Packing serious potential

Many engineering stocks like Mpac Group (LSE: MPAC) face significant uncertainty as the global economy deteriorates. But I think this business could fare much better than many in the current climate.

This is because Mpac designs and manufactures high-speed packaging and automation systems. With labour shortages worsening and staff costs increasing, demand for its services could be set to jump.

Indeed, a third of UK firms plan to invest more in automating their processes due to employee shortages, according to an HSBC survey of 670 companies published this week.

I think investors can expect Mpac’s profits to soar as the technological revolution rolls on. Analysts at Grand View Research also think the global robotic process automation market will expand at an incredible compound annual growth rate of 38.1% between now and 2030.

The flying dragon

Auto retailers such as Pendragon (LSE: PDG) aren’t just under threat from broader economic conditions. They also face the danger of new car shortages as car production rates stall.

In recent days, GM announced some 95,000 vehicles were sitting unfinished due to chip shortages. This is a problem affecting major motorbuilders all over the globe.

Yet despite these threats, I’m still considering buying Pendragon stock. I think the business could benefit enormously over the short term and beyond as environmental worries and soaring petrol and diesel costs supercharge demand for electric vehicles (EVs).

Latest data from the Society of Motor Manufacturers and Traders (SMMT) showed sales of battery-powered and pure hybrid vehicles in the UK continue to rise strongly despite the cost-of-living crisis. These were up 18% and 12% year-on-year respectively in May.

A top stock for tough times

Unfortunately the number of UK businesses going bust is tipped to soar as the economy tanks. It’s an environment in which FRP Advisory Services (LSE: FRP) could see demand for its operations explode.

In fact, the corporate restructuring expert is already witnessed a strong pick up in trade. Revenues jumped 21% in the 12 months to April. The business said it has seen the level of enquiries pick up in recent months due to rising economic headwinds and the removal of government support for businesses.

FRP also provides consultancy in the realm of mergers and acquisitions. Unfortunately, this is an area that could suffer in the short-to-medium term as economic conditions deteriorate.

Still, I think the firm’s expertise in several other areas more than offset this risk. As well as providing restructuring services, FRP also helps companies deal with debt, disputes and pensions issues. I expect it to thrive and this is reflected in its soaring share price.

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I don’t think that all UK shares will struggle to rise next month, however. I have no intention of stopping buying British stocks for my Stocks and Shares ISA any time soon. This is because there are still plenty of quality companies which are thriving despite the economic downturn.

These particular two shares have continued to trade strongly despite the recent pandemic. And I reckon they could enjoy strong price rises in the days and weeks ahead.

A top UK tech share

Companies are investing more and more money on protecting their IT operations from cyberattacks. I think this makes Kape Technologies (LSE: KAPE) a brilliant UK share to buy right now. In fact I’d buy it for my ISA before full-year financials come out on 17 March.

A string of upbeat financial statements has lifted the IT giant’s share price 16% higher over the past 12 months. In its January update it said it had been “substantially growing its customer footprint” in 2020 and that, as a consequence it expected revenues to have jumped 85% from 2019 levels. I believe sales should continue to march higher too as the popularity of both homeworking and e-commerce goes from strength to strength.

The obvious threat to Kape Technologies is that hackers and cybercriminals are always working to bring down security systems. And numerous or high-profile failures by the UK share’s systems could significantly dent future business wins in the future. In the meantime the company is expected to record a 2% earnings rise in 2021. This leaves it trading on a price-to-earnings (P/E) ratio of 21 times.

High growth, cheap valuation

The Mpac Technologies (LSE: MPAC) share price has also rocketed recently. In fact it’s up 90% during the past year. And I believe the release of full-year financials (also on 17 March) could be the catalyst for further gains.

This UK stock provides high-speed packaging and automation systems to businesses. It’s therefore benefitting from the rising investment companies are making in robotics to improve efficiency. It’s why Mpac claimed last month that “we continue to win original equipment and service orders with robust demand” in spite of the impact of Covid-19 on the global economy.

