Aim is full of traps but we’ve had a good look at In­specs and it seems promis­ing

This maker of eyewear frames has some blue-chip clients and – in nor­mal times at least – makes good re­turns,

The Daily Telegraph - Business - - Business - says Russ Mould Russ Mould is in­vest­ment di­rec­tor at AJ Bell, the stock­bro­ker

THIS col­umn’s record with Aim-quoted smaller com­pa­nies is patchy to say the least, with Strix and Fran­chise Brands no­table suc­cesses and Ac­crol, Hur­ri­cane En­ergy and Zytronic among a longer list of howlers (although we have not yet given up on the last-named stock).

A look at any firm quoted on Lon­don’s ju­nior mar­ket must there­fore come with a bit of a health warning but In­specs, a new­comer to Aim, does have an in­ter­est­ing look to it.

The com­pany is a de­signer, man­u­fac­turer and dis­trib­u­tor of eyewear frames. They are then sold by well-known chains, in­clud­ing op­ti­cians such as Vi­sion Ex­press and Spec­savers, as well as re­tail­ers Next, Asos and Walmart.

The range cov­ers op­ti­cal, sun­glasses and safety wear and is sold ei­ther branded or on a pri­vate-la­bel ba­sis.

In­specs’ prod­ucts are sold at more than 30,000 sites and the firm has four man­u­fac­tur­ing fa­cil­i­ties, in Bri­tain, Italy, China and Viet­nam. The shares floated on Aim at 195p in Fe­bru­ary so in­vestors have missed noth­ing so far, bar­ring some price volatil­ity, although the com­pany has hardly been helped by the pan­demic, which forced most of its cus­tomers to close down and the com­pany to fo­cus on cash preser­va­tion so that it could come through the cri­sis and then emerge ready to ben­e­fit as stores re­opened. How­ever, Covid-19 will not stop peo­ple need­ing to get their vi­sion cor­rected, as Questor can at­test af­ter star­ing at a small lap­top screen at home for the past four months. Even al­low­ing for the bad news from Boots, which is clos­ing 48 of its op­ti­cians, shops across the sec­tor are now open­ing again and it seems rea­son­able to as­sume that busi­ness could slowly start to im­prove, un­less the virus re­turns with a sig­nif­i­cant se­cond wave.

Last year gave some in­di­ca­tion of In­specs’ po­ten­tial. Sales rose by 7pc and un­der­ly­ing prof­its climbed nicely as vol­umes in­creased by 20pc, helped by an ex­pan­sion of the fac­tory in Viet­nam. Per­cent­age re­turns on cap­i­tal em­ployed stood in the mid­teens, while cash con­ver­sion and cash gen­er­a­tion were both strong.

There are dan­gers, over and above the near-term un­cer­tainty cre­ated by the pan­demic. By their very na­ture, smaller com­pa­nies can be riskier than larger ones be­cause their rev­enues are less well di­ver­si­fied and they can be more re­liant on key in­di­vid­u­als.

In­specs is a case in point. Nearly half of its sales last year came from just five cus­tomers and the com­pany needs to keep woo­ing clients, ei­ther to win them or to main­tain ex­ist­ing li­cens­ing re­la­tion­ships with brands such as Su­perdry and Hype. Robin Tot­ter­man, founder and chief ex­ec­u­tive, is clearly still a key in­flu­ence and he also owns more than a quar­ter of the shares, so liq­uid­ity in the stock could be lim­ited.

Any­one pre­pared to back In­specs needs to think about do­ing so pa­tiently for the long term rather than as a quick punt, although there is a good geo­graphic sales mix: Bri­tain gen­er­ated 25pc of group sales last year and over­seas mar­kets the rest.

The firm did not pay a div­i­dend in 2019 and is un­likely to do so this year ei­ther, which could de­ter in­come seek­ers. How­ever, an­a­lysts’ fore­casts do hint at a maiden div­i­dend in 2021.

A forecast price-to-earn­ings ra­tio of nearly 70 for 2020 tells of the dam­age done to sales and prof­its by the virus, es­pe­cially in the first half. How­ever, In­specs’ ver­ti­cally in­te­grated model means that mar­gins should re­cover quickly as and when vol­umes re­turn.

If we as­sume that earn­ings re­turn to some­thing like their pre­vi­ous tra­jec­tory in 2021 and 2022, the shares trade on a much more rea­son­able mid­teens mul­ti­ple of es­ti­mated prof­its in two years’ time. Growth should come from or­ganic ex­pan­sion, but could be sup­ple­mented by se­lect ac­qui­si­tions.

Pa­tient fans of in­vest­ing in smaller com­pa­nies may well find that In­specs is worth a se­cond look.

Questor says: buy Ticker: SPEC

Share price at close: 195p

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.