Small companies with big potential

small business owner using smartphone in her store

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published 20 July 2023

Every July I revisit my share tips from January. As I often point out, investing over a time frame as short as six months is akin to flipping a coin, especially in a market where stock prices are falling across the board (as is the case in my stomping ground of small caps).

Harvest Minerals (Aim: HMI) 7.95p, now 3p

My first pick was Australian natural fertiliser producer Harvest Minerals. As I wrote six months ago, this stock is especially susceptible to overall market sentiment. However, cash generation is strong, with cash rising to A$2.7m from A$1.7m; A$1.2m in debt has been paid down too – taking total cash generation to A$2.2m.

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This equates to £1.16m, impressive compared with a current market value of £9.8m. Still, Harvest has warned that it now expects to sell just 120,000 tonnes of fertiliser this year, down from the previous target of 200,000 tonnes. Prices have fallen too. Harvest says farmers have delayed purchases in anticipation of further price declines. Moreover, the price of soybeans (Brazil’s main crop) has reached levels close to the cost of production. The company has the cash to get through this downturn, but given the poor share-price performance I am happy to admit that, so far, I am wrong on this.

Few people are suffering more than executive chairman Brian McMaster, one of the company’s largest shareholders, but the lack of predictability in the business understandably puts many investors off. I consider this a high-risk share because of the potential for a delisting.

Altitude (Aim: ALT) 31.5p, now 38.5p

Altitude is a technology company that provides services to the promotional merchandising and print industries in North America. The company’s AIM Smarter platform connects buyers, sellers, and manufacturers of promotional merchandising.

The group has continued to impress and since my last article broker Zeus’s expected adjusted profit before tax figure for the year to 31 March 2023 has almost doubled to £0.9m from £0.5m.

Furthermore, continued growth is expected in 2024 with adjusted profit before tax set to total £1.3m. The shares are not cheap, but I believe the business is scaling up and there is scope for further progress.

XP Factory (Aim: XPF), 21.5p, now 16.75p

XP Factory was formerly known as Escape Hunt. It operates “escape rooms”, into which players are locked until they can solve a puzzle, and also acquired Boom Battle Bars in 2021, which added games such as augmented-reality darts and axe-throwing.

In January I highlighted the risk of a slowdown in consumers’ discretionary spending. Yet the group said recently that “it has been performing ahead of management’s expectations”. Like-for-like revenue rose by 32% year on year in the first quarter.

The threat of lower household spending hasn’t gone away, but investment bank Singer Capital Markets has pencilled in sales for 2023 of £42.6m compared with last year’s £22.8m. Margins continue to meet or beat management’s internal targets. I see no reason to change my view here.

Brave Bison (Aim: BBSN), 2.2p, now 2.4p

Brave Bison is a media, marketing, and technology company focused on social media. It owns and operates more than 650 channels across all major social-media networks and boasts some of the biggest brands in the world, with a client list that includes Google, Panasonic, New Balance, Currys, and more.

Net income totalled £2.1m last year – putting the company on a price/earnings (p/e) ratio of just above ten. Given that sales are set to grow to £42.9m this year from 2022’s £31.7m, I think the price is extremely attractive. There is also plenty of cash on the balance sheet. Still, the company said in April that “trading had become more challenging in the first half of 2023 as customers’ budgets have come under pressure”.

I remain bullish on all four stocks. Altitude hit highs of 48p; Brave Bison reached 3.1p and Harvest almost 10p. For the short-term trader, the opportunities have been plentiful. As always, you must do your own research and manage risk. Below are four more shares where I feel the upside could outweigh the downside.

Kitwave (Aim: KITW), 285p

Kitwave is an independent wholesale delivery business specialising in selling impulse-purchase products, such as confectionery, soft drinks, snacks, ice cream, frozen and chilled foods, alcohol, groceries, and tobacco.

The company is a rival to Booker and other wholesalers. It uses a buy-and-build model, acquiring smaller businesses that are happy to sell and also deploying cash generated from operations (rather than constantly issuing shares). It may not sound the most exciting business model, but the group is performing strongly. The forecast for its 2023 post-tax profit has been raised to £21.2m, putting the stock on a p/e of just above ten.

Nightcap (Aim: NGHT), 9.25p

Nightcap operates cocktail bars and is focused on acquiring and developing “wet-lead” brands (those relying on drinks only, not food) in order to roll these out across the country. It was founded by Sarah Willingham, an investor on the UK hit series Dragons’ Den and her husband (and co-founder) Michael Toxvaerd.

After listing on Aim at 10p in January 2021 the shares shot up to 36p within six weeks. A few months later the company set out to acquire Adventure Bar with a £4m placing, and ended up raising £10m thanks to significant demand.

Some shareholders at the time complained about the dilution. However, there is no doubt that this additional cash buffer put the business on a better financial footing as it didn’t need to raise money in 2022, when many companies were doing so at share-price lows.

There was, though, a small placing at 12p in June 2023 to acquire the Dirty Martini brand from administration for £4.65m. Given Dirty Martini’s unaudited 2022 revenue of £23.7m and Ebitda of £3.9m, this is a very attractive acquisition. Its sales were worth more than half of Nightcap’s £35.9m in 2022. The dilution is small, with £2.35m being raised at 12p (a premium to the share price) with three investors. This puts Nightcap in a prime position to expand further. However, house broker Allenby has reduced 2023’s revenue target to £47m from a previous estimate of £49.3m despite the significant scale of the acquisition.

This is a big reduction and reflects the ongoing rail strikes and potential for a major slowdown in consumption. However, I see this stock as a potential winner once the dust has settled. That could be some time away though.

McBride (LSE: MCB), 30.5p

McBride is the supplier of private-label household and personal-care products: washing-up liquid, bleach, disinfectant sprays, powders and aerosols, for instance. The shares have been in decline since the start of 2018, when the price topped out at 234p. They recently hit lows of 15p.

Investors had been concerned with the company’s debt. However, in January it announced that management had managed to deliver improved profitability and that net debt was in no danger of breaching banking covenants. McBride released a trading update on 14 July claiming that “adjusted operating profit will be materially ahead of current market expectations” and that net debt had outperformed forecasts too. The upshot is that with the share price having doubled from its lows, the long-term trend could be changing and we are witnessing a turnaround. That said, the shares do still carry significant risk. Net debt has reached £166.5m, compared with a market value of £54m, so the company is carrying more than three times its value in borrowings on the balance sheet.

However, if McBride can continue to improve operational efficiency and pay down the debt with cash flow, the share price can go higher. The company reports that there has evidently been a shift among consumers to own-brand labels in order to get better value as inflation starts to bite and pockets are squeezed.

This stock looks ugly at first glance. But it’s when other people turn their nose up at equities that outperformance becomes more likely. Popular stocks are usually priced for their popularity, and fail to achieve outsized returns. If you do what the average trader and investor does, you will end up with average results. I feel the risk-reward ratio for McBride here is firmly skewed to the upside. But I can always be wrong.

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