Now Mpac is smaller than many of its rivals. This, combined with the threat of further industry consolidation, could weigh on margins down the line. But I still think the automation company is still an attractive stock at current prices. City analysts reckon earnings here will soar 25% in 2021. This leaves it trading on a low forward price-to-earnings growth (PEG) reading of 0.7.

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Stock investors need to be extremely careful before splashing the cash. But the murky economic picture doesn’t mean investors should stop buying UK shares entirely. There are still boatloads of terrific London-quoted stocks that should thrive in 2021. Even if the Covid-19 crisis rolls on and on.

2 top ISA stocks!

I’ve gone shopping for undervalued stocks following the 2020 stock market crash. There are plenty more impressive UK shares I’m thinking of adding to my Stocks and Shares ISA in 2021 too. Here are two on my radar today:

#1: The 6%+ dividend yield

Even if the global economy struggles in 2021 one thing’s for sure, investment in power plants will continue as usual. It’s a phenomenon which kept power station operator ContourGlobal (LSE: GLO) ticking over nicely last year. And it’s a theme which explains why City analysts reckon annual earnings at the business will rise 14% in 2021.

The energy needs of a rapidly-growing world population are set to shoot through the roof in the coming decades. The reasons behind this demand growth will play straight into the hands of this particular UK share too.

According to BP: “The vast majority of the growth… is driven by emerging ‎markets, led by developing Asia (China, India, and Other Asia) and Africa, as increasing prosperity ‎and living standards underpin higher electricity consumption.”

ContourGlobal already operates plants across Central and South America alongside Africa.

What’s more, ContourGlobal is an expert in the realm of ‘green’ energy. It operates more than 100 thermal and renewable plants across the world and stands to gain from rising demand for low-carbon energy. Today, this UK share carries a 6.1% dividend yield, putting it firmly on my ISA watchlist.

#2: A UK growth share on my radar

Mpac Group (LSE: MPAC) might be more vulnerable to an extended downturn in the global economy than ContourGlobal. But, at current prices, I think the packaging powerhouse remains too cheap to miss. City analysts reckon earnings here will rocket 48% in 2021. This leaves it trading on a forward price-to-earnings growth (PEG) reading of 0.3.

To use its own words, Mpac “is focused on creating high speed production lines that package the products that millions of people worldwide depend on.”

It therefore stands to gain hugely from the rapid automation which companies across the world are embracing.

On top of this, this UK share has elected to focus on the fast-growing healthcare, pharmaceuticals, and food & drink sectors. It’s a plan which its seismic acquisition of medical and consumer healthcare specialist Lambert Automation in 2019 significantly bolsters. I’d expect to get very rich from this British stock during the 2020s and beyond.

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Tom Rodgers: Sylvania Platinum

Sylvania Platinum (LSE: SLP) is one of those stocks I think will become increasingly strategically important. The platinum group metals the company processes at a low cost from its base in South Africa are used in practically every modern electrical appliance. Prices for rhodium and palladium have rocketed to near all time highs this year as demand outstrips supply.

With $55m cash and no debt, profits and earnings per share both doubling from 2019 to 2020, and investors in line for a special windfall dividend in 2021, this is one of the most obvious micro-cap no-brainers I’ve seen for years. 

Tom Rodgers owns shares in Sylvania Platinum.

Zaven Boyrazian: Tristel

Throughout 2020, medical centres around the world have adopted far more rigorous cleaning standards. In light of recent news, a Covid-19 vaccine may soon be ready.

However, even after this pandemic comes to an end, the increased disinfecting practises are likely to continue with stricter legislation. This creates a vast opportunity for Tristel (LSE:TSTL).

The firm manufactures infection prevention products that are widely used throughout hospitals. Given each of their products are consumables, they create a recurring income from existing customers.

As all products require FDA approval, Tristel faces little competition within a rapidly expanding market space.

Zaven Boyrazian does not own shares in Tristel.

Kirsteen Mackay: Tracsis

Tracsis (LSE:TRCS) is a UK tech stock that makes software specifically designed for the transportation industry, with railways being a main beneficiary. The company has been publicly listed for 13 years and its share price has risen approximately 1,075% during this time.

