When it comes to small-cap income stocks, Northgate (LSE: NTG) looks to me to be one of the market’s best opportunities. Shares in the vehicle rental company currently support a dividend yield of 5.2%, and the payout is covered more than twice by earnings per share. However, despite the attractiveness of this dividend, it appears that the market is cautious about the outlook for Northgate as shares trade at a downbeat forward P/E of 8.1.
Looking at the figures published by the company this morning for the three months to the end of January, I believe that this valuation undervalues the group and its prospects.
The company reported this morning that it managed to increase its number of vehicles on hire (VOH) for the first time in three years in the last fiscal quarter. During the period, the number of VOH ticked higher by 0.7%, which, considering the lack of growth over the past three years, is an impressive achievement. The firm expects this trend to continue for at least the first half of 2018.
This turnaround follows the introduction of some self-help measures outlined by management during the Capital Markets Day on 4 October 2017. As well as improving sales trends, the firm is also looking to optimise its capital base by selling vehicles only when they have reached an age which maximises cash returns for shareholders.
This should lead to an improved return on capital — a measure of how much profit a business makes for every £1 invested — for the group as it squeezes more life out of its asset base. Getting more life out of its vehicles will also mean lower levels of capital spending, which could translate into higher returns for shareholders, great news for dividend-seeking investors.
Overall, with cash returns likely to increase going forward and growth returning, shares in Northgate look absurdly cheap right now.
Another small-cap income stock that I believe looks too cheap to pass up is Braemar Shipping Services (LSE: BMS). Over the past few years, this shipping company has struggled as a glut of large transport ships has depressed the market. From a net profit of £6.8m in 2012, Braemar crashed to a loss of £0.5m in 2017. Nonetheless, analysts expect earnings to recover for 2018 with a net profit of £6.5m pencilled in and earnings per share of 21.4p.
And it looks as if the company is on track to hit these figures. Alongside the firm’s interim numbers, chairman David Moorhouse said, “We are well placed to deliver a stronger second half business performance compared with the first half of our financial year, as Braemar’s improving momentum continues.”
Still, despite management optimism, the market is unconvinced. The shares currently trade at a discount forward P/E of 9.4 and support a dividend yield of 6.4%. The payout is covered 1.5 times by earnings per share and is also backed up by £6.4m of cash on the balance sheet.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Northgate. 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.