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5 reasons why I’ve added this promising small-cap stock to my portfolio

Since coming to the market only a few months ago, Middlesborough-based jeweller, currency specialist, precious metals buyer and pawnbroker Ramsdens Holdings (LSE: RFX) has performed admirably, prompting me to take a closer look at the micro cap.

I liked what I saw — so much so that I’ve added the company to my portfolio. Here’s why.

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Forecast-beating results

Let’s start by looking at the company’s most recent set of annual results.

In the year to the end of March, group revenue rose 15% to £34.5m. Excluding costs related to its recent IPO, EBITDA came in 27% higher at £6m, with pre-tax profits jumping 73% to £4m. These numbers beat market expectations.

Broken down, Ramsdens saw growth in all parts of its business. Revenue from its foreign exchange segment climbed 18% to £9m, matched by growth in Precious Metals (up 17% to £10.8m). But the star of the show was the company’s retail jewellery division with revenue rising 23% to just under £6m. While not as high, a 7% rise in revenue (to £6.1m) in its pawnbroking segment was also positive.

Over the last financial year, Ramsdens served over 730,000 people with customer growth of 8% and 14% noted in its foreign exchange and pawnbroking segments respectively. 

Heralding a “transformational year” for the company, CEO Peter Kenyon stated that Ramsdens had made a “strong start” to the current year and was “confident of making further progress” as it entered the important summer period.

From an investment perspective, so far, so good.

There’s more…

Buying a company’s shares based solely on recent results is risky, of course. So here are five more reasons why I’m bullish on Ramsdens.

Let’s start by looking at the valuation. Right now — and despite rising 50% since joining the market — shares in the company still trade at 12 times forecast earnings, based on predicted growth of 17% this year. At a time when many other companies are looking fully valued, Ramsdens looks cheap.

In addition to looking reasonably priced, Ramsden’s stock also boasts the added attraction of a predicted 4.3% dividend yield for 2018, fully covered by profits. With interest rates still punishingly low, that’s got to be appealing to those willing to embrace a degree of risk to generate more income.

Third, management at Ramsdens appear to have sufficient ‘skin in the game’ — something I’ve become increasingly more concerned with as an investor over the last few years. The aforementioned CEO, for example, owns 5% of the company. The fact that he’s significantly invested — with a holding valued at well over £2.3m — gives me confidence that he will be just as concerned about performance as I will be. Never discount the value of investing in companies with owner operators. 

Fourth, Ramsdens’ balance sheet appears sufficiently robust with a net cash position approaching £10m at the end of March. With economic uncertainty likely to remain rife, that’s no bad thing. 

Finally — and on a related note — there is a strong possibility of profits racing ahead over the next couple of years as people grow increasingly concerned about the impact of Brexit. Pawnbrokers have traditionally done well during economic downturns and I’m encouraged by the company’s plans to continue growing market share in what remains a fragmented industry while continuing to offer a diversified (but complementary) range of services.

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Paul Summers owns shares in Ramsdens Holdings. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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