With the pandemic pausing travel, this has caused a sharp shock to the company, but it’s still winning government contracts. Although the Tracsis share price has seen extreme volatility this year, I think it will renew its growth trajectory once normality resumes. It has a £150m market cap. Its price-to-earnings ratio is 28 and earnings per share are 17p. 

Kirsteen does not own shares in Tracsis.

Edward Sheldon: Cerillion

My top micro-cap stock for November is Cerillion (LSE:CER). It’s a leading provider of cloud-based (SaaS) billing, charging, and customer management systems.

Cerillion appears to have plenty of momentum at the moment. In October, the group advised that trading in the second half of the year ended 30 September was strong. During this period, the company signed its largest-ever contract. Meanwhile, it said that its back-order book was at record highs and that it expects revenue and adjusted EBITDA for the year to be ahead of current market expectations.

At the time of writing, Cerillion has a market cap of under £100m, meaning there’s plenty of potential for growth. All things considered, I think this micro-cap stock looks pretty exciting.

Edward Sheldon has no position in Cerillion.

Rupert Hargreaves: Inspecs

I have my eye on UK-based designer, manufacturer and distributor of eyewear frames, Inspecs (LSE: SPEC).

The UK eyewear market is vast, and it’s only expected to continue to expand over the next few decades. This growth is projected to show through in Inspecs’ top line next year. Sales set to jump by a third in the next two years.

A cash-rich balance sheet could also hint at the prospect of large dividends from this consumer-focused business.

In my opinion, as Inspecs’ sales expand over the next few years, the stock has the potential to jump higher.

Rupert Hargreaves does not own shares in Inspecs.

Royston Wild: Bloomsbury Publishing

Bloomsbury Publishing is a share I’d buy today and hold for all time. It’s not just the eternal appeal of the Harry Potter franchise which makes this UK share a great long-term buy. I’m also encouraged by the huge profits potential of its move into academic publishing.

Bloomsbury’s shares recently soared to their most expensive since February on some blowout trading numbers. First-half earnings clocked in at twelve-year highs as sales of the publisher’s online books and e-books rocketed. The performance of its digital academic products was also impressive as institutions switched to remote learning due to the pandemic. As a consequence sales of these particular products surged by almost half year on year.

With organic sales rocketing, and its cash-packed balance sheet also creating chances for more profits-boosting acquisitions, I reckon Bloomsbury is a terrific buy right now.

Royston Wild does not own shares in Bloomsbury Publishing.

Kevin Godbold: MPAC

Global packaging company MPAC (LSE: MPA) aims to become a market leader in the “pharmaceutical, healthcare, food and beverage sectors.”

I think MPAC’s niche in those defensive sectors looks attractive. The business is bouncing back from the first wave of Covid-19 lockdowns. And in September the directors announced an acquisition in the US, followed in October by the relaunch of the MPAC brand along with a new corporate website.

City analysts expect earnings to resurge more than 50% in 2021. And with the stock near 400p, the forward-looking earnings multiple is just below 11. With growth on the agenda, I’d buy the micro-cap stock for November and beyond.

Kevin Godbold does not own shares in MPAC.

Jonathan Smith: Oxford Metrics

Oxford Metrics (LSE: OMG) is a UK based software and data analytics company, with offices worldwide. It has an asset management software arm called Yotta, that has been performing very well in recent times. I feel the business is well set to perform well even during an extended pandemic situation. The firm has no debt, and cash balances of over £14m as of Q2 2020. 

The nature of the business also means strong ‘annualised recurring revenue’, that was up 14.6% versus last year. This should aid continued growth in the future. The share price has doubled in value over the past 5 years.

Jonathan Smith does not own shares in Oxford Metrics.

Roland Head: Brickability

Recent results suggest the housebuilding market is enjoying a rapid recovery from the COVID-19 slump. One company I think could benefit from this strong demand is Brickability (LSE: BRCK).

This £115m firm sells bricks, roofing, and other building materials to housebuilders. Growth areas include heating, plumbing and doors. Chairman John Richards says that the company is seeing a “V shaped” recovery and the firm has just issued a solid set of half-year results.

