Sometimes it is worth the effort of digging so deep

AFRIEND OF MINE who has been in the investment game an awfully long time has confessed to being on the verge of abandoning his quest for uncovering value at small-cap stocks. His contention is that the broader market would these days rather not take on the sometimes arduous task of recovering value in “difficult businesses” by unpicking complicated control structures and pushing for executive shake-ups or organisational restructurings.

And I must say there is something masochistic about trying to unlock value or implement a turnaround in a business that has its prospects locked into a trading environment that is subject to destabilising economic and political developments.

I still love my small-cap shares, but am fretful at the dismal (even dismissive) market ratings tagged onto more than a handful of profitable industrial counters.

Let’s peruse a few. Aluminium supplier Hulamin — which has hinted at a fairly rosy outlook — trades on a five times earnings multiple. Household goods supplier NuWorld — under review in this edition — trades on a six times earnings multiple in spite of a looooong track record of profits and dividends. Logistics group Value — which confirmed a strong recovery in its recent set of interims — trades on a seven times multiple that belies the fact that this business is a reliable cash flow generator and a payer of dividends and has a balance sheet that can accommodate acquisitions.

While these earnings multiples suggest that long-term prospects are dim, at least shareholders in the businesses have seen a spurt in the share prices. Hulamin is up 19% over a year, Nu-World a stunning 53% and Value 35%. Investors who backed these companies last year have secured a pretty decent return sans any significant risk.

With this in mind, I am asking — for a friend — whether it may not be worthwhile to take a closer look at a few other poorly rated industrial counters where the share price might be poised for a low-risk bounce. I am thinking of companies like Santova Logistics — trading on an eight times multiple — whose shares have dropped more than 20% in a year even though its specialised logistics systems churn strong profits. The shares of industrial services conglomerate ENX Group have plunged 25% over a year. Judging by recent interim numbers, it is trading on a forward multiple of around five or six.

Consolidated Infrastructure trades at a less than seven times multiple, and its shares are down 42% over a year. Timber specialist Kay-Dav — steadily profitable over the last few years, with nice dividends — is on a seven times multiple, while investment holding company Stellar Capital Partners trades at a HUGE discount to intrinsic net asset value.

Does opportunity knock in these stocks, I wonder?