Sweet and healthy profits ahead?

On Friday I mentioned that I hadn’t added to my portfolio recently, but after some research over the weekend, I did identify an opportunity and bought shares in a company called Zetar early this (Monday) morning.

The idea came from a brief article in the FT weekend, and after some research I decided to take the plunge.

The first thing that caught my attention when researching this company was that it is currently trading on a historic P/E ratio of about 6, and yet results released last week suggest that the company has weathered a storm and is set fair for growth. Surely a P/E of 6 is far too stingy.

Zetar is essentially a producer of confectionary and healthy snacks. In their recent finals, it appears that confectionary grew very well (despite an unseasonably warm Easter), but the snacks division was hit by a very sharp rise in commodity costs in the first half of the year. The overall figures for the year were nevertheless encouraging, and in the second half of the year they have managed to pass the increased costs in their snacks division on to their customers and hence improve margins. In the first 11 weeks of the new financial year, revenues as a whole are some 6% ahead of the same period last year.

They have clearly identified a number of growth opportunities for the short, medium and long term, and have been awarded a “food gifting” license for the London Olympics 2012. They have also formed a strategic partnership with two unidentified major European companies.

The balance sheet looks pretty healthy with a net tangible asset value of about 118p per share, and a NAV of 350p (including intangibles and goodwill). They have over £4m cash on the balance sheet, and banking facilities in place with HSBC until 2014 (recently negotiated on relatively favourable terms). Free cashflow is healthy, and they have also introduced an inaugural dividend of 2.25p (about 1%) covered about 16 times by earnings.

It was a pretty upbeat forward looking statement, despite the headwinds still facing the retail environment, and surely the shares deserve a re-rating. If earnings come in around 40p next year then a P/E ratio of 10-12 gives a value of 400p-480p. This leaves a substantial amount of upside from this mornings opening price of 220.5p.

There is a nice piece written about the company on the Motley Fool where the CEO and FD gave a presentation around January (I think?). Interestingly the company seems to supply most of the major retail outlets, and the management team appear to have set ambitious but achievable targets (see article – there is a link on ADVFN).

There has been plenty of consolidation in this sector in recent times (think Cadbury’s and Uniq). In fact whilst Zetar are looking towards organic growth, they are keeping an eye out for small bolt on acquisitions, although will they inevitably become a target themselves?

All-in-all the investment case is compelling at these levels.

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P.S. Actually the real reason that I’ve bought shares in this outfit is that last Christmas we pretty much depleted our local supermarket of Zetar’s -  Bailey’s chocolates and I’m secretly hoping that, in the future, shareholders may qualify for substantial discounts. They are absolutely delicious!!!!

P.P.S. There are two technical points of interest. Firstly, the shares have been trading in a range for some time, but after this mornings rise there appears to be a positive breakout. Secondly, UBS have been and are a seller of this stock; they have recently offloaded considerable volume, but are now down to their last 3.7%. They don’t seem to be having any trouble selling, and a bit like Zetar’s chocolates, the shares are quickly gobbled up by eager buyers. I expect once UBS have finished (which isn’t taking very long) I am hopeful that the shares will make an even sharper move upwards.

Underperfomer pays dividends

In my last blog at the end of June, I intimated that I am currently scouring the market to identify potential investments. Whilst I have added a number of companies to my watch list, I have yet to take the plunge and add to my current portfolio. Patience is the key.

Meanwhile I thought I’d revisit a couple of companies that I have mentioned in the past.

Firstly Vodafone. Vodafone released a trading statement today which basically stated that trading was in line with market expectations. Of particular interest is that free cash flow is healthy and dividend targets on track. Given that the dividend is currently over 5.5%, it looks an attractive share for income seekers. It’s interesting to note that since Vodafone introduced dividend payments they have increased the payment every year except one.

I have also noted that press speculation in recent months has talked about the possibility of a Special Dividend.

As I mentioned in a previous blog, Vodafone has been an underperformer in terms of capital growth over recent years. Perhaps it will become an outperformer in the next few years?

I tend not to invest in large companies (particularly FTSE-100 companies) simply because they have less potential to multi-bag over short time periods (although the recent recession temporarily threw up one or two opportunities. I seem to remember Barclays Bank was one) and armies of people are watching and analyzing these stocks. However, if I was looking for a relatively safe haven that would provide a nice income stream then Vodafone would certainly merit further research.

Another company that released a trading statement today was the Mission Marketing Group. Again trading is in line with expectations and given that broker forecasts come in at around 4p for 2011 and 5p for 2012, it does appear that the shares are undervalued. If they do hit targets for the year then I can easily imagine the shares doubling or more from here.

 As mentioned in a previous blog, I did notice these at around 10p-11p when they were hovering around my own personal ‘margin of safety’ criteria. Since I am essentially a long term investor, I probably won’t buy shares in TMMG because it’s not the type of business that particularly appeals to me. However, if I had allocated some trading money then it looks good for a short/medium term bet.