The shares trade on just seven times 2021 forecast earnings and offer a well-covered 5% yield. I’d be happy to buy at these levels.

Roland Head does not own shares in Brickability.

Paul Summers: Churchill China

With things looking positive on the coronavirus vaccine front, my pick of the micro-cap stocks this month is ceramic tableware supplier Churchill China (LSE: CHH). 

Naturally, the £140m cap has seen its revenue, profits, and share price walloped by the virtual shutdown of the hospitality sector in 2020. However, I think the potential rewards now outweigh the risks.

While a full recovery won’t be immediate, earnings are expected to bounce back in 2021 as pubs, restaurants and hotels reopen. In the meantime, this high-quality, ‘family-owned’ company has cut costs where it can and remains debt-free.

Paul Summers owns shares in Churchill China.

Matthew Dumigan: Tatton Asset Management

Since flotation in 2017, shares in Tatton Asset Management (LSE: TAT) have been rather volatile. However, over the three years, the company’s share price has risen 45%, delivering a tidy return to investors. 

The company provides a range of on-platform only services ranging from discretionary fund management and compliance to mortgage provision. What’s more, the firm’s recent half-year results report was positive, with group revenue increasing by 12.6% year-on-year and adjusted operating profit rising by 21.9%.  

Ultimately, I’m impressed by the company’s earnings growth and I reckon Tatton can continue to deliver a strong performance in the years to come.  

Matthew Dumigan does not own shares in Tatton Asset Management.

G A Chester: Trans-Siberian Gold 

Trans-Siberian Gold (LSE: TSG) is a small but profitable miner with ambitions of becoming a premier mid-tier operator. Its strategy is to maintain a strong balance sheet, while both investing in growth opportunities and paying a base level of sustainable dividends through the commodities cycle. 

The base level’s set at around $3m a year (a 2.5% yield at the current share price), but the company regularly distributes more. This year’s interim dividend alone was $7m (5.9% yield). 

With its growth prospects and record of distributing surplus cash to shareholders, Trans-Siberian Gold is my top pick in the smaller companies space. 

G A Chester has no position in Trans-Siberian Gold.

James J. McCombie: Surface Transforms

Surface Transforms (LSE: SCE) recently won a contract worth £27.5m to supply an eighth global automotive customer with its high-performance carbon-ceramic brake discs. As a result, revenues should quadruple to £8m in 2022 versus 2020, and earnings per share should turn positive.

The high-performance brake market is worth £200m and growing, but a single supplier is dominant. Surface is now a credible alternative for manufacturers looking to diversify, and I think it will increase its market share significantly. 

Since electric vehicles need brake discs, Surface also looks good for the long-term, and I think it’s a great micro-cap stock pick.

James J. McCombie owns shares in Surface Transforms.

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That’s why I’ll look at two shares from outside the FTSE 100 in this article. Mpac (LSE: MPAC) is a packaging company, and Computacenter (LSE: CCC) is an IT reseller.

Improving company

Turning our attention firstly to Mpac, this is a company that has been held back mainly by two factors. One is beyond its control — that’s investor perceptions of packaging and plastics. This shift has held back many packaging companies’ share prices. The second issue is a pension liability that has scared investors. It will likely be gone within the next couple of years, however.  

There’s a lot of potential for the shares to move higher. They are only on a P/E of around eight. One catalyst could be its US acquisition. Mpac is paying $13m in cash for Switchback, a supplier of packaging machinery and automation solutions to the food, beverage and healthcare markets. The deal comes with a further earn-out consideration of $2m to be paid, depending on performance.

Another boost for Mpac could be technology. In 2019 the group acquired Lambert Automation, an established automation solutions provider to the medical and consumer healthcare markets. The value of this technology doesn’t seem to be reflected in the share price, given how automation will be transformative to the industry in the coming years. 

The company’s share price hasn’t reacted strongly to positive updates from management. That indicates to me it could be a bit of a hidden gem that could see rapid share price growth in the next few years.

