3 Solid Small-Caps Set To Fly? Tasty Plc, Bioventix PLC And Alkane Energy Plc

Great business franchises support a longer-term investment in Tasty Plc (LON: TAST), Bioventix PLC (LON:BVXP) and Alkane Energy Plc (LON:ALK).

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Investing in small-cap shares is different from investing in larger companies. Trading results can be more volatile, and share-price movements can be fast and furious.

It’s common for small-cap share prices to halve or double within just days or weeks.

Some smaller businesses are better than others

Speculative or risky underlying businesses don’t power all small-cap shares, though. Sometimes we find a solid and well-financed business with a good business model and an attractive trading niche or franchise.

We have three such solid small-cap firms in Tasty (LSE: TAST), Bioventix (LSE: BVXP) and Alkane Energy (LSE: ALK), each of which, in my view, looks attractive now in terms of upside potential for investors.

Rolling out a successful concept

Tasty is rolling out a restaurant expansion programme. Recent full-year results revealed the firm added seven new outlets during 2014 and a further three since the end of the year, bringing the total number of outlets to 39 as of 30 March 2015.

After testing the concept mainly in the South and East of the UK, recent openings are farther afield, such as Nottingham and Bristol. The mainly Wildwood-branded pizza, pasta and good-times restaurants seem to be popular, and the rollout programme is gathering pace at a time when the macro-economy is improving in Britain.

An experienced management team with previous successful rollout experience heads the company, and the firm shows every sign that it executes its business well — a focus on getting the basics right seems to be paying off. The numbers tell the story: for 2014 the company posts revenue up 28%, gross profit up 26% and pre-tax profit up 46% over the previous year’s figures.

Financial progress is steady and solid on most important measures:

Year to June

2010

2011

2012

2013

2014

Revenue (£m)

10.56

14.56

19.32

23.19

29.73

Net cash from operations (£m)

1.22

1.74

2.4

3.24

5.31

Adjusted earnings per share

0.56p

2.67p

2.67p

2.95p

3.88p

In my opinion, Tasty’s expansion remains in its infancy, and the pace of expansion may accelerate from here given the favourable economic backdrop and the proven success of the firm’s restaurant concept.

Drivers from here could be:

  • Improving like-for-like sales as the economy continues to strengthen;
  • Acceleration of the firm’s rollout programme.

Hard to imitate

Bioventix specialises in the development and commercial supply of high-affinity monoclonal antibodies and occupies a profitable niche market. The company’s in-house development programme produces some of the tools scientists need to tackle the diagnosis or monitoring of a broad range of conditions, including heart disease, cancer, fertility, thyroid function and drug abuse.  New start-ups don’t challenge the firm’s profit margins every day, as the company’s operations demand a high degree of specialist knowledge. A small team works to develop ongoing forward revenue and profit streams, which suggests growth potential. Meanwhile, royalties on previously licensed developments drive impressive financial results: 

Year to June 2011 2012 2013 2014
Revenue (£m) 2 2.4 2.7 3.35p
Earnings per share 17.59p 24.62p 30.28p 36.53p

 Drivers from here could be:

  • Newly developed antibodies increase forward royalty earnings;
  • The firm might increase its workforce and accelerate development activities. 

Electricity-generation from gas

In a trading update released today, Alkane Energy reports an encouraging step change in performance, driven by acquisitions during 2014. The firm uses methane trapped in abandoned coalmines to drive engines that turn generators. The company then feeds the electrical energy produced to the grid. When methane runs out, Alkane buys in gas to drive the engines for power-response, where the grid needs temporary energy quickly to cover as larger plants start-up or when demand peaks.

Output in the first three months of 2015 has increased by 26% and the share price is heading up, breaking a period in the doldrums. The fallen oil price seemed to pull down Alkane’s strategic investment in Egdon Resources (LSE: EDR), where Alkane transferred its shale rights. A weaker power selling price environment also weighed on Alkane’s shares. However, operational progress remains steady:

Year to December

2010

2011

2012

2013

2014

Revenue (£m)

6.62

9.5

14.66

20.57

15.96

Net cash from operations (£m)

3.46

4.37

6.53

5.56

4.64

Adjusted earnings per share

2.01p

2.26p

2.96p

3.01p

2.61p

 Drivers from here could be:

  •  Further growth from acquisitions;
  •  Organic efficiency gains;
  •  Firming electricity-selling prices;
  • A recovering oil price lifting Alkane’s Egdon Resources investment;
  • Egdon Resources adds value to the shale licences on Alkane’s operating areas;
  • Better forward uptake of Alkane’s power-response offering.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold owns shares in Tasty and Alkane Energy. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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