Finally, Surgical Innovations released a RNS regarding a 5-year $8m agreement with SI US. This is one that I did own and sold for a five fold profit. As I stated at the time, the future does look bright for this company and I am sure there is further upside in the share price in the short, medium and long term and good luck to shareholders. However, the decision to sell my holding here was the right one for me. Sometimes the right time to sell is a very personal decision which can depend on a whole variety of reasons.

When is a good time to sell?

Like many investors, I find selecting companies to invest in far easier than deciding when to sell a holding. I have clear criteria and rules that I try to follow when buying shares but I’m less certain about the right time to sell. This selling dilemma has cropped up a couple of times this month, as I shall explain below.

Firstly though, it’s a dilemma that hasn’t troubled me where Avesco is concerned. Avesco released their 2011 interim results in mid June, and my personal expectations have been exceeded for this six month period. Given that Avesco benefits from the even year effect (Olympics, World Cup etc.), I wasn’t expecting such a great improvement in overall and underlying performance compared to 2010. Whilst the third quarter results for 2011 will be up against the tough comparator of last year’s World Cup, the overall full year results are shaping up to be far stronger than 2010 which is extremely encouraging as they enter London Olympic year 2012.

When the interims were released, the shares initially dipped on the news that the Disney court case may take longer than some traders had hoped. However, two recent research notes have picked up on the fact that this company is worth £2+ even without any Disney windfall and the shares have risen again since. The two notes are posted on the ADVFN AVS thread.

Avesco is still undervalued on many valuation measures, and it’s an easy decision for me to continue holding.

The day after Avesco’s interims, I was faced with a dilemma when, totally out of the blue, Indigovision issued an unwelcome and unpleasant profits warning. Given their encouraging interim results, I was hoping that trading was still robust. The trading update gave few details other than to say that revenues would show some improvement on last year, but profits would be significantly below expectations. Given the terse nature of the update and the scant detail, my impulse was to sell the remainder of my holding, which I duly did.

The profit warning had been issued on Friday morning, and I did spend part of the weekend agonizing over my decision to sell. I can see both a bull and bear case for indigovision which I have mentioned on the ADVFN IND bulletin board. However, since buying in 2004 for around 60p and with subsequent sales at prices of £9+ and £6+ respectively, my investment returned 750% overall (annual compounded return of 36%) and I am more than happy.

Indigovision will remain on my monitor. Is the company now good value or a bit pricey? The full year results should paint a clearer picture, but we’ll have to wait until September for those. This will be the second year that earnings have disappointed despite a pick up in the global economy. Whilst world economic growth couldn’t be described as strong, I would have expected Indigovision’s performance to at least be improving. The bulls argue that it’s operational gearing in reverse (and temporary), but you can’t ignore the fact that, whilst margins are still excellent, they are falling and overheads are increasing. Indigovision may have to start ‘peddling faster’ just to stay still?

The biggest dilemma that I had was about three weeks (or so) ago.

In previous blogs you will see that I picked up a holding in Surgical Innovations for under 2p less than a year and a half ago. After their last set of results, I had decided that this company was almost certainly a long term hold. However, as the share price broke through 10p again and up towards 11p, I did sell.

Why did I sell? Two reasons really. Firstly, a five bagger in such a short period of time is an extremely healthy return, and secondly I believe (rightly or wrongly) that the chances of SUN multi-bagging again in such a short time frame have fallen quite considerably.

Surgical Innovations have done exceptionally well over the last year or so, and I can easily imagine that the business will continue to boom in the forthcoming years. The company is currently valued at around £40m on revenues of £7m and profits of £1.8m. The forecast EPS figure for 2011 is 0.6p giving a forward P/E of around 15.  SUN doesn’t look expensive given future growth prospects, and I can see further upside in the share price if they continue their momentum. However, I believe the potential upside in the near and medium term is now more limited and better opportunities may present themselves. I shall keep SUN on my monitor just in case any price weakness tempts me back in.

Densitron is a more recent purchase, and today they released a very upbeat trading statement. Given their broker forecasts (2011(E) EPS – 1.49p and 2012(E) EPS – 2.17p) and DSN’s confident statement about meeting 2011 estimates, a near term share price of around 20p looks entirely possible. Their forward looking statements look very promising, and there is a nice dividend. Just like Avesco, I am more than happy to keep all of my holding.

I’m currently scouring the market for further potential investments, and will update my blog when I make any new purchases.

P.S. I see that Indigovision’s broker (Brewin Dolphin) is predicting EPS for 2011 around 18p/19p. Forward P/E for 2011 is therefore about 15. Not expensive if growth resumes next year, but if the market isn’t convinced by IND’s forward looking statements then it could attract a single digit p/e ratio which will put the shares below £2 (2009 - EPS 34p, 2010 - EPS 26p, 2011(E) - 19p). They will stay on my monitor, but I’m not in any rush to leap back in.