This company's share price has taken a real beating over the last few years but it looks ripe for a recovery.
There are quite a few micro-cap companies around at the moment that were small or even medium caps just a short time ago before their hammering by the market.
One such is AIM-listed API (LSE: API) which makes specialised materials including foil, holographic and laminate products for packaging. These end up in things like fag packets, drinks cartons, food packaging and various consumer products. API has businesses in the UK, Europe, the USA and the Asia-Pacific region.
Today's valuation of API of just £6.0m at its mid price of 8.5p seems to suggest the game is up for the Stockport-based company, yet it turned over £93.4m last year and made an operating profit of £2m to the half year. This is one heck of a fall from the peak of 173p four years ago -- though there were roughly half as many shares in issue then.
Glass half empty?
Arguably, investors' fears were realised when the company's trading statement at the end of January spoke of reduced expectations for the full year, including a pre-exceptional loss before tax, due to falling demand for its products.
And although we were told the business is continuing to operate within its banking covenants, this did little to allay investors' fears as any mention of "banking covenants" is scary stuff indeed.
Also, Steel Partners is the biggest shareholder, owning over a third of the company and it was this hedge fund's selling of UNIQ (LSE: UNIQ) which recently knocked back the price of that share in March. If the investment company starts to offload its API shares at any price, then the same could happen here.
Glass half full?
However, one would imagine that Steel Partners would have been selling already if they'd had to. And the c.£1.25m they'd be likely to raise isn't exactly a huge amount by hedge fund standards.
Also, the January trading statement said that API's full-year revenues are now expected to show a year-on-year decline of around 3% at constant exchange rates. Whilst this is clearly not good news, it wasn't all that bad either, considering the economic backdrop; mirroring, perhaps, that fact that quite a lot of end usage of API's products is in essential items. And the company still expects to deliver a trading profit which doesn't suggest it's time to blow the full-time whistle just yet. Added to that is the net tangible asset value (NTAV) of almost £26m and the likely turnover of more than £90m which puts the price-to-sales ratio (PSR) at a lowly 0.066.
API has also reduced its headcount by 10% (around 80 people) and is trying to find other ways of reducing costs without damaging its business prospects. Furthermore, the weakening of sterling against the Euro will have helped margins.
Director buying
Trading conditions haven't deterred the chairman who bought a few shares at 4.5p in March to add to the 450,000 he bought at 13p in July last year, and the 50,000 he bought a year ago at 21p.
We'll find out the details of just how bad things are soon enough. API's final results to the end of March are due during the next couple of weeks, so it may be more prudent to wait and see what the company has to say about the future. After all, API is a very small company at the current price which is both its attraction and its risk. And the shares are tightly held with just a 20% free float, so expect volatility in the price.
Low point in cycle
Overall, the investment case for API is its NTAV and low PSR, together with its potential for recovery and the cyclical nature of its business. The cycle has taken a very sharp downturn recently, of course. But is the decline in trading of the past few months an anomaly that will gradually be corrected as things get back on track -- or a major seismic shift that will affect the likes of API for years to come? If it's the former, API definitely looks to be worth a lot more to me.
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David owns shares in API.
