VALUE INVESTING
Victorian Values

By Stephen Bland (TMFPyad)
September 29, 2000

The word "tinpot" has acquired a special meaning on the value shares board. Specifically, a market cap of under £100m. This figures comes from my personal lower cap limit below which I would personally rather not invest in a share, although I might sometimes go a little below that for a good one. I have laid out many times why I have this prejudice so I won't repeat it all here, though I do make a few comments on this at the end. Many other experienced readers, though, are less bothered than me about this and are willing to go in for much smaller value shares.

Because this is the non pyad value shares series, I feature this week a prime example of a tinpot value share, Victoria plc (LSE: VCP) whose market cap is under £10m. The company is a carpet manufacturer, based in Kidderminster.

Here are the usual fundamentals:

• Price (mid) 133p (but note the large spread of around 9p, typical of tiny caps)
• High/low this year 169/123
• High/low five years 169/63
• Market capitalisation £9m
• Earnings per share year ended 31/03/00 20.4p
• Forecast earnings per share year ending 31/03/01 24.4p
• Forecast earnings per share 31/03/02 27.0p
• Price/Earnings (P/E) ratio historical 6.5; 01 forecast 5.5
• Yield on historical dividend of 5.5p 4.1%; on 01 forecast 4.9%
• Price/Book 0.5
• Gearing (historical) 30% (but see comments below)
• One year relative strength +12%
• Directors own 10%
• Other majors own 36%

Note the ultra-low P/B of 0.5. Very attractive.

At the last accounts there was net debt of £5.5m, against net assets of £18m and a market cap of £9m. But the good news is this. Since then the company has sold off surplus property for around £3.5m and still has further property for sale. It will thus be realising a lot of cash.

Consider the chairman's comments at the AGM in July:

"...the group has made an encouraging start to the year... we are optimistic of sustaining the improved performance throughout the year."

And that is just on the carpet manufacturing side, not including the cash realised from the property sales.

On top of this, the company has an outstanding growth rate of EPS, on normalised figures going from 4.75p in 96 to 20.4p for 00 without a dip. If the forecasts prove to be near accurate, then the growth continues. EPS has gone up more than four times between 1996 and 2000, yet the share price has only risen by about 50%. This of course has caused the P/E to collapse. And yet by any definition this is an excellent growth share.

Net current assets are £6.3m at the last accounts and that will presumably rise by the cash raised from property sales. Property is a fixed asset, but cash is a current asset, thus the sale of a property converts a fixed asset to a current asset. As result current assets will rise to around £9-10m, other things being equal, a figure which is at or above the market cap. It is rare to find a value share trading not only way below net assets, but around or below current assets as well.

Many value shares arise from a situation where a share has fallen back a lot, perhaps because of a temporary dip in EPS. They may become oversold, and where a sharp recovery looks likely which has not yet been taken account of by the market, the share acquires value characteristics. But with Victoria, this is not a recovery play because there has been no fall in normalised EPS. It has just been sadly neglected. A common problem with small caps, and one reason why I don't like them. Not enough investors are interested, and certainly few institutions, who are the main buyers in the stock market.

If I were not so racist about small caps I would be seriously interested in Victoria. I like the name, always a good sign. Good name for a lady. Nomenology tells us that Vickys are cool, witty, not necessarily devastatingly attractive but nice, pleasant company. Make you feel good.

What does it smell like? Damn good to me. Pity it is so small, 'cos I'm not buying.

A few words of warning on small caps. I have already referred to the large spread. 9p on a mid price of 133p is enormous, compared with that on large caps. Makes it harder to make money. Only two brokers have made forecasts, in July and August respectively, so that increases the risk of error there. And without casting doubt on the directors of Victoria personally, I believe that small cap directors in general possess less integrity than those of larger companies and are consequently sometimes more inclined to hype their own stock.

Further, as I refer to above, the general lack of institutional interest in buying small caps, or the media in commenting upon them, means that there are fewer factors to cause the value to out, even if the critical outing factor of rising earnings per share is there. However the P/E is so low already, that if EPS goes on rising as forecast, then something will have to give sooner or later.

If anyone is interested, it will therefore require patience. All value shares require this, but those which are less likely to attract attention require even more. And I do consider that the risks associated with very small caps like this are far greater than larger caps, so potential investors must consider this point very carefully.

Where Next?

Is Victoria worth the small-cap risk? Let us know what you think on the Value Shares discussion board.