credentials and aren't controlled by one major stakeholder, you can stack the odds in your favour.

These are a few I've been weighing up of late; beginning with the smallest first:

Titon

In the depths of the early 2009 depression, I dithered over buying shares in Titon Holdings (LSE: TON) -- which makes ventilators for windows -- around the 20p mark. I didn't buy, but wish I had as the shares went to 60p earlier this year before falling back to their current level of 54.5p, valuing the company at just £5.8m.

Incidentally, in such cases where the sheer size (or lack of it) of a company makes it risky, I tend to sell half if and when the share price doubles -- and run the remainder for free if I think there's still value left.

The company benefited from changes in building regulations which are driving up the air tightness standards for buildings. Exports make up around 20% of Titon's sales. There is a US subsidiary and a joint venture operation in Korea where Titon also has manufacturing facilities.

The trouble is that when cash is tight, people aren't too worried about new windows and Titon has been suffering. But the company still managed a £0.6m pre-tax profit in the toughest year since Adam was introduced to Eve. 

There's a very healthy 29.5p per share in cash, net tangible assets of 92p per share, and the Chairman owns a 21% chunk. If you factor in the prospect of growth in Korea and recovery elsewhere, the shares could recover sharply.

Also, despite its small size, Titon retains a full listing.

Belgravium

One small cap that's really been motoring this year is AIM-listed mobile computer specialist Belgravium (LSE: BVM). In fact, the share price has more than doubled since the start of the year, but I believe there could be much more to come.

The company doesn't give much away, but managed a pre-tax profit of £432,000 last year whilst reducing net debt by over £1m to £264,000. At the current 7.25p per share, Belgravium is valued at just £7.3m, and recently told us it is wining orders, increasing turnover and sees a steadily improving year.  

Argo Group

Investment manager Argo Group (LSE: ARGO) isn't one for the faint of heart. Such companies can be hard to get to grips with and when you factor in Argo's Cypriot base and AIM-listing, sensible investors may wish stop reading now.

On the other hand, at 13.9p, the company is valued at just £9.7m, yet has over £7m in cash, net working capital of over £16m, net tangible assets of £16.4m, made a pre-tax profit of £750,000 in the first half and has recently put some potentially troublesome legislation to bed.

So the valuation seems to make little sense -- something which hasn't gone unnoticed as the company has been buying back its own shares for cancellation. Meanwhile, the CEO and Chief Investment Officer own a third of the company between them.

Michelmersh Brick

I explained in April why I thought shares in AIM-listed specialist brick-maker Michelmersh Brick (LSE: MBH) looked good value at 34p.

The shares have now slipped back to 30p, valuing the company at £17.5m -- a long way from their absolute peak of 130p just after the summer of property love in 2007.

But now is hardly the ideal time to be in the brick-making business, for obvious reasons. The trick is in deciding the extent to which the gloom is already in the share price -- and how Michelmersh can cope with depressed demand for its products.

The company has been cutting costs and managed a small underlying operating profit last year. But the key to any share price increase lies in a rising net asset value. Michelmersh has close to twice its valuation in net tangible assets, though the real value may be much greater as the land is accounted for on the balance sheet at cost, not as development land.

Michelmersh buys land from which it extracts clay to make bricks, then allows landfill on the land before selling it on for development. The company says it has long-term potential at three sites in different stages of development for housing.

The first is a 16-acre site at Telford where the company is negotiating a deal with Persimmon (LSE: PSN), whilst sites in Leicester and Hampshire have long term housing development potential. Favourable deals could see the value come out.

More from David Holding:

> David owns shares in Belgravium, Argo Group & Michelmersh Brick.

Share & subscribe

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

 

There are no comments yet - why not be the first?

Join the conversation

Please take note - some tags have changed.

Line breaks are converted automatically.

You may use the following tags in your post: [b]bolded text[/b], [i]italicised text[/i]. All other tags will be removed from your post.

If you want to add a link, please ensure you type it as http://www.fool.co.uk as opposed to www.fool.co.uk.

Hello stranger

To add your own comment, please login.

Not yet registered? Register now.