Do as I say…

…not as I did last week

Finweek English Edition - - Moneyclinic -

THE TEMP­TA­TION was just too great last week. Per­haps it was the some­what bor­ing – rather un­pre­dictable – trends of large com­pa­nies’ share prices that led me to buy shares in two small com­pa­nies. Set Point (JSE code SPO), with a mar­ket cap­i­tal­i­sa­tion of just more than R300m, and es­pe­cially Amecor (code AER), with a mar­ket value of only R79m, are ex­actly the kind of small-cap shares I al­ways warn prospec­tive in­vestors not to get in­volved in. How­ever, their fi­nan­cial fig­ures in­di­cate it’s per­haps not such a se­ri­ous er­ror to oc­ca­sion­ally buy such shares.

In its over­view of Set Point, IFR (writ­ing for PSG-On­line) says the com­pany is a sup­plier of an­a­lytic and re­lated tech­no­log­i­cal equip­ment used in, for ex­am­ple, the ve­hi­cle man­u­fac­tur­ing, petro­chem­i­cal and min­ing in­dus­tries. In the IFR fi­nan­cial sur­vey for the six months to Fe­bru­ary, when in­creases of 3% and 5% in turnover and profit were recorded re­spec­tively, the com­pany re­ported the gen­eral de­cline in com­mod­ity prices also hit them hard. Nev­er­the­less, Set Point earned a profit of 6,4c/share for the six months. Cash flow was rea­son­able and an in­terim div­i­dend of 2c/share was de­clared. In April, when the in­terim profit was de­clared, the shares were still trad­ing at 65c.

Last week I bought a few Set Point shares at 85c each on the strength of its fi­nan­cial re­sults for the full fi­nan­cial year to 30 Au­gust 2009, which will soon be is­sued. The key data is as fol­lows: profit for the full fi­nan­cial year could be 15c/share and the to­tal div­i­dend for the year won’t be less than 5c/share. At least 3c/share of that will be de­clared now and be payable be­fore year- end. That puts the share on an at­trac­tive PE of 5,6 and an an­nual div­i­dend yield of 6% or 7%, de­pend­ing on whether the div­i­dend of 5c/share will be in­creased to 6c.

Set Point is cur­rently achiev­ing a fine re­turn of nearly 40%/year on eq­uity. In fact, in its anal­y­sis, IFR gives it a qual­ity rat­ing, which takes into con­sid­er­a­tion all sorts of things, from cash flow to gross profit mar­gin, of 100%.

How­ever, the most im­por­tant mo­ti­va­tion for my buy­ing the share was chair­man Chris Seabrooke’s reg­u­lar per­sonal buy­ing of the share over the past few months. He’s even paid as much as 80c/share. Seabrooke sim­ply buys the shares on the JSE with or­di­nary money. There aren’t any clever tricks, like those of so many other direc­tors who spec­u­late in their com­pa­nies’ shares on the Safex fu­tures mar­ket. Set Point is small but it may per­haps of­fer sim­ple, old-time value.

Amecor’s ac­tiv­i­ties may per­haps ben­e­fit from South Africa’s craze about se­cu­rity; no, it’s prob­a­bly an es­sen­tial with 2010 loom­ing. This small com­pany is ap­par­ently a leader in the field of se­cu­rity equip­ment, such as ra­dios, mon­i­tor­ing sys­tems for guards and so on. The panic but­ton in your house may per­haps come from Amecor.

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