2 ‘under-the-radar’ small-cap stocks

Rupert Hargreaves — Thu, 14 Sep 2017 11:40:06 +0000

Shares in investment management group Gresham House (LSE: GHE) fly under the radar of most investors even though the company’s growth is exploding. Indeed, today the firm reported an increase in asset management revenue of 100% and a growth of assets under management of 50% for the six months ending 30 June 2017.

However, despite Gresham’s rapid sales growth, shares in the business have barely budged over the past five years. So what’s gone wrong?

What has gone wrong?

Gresham’s speciality is alternative asset management, which simply means that the business invests money on behalf of clients into alternative assets such as property, renewable energy and venture capital funds. Profits from these activities are lumpy and the business has been unable to report a sustainable profit.

Nonetheless, it looks as if management is now confident that the business really is on track to sustainable profitability. In today’s trading update CEO Tony Dalwood said: “The Group has achieved a number of milestones including passing through £0.5bn AUM….I am pleased to report that we are on track to achieve profitability on a run-rate basis in the second half of this year.” Pre-tax losses improved from -£1.2m to -£0.8m for the period under review.

I’m excited about Gresham’s prospects. It seems that more and more investors are looking to alternative assets to provide returns as interest rates remain depressed and equity valuations continue to rise. The asset manager should benefit from this trend. What’s more, management has plenty of firepower to buy up bolt-on growth.

During the first half, the firm sold an inherited legacy property asset Southern Gateway for gross proceeds of £7.3m, allowing it to pay down outstanding debt and improving tangible realised assets to £27.4m — around 67% of Gresham’s current market cap.

Discount to asset value

Investors also seem to be overlooking the opportunity at real estate investment trust Palace Capital (LSE: PCA).

Just like Gresham, Palace is a specialist. The company’s area of expertise is commercial property and management has proven that it knows this area well.

Since the end of 2014, shares in the REIT have returned around 71% excluding dividends as net asset value has expanded. Over the same period, Palace has paid out 51p per share in dividends for a total return of 90%, or around 17.4% per annum, an extremely impressive return for a company with a market capitalisation of less than £100m. For some comparison, over the past five years, the FTSE 100 and FTSE 250 have produced annualised returns of 9.4% and 14.7% respectively including dividends.

And I believe Palace still offers value for investors. Today, the shares are changing hands at 383p with a dividend yield of 4.9%, but the net asset value of the firm is closer to 443p, 16% above the current market price.

Considering the market-beating yield, and the discount-to-net assets value, I believe this could be an attractive buy for long-term investors seeking a steady income from property.

The post 2 ‘under-the-radar’ small-cap stocks appeared first on The Twelfth Magpie.

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Rupert Hargreaves does not own shares in any company mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

2 shares on my watchlist yielding more than 5%

Rupert Hargreaves — Sat, 20 May 2017 07:30:10 +0000

The market’s best investments are usually hidden from plain sight and away from the crowd. Because they are difficult to find, these stocks often trade at deeply discounted valuations, giving investors who are willing to put in the extra effort an excellent opportunity to profit.

I believe Anglo Pacific Group (LSE: APF) is one such company. Anglo Pacific is a resource royalties company, which means it’s not as exposed to commodity prices as traditional miners. It has revenue-based royalty deals limiting direct exposure to operating and capital costs of the underlying mine operations. The beauty of this business model is that it’s hugely cash generative and there’s very little capital required to generate returns.

Cash cow

In 2016 the company received £19.7m in royalty income from investments and free cash flow for the period was £13.2m.

The majority of this income is returned to shareholders with a minimum annual payment of 6p per share. Management has committed the company to pay 65% of earnings out to shareholders, and at current revenue run rates, the 6p per share payout will have to be revised upwards this year.

However, it doesn’t look as if the market understands the full dividend potential here. Management is looking to pay 65% of earnings per share to shareholders via dividends, but City analysts have only pencilled-in a dividend payout of 7p per share for 2017 on earnings per share of 15.6p. A payout ratio of 65% is equal to a dividend of 10.1p per share giving a yield of around 8.7% at current prices. Of course, management may decide to adopt a more conservative dividend policy if earnings come in below expectations, but right now, it looks as if Anglo Pacific is an extremely undervalued dividend play.

Income and capital

I believe Palace Capital (LSE: PCA) is another hidden dividend champion. The company is a commercial property investment firm with a portfolio worth £185m and a net asset value per share of 419p. At the time of writing, shares in the firm are trading at a near 15% discount to NAV and it is here, as well as the company’s 4.5% dividend yield, where I believe the value lies.

City analysts believe the company is set to hike its dividend payout by more than 10% for the year ending 31 March to 18p per share, which would give a dividend yield of 5.1%, an extremely attractive yield for a solid property investment.

At the same time, investors will be able to take advantage of Palace’s discount to NAV. By buying the shares at a 15% discount to the last recorded net asset value, there is a near 18% upside available in addition to the yield of 5.1%. If the company manages to increase its NAV during the period, the return could even be even higher.

So, if you’re looking for a stock that can provide both income and capital growth with reduced risk, Palace Capital might just be the one.

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