Computacenter: strong share price growth

When it comes to Computacenter, 2020 to date has been a very positive year. The share price has been buoyed by investor appetite for technology-related shares. Operating in the IT industry and benefiting from the rise in working from home, Computacenter has found itself in the right place at the right time.

That makes the shares risky in some ways as they’re now on a P/E of nearly 26. However, I do believe the shares could rise further. Business is booming. In its half-year results last month, Computacenter revealed a 39.4% increase in first-half profit. Its interim dividend was lifted by 21.8% to 12.3p a share.

The company has acquired Canada’s Pivot Technology for C$105.8m (£62m) to expand in the US and Canada. This could be a source of growth as the group has traditionally had the UK and Germany as its largest markets.

The trends underpinning Computacenter’s growth aren’t going away. Companies are increasingly competing using technology and require the expertise of resellers to provide the best devices, software and other equipment. I think Computacenter has the right ingredients to fly and that’s why I think there will be significant share price growth in the coming years.

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Attractive proposition

Judges Scientific owns 16 scientific instrument businesses, which are primarily UK-based but serve global niche markets, with long-term growth fundamentals. The group is listed on AIM and its shares are trading 4.6% higher at 2,270p, as I’m writing, on the back of today’s record results. Its market capitalisation is just under £140m.

It reported a 24.6% increase in revenue to £71.4m, including 17.7% organic growth, and a 55.5% rise in underlying earnings per share (EPS) to 131.9p. At the current share price, the price-to-earnings (P/E) ratio is 17.2. The performance was helped by “very favourable foreign exchange rates” but even so, the P/E looks cheap.

The company boasts a strong order book and has £10.7m cash on the balance sheet to help it pursue selective acquisitions, which are an integral part of its growth strategy. The businesses within the group can experience some short-term variability in performance but the long-term growth drivers make Judges an attractive proposition in my view.

Special situation

Although it counts familiar blue-chip names among its customers, packaging machinery specialist Mpac (LSE: MPAC) will be unknown to most readers. Until recently, this AIM-listed firm was called Molins. The change followed the disposal of the group’s tobacco machinery division and transfer of the Molins name.

I first tipped the company as a ‘special situation’ in June last year when the shares were trading at 101.5p. I put fair value at between 175p — based on pro forma net asset value (NAV) of £35.4m — and 197p. That latter figure was based on £51m forecast sales for the remaining business, valued at the same 0.78 times sales multiple at which the disposed-of business was sold. I upped my NAV estimate to £44.6m (221p a share) in November and suggested “the value on offer here could attract wider attention when the company releases its annual results (with a clean balance sheet) in early 2018.”

Those results showed revenue a little above forecast at £53.4m, giving a fair value of 207p a share on my 0.78 sales multiple, and NAV a little below my estimate at £42.8m, giving 212p a share. The shares are currently trading at 210p and the market cap is £42m.

Still value on offer?

The special situation has played out nicely but looking at the stock afresh, there still appears to be value on offer. According to Reuters, the consensus among City analysts is for EPS of 10.15p for the current year, followed by a 42% increase to 14.4p next year. This gives a P/E of 20.7, falling to 14.6, and a price-to-earnings growth (PEG) ratio of 0.35, which is well to the value side of the PEG fair value marker of one.

The company has net cash of £29.4m, a surplus of £17.6m on its UK pension scheme and deficit of £6.2m on its US one. However, there’s some risk due to the size of the gross pension assets and liabilities (both over £400m at the last reckoning), which potential investors should weigh up.

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However, in its reduced circumstances (it’s been demoted back to the second-tier FTSE 250) and at its depressed share price, Hikma is one of two turnaround stocks I’d buy before 2018.

Recent difficulties

A trading statement last week was indicative of its recent difficulties. It reported a good performance from its Injectables business, steady improvement from its Branded business, but cut its forecasts for Generics for the third time this year.

The company said that as a result of challenging market conditions impacting the US generics industry, it had experienced greater than expected price and volume erosion and that it expects these market conditions to persist in 2018. Also within Generics, it said it still hasn’t been able get the US Food and Drug Administration (FDA) to approve its generic version of GlaxoSmithKline‘s Advair.

