David Holding looks at a collection of small companies with big assets. Could they be due a re-rating?
There are many value tiddlers swimming around the stock market at the moment. By "tiddler" I mean companies whose overall valuation is less than £5m. Quite a few of these companies have seen their valuations hammered unfairly in my opinion.
The problem is that the smaller the company, generally speaking, the greater the investment risk. But with a solid asset base to protect investors, the downside risks are alleviated to a large extent. And, of course, on the flipside to the "elephants don't gallop" principle, the shares can run very quickly in the right circumstances.
De-listing risks
Perhaps the greater risk these days come from de-listings. These seem to be becoming ever more popular as majority shareholders in small companies grow frustrated with the valuations and constraints the market places on their companies -- and decide the cost of staying listed outweighs any potential benefit.
During 2008, 88 UK companies de-listed with the vast majority coming from AIM. This was more than double the number of the previous year.
One example, GSH Group (LSE: GSH), recently announced its intention to de-list causing some very understandable concerns amongst Fool discussion board posters. Although it's not a real tiddler at £36.6m, GSH does have a majority shareholder who owns over 80% of the shares. It takes 75% of the shareholders to agree to a de-listing, so it's always worth checking out the ownership profile to minimse this risk. There are ways private investors can sell their holdings in companies that de-list, but it's a lot harder and, on the whole, definitely something best avoided.
Finding value
So now that's out of the way, let's have a look at a few value tiddlers. There are more than 400 AIM-listed companies valued at less than £5m -– so there are plenty to go at and following are just a few examples:
Electronic information display maker Densitron (LSE: DSN) is valued at £2.3m, but at the last count, made a small pre-tax profit of £80,000 over six months, and was cautiously optimistic about the future. But more to the point, Densitron had a net asset value of over £7m, which could be higher in reality due to its near 25% stake in Taiwanese display manufacturing company, Evervision, and 1.25 acres of land at Blackheath, south east London, for which the company is seeking planning permission for residential housing. Additionally, the company's displays division makes a healthy profit, so if the value of the assets can be extracted and Densitron can concentrate on what it's good at -- today's valuation could look paltry in a few years' time.
Meanwhile, trading may not be great at medical equipment supplier Hartest Holdings (LSE: HTH). But with net tangible assets of around £4.8m, and revenues of £21.7m in the last full year, on which the company made a pre-tax profit of £884,000 -- the current valuation of just £1.3m looks exceedingly measly. Also, Hartest is taking steps to change its operations and reduce central costs to enable the company to operate more profitably in the future. The next market news is unlikely to be pretty. But if Hartest can turn the corner, a punt at 15p could prove to be a shrewd one in time.
Similarly, textile importer Leeds Group (LSE: LDSG) made over half a million last year, has a net asset value of around £12m, but is valued at just £4.2m and has been steadily buying back its own shares.
Trust yourself
These are just three small examples of the plethora of value tiddlers still thrashing about in the AIM market. It's no coincidence that the same shareholder, value hunter Peter Gyllenhammer, has a sizeable holding in all three. But in each case, his holding remains under the 30% level -- above which he would be obliged to make an offer for the company.
With all these situations, timing is crucial. You need to ask yourself how (and if…) the value will come out. Because these companies are so small, doing your own research can give you a genuine edge.
David owns shares in Densitron and Leeds Group.
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