Why small caps Somero Enterprises, Inc. and H&T Group plc could soar in 2017

Roland Head explains why Somero Enterprises, Inc. (LON:SOM) and H&T Group plc (LON:HAT) are rising fast today.

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Today I’m going to look at two of Tuesday’s top movers, both of which have risen sharply following strong trading updates this morning.

Beating expectations

Shares of laser-levelled concrete floor specialist Somero Enterprises (LSE: SOM) rose by 8% this morning after the group advised investors that full-year earnings before interest, tax, depreciation and amortisation (EBITDA) should be “comfortably ahead of current market expectations”.

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Cash generation has also been strong. Somero’s year-end net cash balance is expected to be “significantly ahead of market expectations”. As a result, Somero has increased its dividend payout ratio from 30% to 40% of earnings, and is considering whether to pay a special dividend in 2017.

Somero’s speciality is making the equipment required to produce perfectly flat concrete floors for large warehouses. Modern high racking systems require a level floor, and this is a growth business. The group said trading was “solid” in core markets, with Europe, North America and Australia all contributing to growth. Trading in China — a huge potential market — remained “healthy”.

The company’s share price has now risen by an astonishing 2,500% over the last five years. Somero went into the last recession with too much debt, and narrowly avoided disaster. The risk of another cyclical downturn is real, but the group’s management have been much more conservative with financing this time round. Somero has almost no debt, and management plans to maintain a $10m net cash buffer to protect against the costs of a future slowdown.

After today’s gains, I estimate that Somero shares trade on a forecast P/E of about 11, with a prospective yield of about 3.1%. If I was lucky enough to hold the shares, I certainly wouldn’t sell.

Lending fuels growth

High street pawnbroker H&T Group (LSE: HAT) says that it made “significant progress” in 2016, and expects full-year pre-tax profit to be “marginally ahead of current expectations”. The firm’s shares rose by more than 5% following this news, as the market priced-in another year of strong growth for this group.

According to today’s update, H&T’s pledge book increased by 5.9% to £41.3m last year. The group’s personal loan book rose by 123% to £9.4m. H&T says that the higher price of gold since the EU referendum has also helped to lift profits — as gold is priced in dollars, the weaker pound has boosted the UK retail price of it.

Is H&T still a buy?

H&T shares are now worth 40% more than they were a year ago. They’ve doubled from the low of 140p that followed the gold slump in 2013. However, despite these gains the stock still trades on a price/tangible book ratio of just 1.3. This should provide valuable downside protection for investors.

Based on today’s update, I’d guess that 2016 earnings of 20p-21p per share are now likely. This puts the stock on a 2016 forecast P/E of about 14, with a prospective yield of 3.3%. The outlook for 2017 may also be upgraded, but current forecasts suggest earnings growth of about 4%, giving a forecast P/E of 13 and a potential yield of 3.6%.

H&T has already done well, but the group’s stock doesn’t look expensive to me and may still be worth buying.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Somero Enterprises, Inc. 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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