Three reasons to buy

There are three reasons I rate Hikma a ‘buy’ before 2018. First, I reckon the subdued outlook for the Generics division is fully priced-in. Second, generic Advair could yet get the go-ahead, with the company having entered a dispute resolution process with the FDA, which it expects to complete in Q1 2018. Third, and most significantly, I calculate Hikma’s strong balance sheet gives it up to $1.5bn of firepower to pursue value-enhancing acquisitions, joint ventures or share buybacks. As such, I reckon the shares look cheap on current City earnings forecasts for 2018, which give a P/E of under 14.

Hidden value

In June, under its new chief executive, small-cap Molins (LSE: MLIN) announced the sale of its tobacco machinery division to focus on its higher-growth packaging machinery division. The shares were trading at 101.5p at the time and I calculated the fair value of the rejigged company as between 175p, based on my estimation of net asset value (NAV), and 197p, based on applying the same sales multiple at which the tobacco machinery division was sold to the forecast sales of the retained business.

The deal, and a subsequently announced sale of a Canadian property, didn’t complete before Molins’ half-year-end but there’s enough information in the half-year results to revise my fair value estimates. The sales-multiple-based value remains at 197p, but the NAV rises to 221p.

Balance sheet NAV at the half-year-end was £40.7m. So I remove book value of the Canadian property of £1.5m and tobacco machinery division assets of £38.6m and liabilities of £11.8m. Then I add net cash proceeds from the Canadian property sale of £5.9m, less £1m to adapt a new leased building, and net cash proceeds of £27.3m from the tobacco machinery division sale, of which £1.5m of warranty escrow goes into trade receivables and £2.7m into pension assets.

The result is a NAV of £44.6m, representing 221p a share. The shares are currently trading at around 140p. I reckon the value on offer here could attract wider attention when the company releases its annual results (with a clean balance sheet) in early 2018.

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But for those who reckon the economy is on steady ground, I reckon Virgin could be a great turnaround stock as it continues to grow profitably and its shares trade at only 0.7 times their book value, suggesting plenty of room for upward share price movement if investor sentiment turns positive again.

The company’s health was on full display in H1 results. Underlying pre-tax profits rose to £128.6m from £101.8m the year before as it brought in more retail deposits and promptly turned them into profitable mortgages and new credit card advances. The loans the company has been extending appear to be quite safe, as well as mortgages in arrears of three months or more at just 0.15%, below the industry average of 0.91%. Likewise, credit card arrears were a fraction of the industry average.

On top of making solid loans, the company’s management team is making good progress in cutting costs. Its cost-to-income ratio in H1 fell from 58.8% to 53.9% year-on-year (y/y), which helped boost return on equity (RoE) to an industry-beating 13.35 even as net interest margin remained low due to rock-bottom interest rates.

Unlike larger rivals, Virgin Money is also unencumbered by legacy bad assets or regulatory fines. This means as the company ramps up profitability it can afford to actually pay dividends. The company’s interim dividend was 1.9p and analysts are expecting a full-year payout of 5.84p against 36.79p in earnings per share. With a strong tier one capital ratio of 13.8% the bank’s balance sheet will allow for an ever greater portion of rising earnings to be paid out in dividends in the years to come.

Investors who reckon recent housing price weakness and tepid consumer confidence are only temporary may find a highly-discounted Virgin Money a great contrarian option today.

Slimming down to grow

A riskier turnaround option I’ve been eying up is Molins (LSE: MLIN), which produces packing machinery and equipment for the consumer goods and healthcare industries. The company has suffered from three straight years of falling earnings but its new management team has an ambitious plan to turn things around.

The first step was selling its tobacco packaging business for £30m. This will allow it to focus on the faster growing parts of its business that recorded £25m in revenue in the half year to June. The proceeds from the sale will go towards acquisitions and organic expansion that will allow it to cement its global footprint and land larger contracts with multi-national and local customers.

