VALUE INVESTING
The Cheapest Small Caps On The Market

By Stephen Bland (TMFPyad)
February 20, 2004

Following my last two articles, in which I had a look at value lurking in the FTSE 100 and FTSE 250 indices, the final one today looks at value amongst the FTSE Small Cap index.

As before, balance sheet data is historical from the last annual accounts without amendment for interims or news since, while dividend and earnings per share (EPS) data is based upon consensus analysts' forecasts. Searches must be seen as just a starting point for further research and do note that databases can contain errors. I have used the raw figures extracted from my database without checking the validity of the figures or for updates.

(On the same theme, the February edition of my tipsheet will reveal some attractive small cap value shares as well as the second addition to the high yield portfolio I am constructing. You can subscribe here.)

Lowest P/E	Recent price (p)	P/E
Goshawk (LSE: GOS)	40	3.9
Cox (LSE: COX)	82	5.7
Countryside Properties (LSE: CYD)	231	5.8
Molins (LSE: MLIN)	363	5.9
Chaucer (LSE: CHU)	48	6.1

Highest yield	Recent price (p)	Yield (%)
James Beattie (LSE: BTT)	124	9.6
Delta (LSE: DLTA)	92	8.7
Elementis (LSE: ELM)	29	7.6
UK Coal (LSE: UKC)	135	7.4
Highway (LSE: WHY)	34	7.3

Lowest P/TBV	Recent price (p)	P/TBV
Goshawk (LSE: GOS)	40	0.5
Yates (LSE: YTE)	97	0.5
Tops Estates (LSE: TOPS)	300	0.6
Lavendon (LSE: LVD)	170	0.7
Marylebone Warwick (LSE: MWB)	57	0.7

There are no triple appearances and there is only one double, Goshawk Insurance, in both the price to earnings (P/E) and price to tangible book value (P/TBV) lists. In fact, it tops both.

Perhaps the most interesting feature of the three tables is the preponderance of Lloyds Insurers. There are four: Goshawk, Cox, Chaucer and Highway. The first three appear in the P/E list with Goshawk doing the double as I said in the P/TBVs, while Highway shows up in the dividend yield table.

As expected, property plays feature amongst the P/TBVs with Tops and Marylebone, while Yates is a pubs group that might be considered a sort of property play though I have not investigated the nature of its assets. Hotel and restaurant/pub shares with substantial property assets will at times trade below book, particularly when business is not too good.

An interesting one that pokes out a bit is Molins in the P/E table. A manufacturer of packaging and cigarette making machinery, this might be worth a look for not-too-deep value players.

Several millennia ago, I worked for a period at a cigarette manufacturer and it was fascinating to watch the machines spit out the ciggies then wrap them, machines that were probably Molins made. The company had a clever automated manufacturing line that could be programmed to select the various varieties of tobaccos from bins and feed them into the machines in the appropriate mix depending on the brand being produced. I don't know if Molins is still dependent upon the tobacco manufacturers these days.

The yield list, a strange mix, shows up a well known erstwhile value play, coal miner UK Coal. This share has done quite well in recent times. Coal is probably the last thing that attracts anyone to this firm, the principal interest arising from the large property holdings around the old mines that may have some development potential. Its apparently heavily uncovered dividend is covered by cash flow but in turn that flow depends upon government subsidy, adding a degree of risk that I personally found unacceptable when I traded the share a while back. Unless things have changed, I haven't checked.

Also in the yield table are two specialist chemical businesses, Delta and Elementis. I haven't a clue what specialist chemicals means, or how they differ from everyday, girl-next-door type chemicals, but hey, who cares? Value players don't really concern themselves much with anything as crass as the nature of the business.

Topping the yield list is department store James Beattie, about which I know absolutely nothing. However, for a neglected store play, property assets and trading below book are the key to winning. Like the hotel groups mentioned last week, a department store share can sometimes be little more than property play, which can be interesting if a large discount to book is on offer.

An oddity in the P/TBVs is Lavendon, a plant hire business. That's all I know about it.

Be careful with these smaller caps though. There can be large spreads and the information is more likely to be out of date than with large cap shares.

Where next? Stephen Bland highlights great small-cap opportunties in his Value Investor newsletter. Sign up here (free 30-day trial!).