Interactive Investor

Nine shares for the future

5th June 2015 10:48

Richard Beddard from interactive investor

This month, one share joins the exclusive 'add' category of the 50-plus profitable stable companies we track most closely.

[Please click on the hyperlinked company names in this article for more detailed analysis.]

It's Sprue Aegis.

Sprue designs and distributes household smoke and carbon monoxide detectors. You'll notice that there's a word missing in that description, a word that might normally fit between design and distribute, but Sprue doesn't manufacture. It leaves that to its partner BRK, an American company that owns a factory in China. Sprue distributes BRK's alarms and its own in Europe. I've mentioned the sometimes adversarial relationship of the two partners before as a reason for caution about Sprue, which has grown rapidly, but it's scraped into the 'add' category thanks to the churlish response of traders who sold the shares after it's full-year results announced at the end of April.

Sprue increased revenue 36% and adjusted profit 82%, but it warned that profits might not meet analysts expectations in 2015 due to a higher proportion of revenues from France, where smoke alarms have recently been mandated. Revenues in euros will be diminished once translated back into sterling, if exchange rates remain unfavourable. I don't think short-term currency fluctuations should worry long-term investors, and the sell off has just about dragged the shares into value territory.

Long-termism is one of Share Sleuth's mantras. As I wrote in the first of these monthly reviews of the most attractively priced companies in the squad of profitable, relatively stable companies, they won't necessarily prove themselves in a year, but the objective is to hold them indefinitely.

Long-termism is one of Share Sleuth's mantras"

Another situation requiring patience from shareholders is Sagentia. At the company's AGM in May we discussed a curious predicament. Sagentia hires out the expertise of its scientists to companies who need help with research and development. It's good at fixing other companies' problems but it has one of its own. The problem is financial, not scientific: what to do with Sagentia's cash surplus.

Too much cash is a good problem to have, a sign of success, but attempts to get it out of the company are being frustrated. Sagentia's first instinct was to tender to buy shares from its institutional investors. This would make the remaining shares in the market more valuable and enrich shareholders. But the institutions wouldn't sell, probably because at market prices the shares were undervalued. Sagentia's next instinct was to buy the shares back in the market. But talk of Sagentia's undervaluation has increased interest in the shares and they are less undervalued than they were. Any move to buy more shares is likely to move the price further up, which will mean existing shareholders pay more and benefit less.

That's because the shares are illiquid, few change hands because Sagentia is a smallish company and executive chairman Martyn Ratcliffe owns 33% of the shares. When the supply of shares to the market is low it doesn't take much to move the price.

A third solution would be a special dividend. This would be agreeable to smaller shareholders with holdings protected from income tax in SIPPs and ISAs, but not to larger shareholders, and in particular Ratcliffe. A fourth option is investment, an acquisition perhaps, but the company is rightly wary of wasting the money.

It's an impasse. What we need is a catalyst, something to happen that will unlock the value. It might be as simple as waiting until the chairman needs the cash. But we may have to wait for it to trickle out slowly, in buybacks and gradually rising dividends.

The 'add' category is a way of identifying companies in the Share Sleuth spreadsheet cheap enough to add now, were the portfolio not already full. It shouldn't change much from month to month, but I'm always looking for new 'adds'.

This month scientific instrument manufacturer Judges Scientific, food wholesaler Booker, and supplier of pork and now poultry products Cranswick all passed Share Sleuth's quality criteria. They're not obviously cheap though, so they join the 'watch' category.

Games Workshop, which sells fantasy wargames and miniatures, LED lighting manufacturer Dialight, potter Churhcill China, and wallpaper and fabric designer Colefax are all solid companies in the 'watch' category, flirting with value territory.

Meanwhile Animalcare, Sprue Aegis, and Treatt, could be demoted to 'watch' status, if their share prices rise much further.

Here are all the 'adds' today:

Animalcare [Earnings Yield 7%] Manufactures generic and enhanced pet medicines. Also supplies pet identification and veterinary products.

BrainJuicer [Earnings Yield 8%] Conducts market research using techniques adapted from behavioural science research.

Castings [Earnings Yield 11%] Manufactures cast iron parts for commercial vehicles.

Dewhurst [Earnings Yield 15%] Manufactures pushbuttons and other components for lifts, keypads and railway rolling-stock.

Goodwin [Earnings Yield 9%] Manufactures castings and machined components, principally valves and pumps. Also processes minerals.

Rolls-Royce [Earnings Yield 8%] Manufactures and services gas turbines for aeroplanes and piston engines for all manner of vehicles and power generation.

Sagentia [Earnings Yield 9%] Does research and product development for customers in medical, industrial, consumer and energy industries.

Sprue Aegis [Earnings Yield 7%] Designs and distributes smoke alarms and carbon monoxide detectors.

Treatt [Earnings Yield 7%] Sources and processes natural ingredients for flavours, fragrances and cosmetics.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

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