With the sale only completed on August 1, it’s still very early days, but initial signs of a turnaround are promising. In H1, underlying earnings per share were 3.1p, a vast improvement on the 4.2p loss recorded in the year prior. And with net debt down to just £1.1m even before the proceeds of the sale, the company will have plenty of financial flexibility to pursue deal-making. There’s still a lot of work to be done, but I’ll be keeping a close eye on Molins in the quarters to come.

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Big discount?

The sale of the division will considerably strengthen Molins’ balance sheet and cash-positive position (net cash at the last year-end was £0.8m). It will also enable the company to accelerate investment in its Packaging Machinery division and acquire complementary businesses.

The company had net assets of £35.4m at the last year-end and says that the £27.3m from the sale of the Instrumentation & Tobacco Machinery division is similar to the book value of the division’s net assets. Even after the rise in the shares to 101.5p, Molins’ market cap is just £20.5m — a 42% discount to net assets. Put another way, if the shares traded in line with net asset value, the price would be 175p.

Meanwhile, the company says it’s “confident that the Continuing Group’s sales in 2017 are likely to be significantly ahead of last year” and has implicitly guided on £51m. If we apply the 0.78 times sales multiple at which the Instrumentation & Tobacco Machinery division is being sold to the remaining Packaging Machinery division, we get a share price of 197p.

There are execution risks with Molins’ strategy to acquire complementary businesses and the company also has a significant pension deficit. The current deficit recovery plan involves payments of £1.8m a year (increasing by 2.1% a year) through to 2029. Nevertheless, the size of the discount of the share price to my fair-value calculations of 175p-197p persuades me that there is potential for significant gains for buyers of the stock today.

Stamps licked?

Shares of Stanley Gibbons (LSE: SGI) shot up 18% to 13.13p on Friday after it announced an unsolicited approach from private equity group Disruptive Capital regarding a possible offer. However, the shares have retreated to 11p today after a further announcement from the stamps and coins company and an announcement from Disruptive Capital.

Stanley Gibbons had a peak market cap of £179m just a few years ago but is currently valued by the market at just £19.7m after accounting shenanigans, difficult trading conditions, debt problems and an emergency fundraising. On the face of it, there could be value here, because the shares are trading at a discount of 56% to net asset value at the last balance sheet date (30 September) and at just 0.39 times trailing 12-month sales.

However, 30 September is a long time ago and sales were in decline at that time. More recently, the company reported little headroom on its borrowing facilities at 31 March, saying it was “utilising £17.2m out of its total facilities of £18.3m”.

In today’s announcement, Stanley Gibbons formally put itself up for sale, saying further investment is required. At the same time, Disruptive Capital announced it didn’t have key information “to evaluate whether or not to make an offer” and is not making one. Similarly, I think there’s currently insufficient information to evaluate whether the shares are good or poor value at their current level.

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Sales slumped 16%, down to £40m, with underlying pre-tax profit taking a 60% nosedive to £0.6m. On a statutory basis there was a pre-tax loss of £0.1m.

The company says that its first-half performance was broadly in line with management expectations, but that adverse market conditions in the Middle East and eastern Europe had a negative impact on its Tobacco Machinery division, owing to order deferrals.

However, Molins says that there was “good progress” in its Scientific Services and Packaging Machinery divisions, where  sales in local currencies were up 4% and 9% respectively on the prior period.

Underlying earnings per share (EPS) were down almost 68%, to 2.1p, with a basic loss per share of 0.9p. However, the company has recommended maintaining its interim dividend at 2.5p per share.

Commenting on the results, CEO Dick Hunter said:

“As in previous years, the Group’s full year trading performance will be significantly weighted towards the second half.  The Board is mindful of the strength of sterling and current market conditions for the Tobacco Machinery division.  The prospects for the Scientific Services and Packaging Machinery divisions continue to be encouraging.  We continue to pursue our growth initiatives in all divisions.“

At just over 140p, Molins’ share price is now down 27% on the year-to-date, compared with a fall of 8.5% by the AIM All-Share (Molins was admitted to the AIM in June of this year). But over the past five years, Molin’s share price has risen 99%, versus gains of 31% by the AIM All-Share and 44% by the FTSE All-Share.

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