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Titanic annual sales and yet tiny market capitalisations – we've found a clutch of companies that exhibit these features. Two look like investor dreams, one holds speculative appeal and two others boast debt piles that would make even Premiership football clubs blush. James Crux weighs up the risks.

Identifying companies that have low price-to-sales ratios is a useful, if somewhat crude, means of throwing up investment opportunities. What you find when you deploy this tool are companies that have huge annual sales (compared to their small cap peers) and market capitalisations that are a mere fraction of this figure. Not all companies you identify are remotely fit for investment, mostly due to the debts weighing down their balance sheets, but occasionally a few stock market gems are thrown up.

Montpellier's appeal

One such gem is AIM-quoted construction and property play Montpellier, whose valuation seems to be an incredible anomaly.

In the year to September, Montpellier's sales came in at £434 million (£445 million previously) and pre-tax profits were down slightly at £4.7 million (£4.9 million). The group finished the year with a strong cash position (£20 million sits in its coffers) yet at 37p, down from a 52-week high of 48p, the company has a paltry market valuation of £21.9 million, a historic p/e of only 5.1 and a yield of 4.5 per cent.

In truth, the results were a little disappointing, as managing director Paul Sellars would admit. But this company has just completed a restructuring and sold its investment division. It has also ditched loss-making subsidiaries, taken out costs and focused wholly on construction, and has revenue still being generated from its property interests.

In a recent trading statement, Sellars boasted of his group's un-geared balance sheet and was of the opinion that the construction division should improve this year.

Even if you take on board the fact that Montpellier's margins are wafer thin (it is a contracting business where the average margin is about one per cent), the market cap equates to little more than its cash pile, valuing the business at next to nothing.

Interior's attractions

Another interesting investment proposition can be found at Interior Services, one of the junior market giants in revenue terms. It had a 'fee income' of £57.7 million in the year to June and turnover of £402 million (£406.4 million), but its market capitalisation is only £41.2 million at the current 159p share price. This gives it a price-to-sales ratio of a paltry 0.1.

For the most part, this reflects the group's falling out of favour with investors in recent times. A contractor, like Montpellier, it renovates and fits out major offices and other buildings and is perceived as being at risk from the current glut of office space in central London. Basically, flagging demand means less need for its fit-out services.

That said, fee income has remained steady for the past three years, which is a decent performance given some tough economic times.

David King, the group's executive chairman, expressed optimism about the current year to June at the December AGM, seeing 'the first signs of an increase in potential demand for our services'. Last year, the dividend was lifted 15 per cent to a decent 7.5p, in a year when it technically recorded a loss if goodwill and exceptional charges are added back in. The group could easily afford this as its last figures showed it had cash of £33 million in the bank.

Interior's interim numbers to December are due for publication very shortly. Recent estimates from house broker Panmure Gordon suggest 18.9p of earnings for the current year and a ten per cent hike in the annual pay out to 8.25p. These figures place the shares on a forward multiple of 8.4 with a 5.2 per cent yield. This looks excellent value.

Cape – edging into debt

Restructured international industrial services stock Cape, led by the redoubtable Martin May, deserves a little more slack from the market. The group has a market cap of just £42.1 million, though sales in the first half to June 2003 alone were £107.8 million, while net debt was reduced from £32.7 million to £21.2 million and interest cover was four times.

Its industrial services business was responsible for almost all of the revenue, and has good growth prospects in both the Middle and Far East. This remaining operation is involved in industrial scaffolding, insulation and specialist coatings.

The main worry at the group is that, while it has settled South African and UK shipyard asbestos damages claims, other claimants might emerge. Even if they do though, Cape has the money to pay them, so the market isn't really justified in holding this legacy against the company forever.

To top it off, Cape also owns an attractive site adjacent to the M25 in Middlesex that could yield a cash windfall.

Henlys' debt conundrum

Although Cape's debt isn't a problem, this often isn't the case with many other companies that do merit their ludicrously low price-to-sales ratios. Two such ventures happen to be bus-making operations on the main board.

Henlys, a manufacturer of buses and coaches both here and in the US, reported sales of £516.7 million (including the contributions of joint ventures and associates) in the year to September 2003. This included £96.4 million from its share of TransBus International (see below).

As things stand, the company's market value is a paltry £31.2 million, a level it was battered down to in early February following the firm's third profit warning in the space of nine months. In a galling update, Henlys said that this year's earnings would be 'substantially below current market forecasts', due to a 'budgeting error' as well as delays in the recovery of its Blue Bird US subsidiary, which it bought back in late 1999. The accounting 'error' apparently arose on double counting of cost savings from outsourcing some components that used to be supplied internally.

In other bad news, the group announced that the order intake for its new commercial bus, coach and motorhome products increased at a slower rate than expected and that there was a reduced margin on the delivery of some school buses made at the time of an overhaul at its plant in North Georgia.

Even though earnings for the rest of the group will be only marginally below expectations, the issues at Blue Bird – which accounts for around 80 per cent of group sales – might shave about £20 million off the group's total operating profit for the year. Many analysts, who were hoping that this year would represent a turnaround in the group's fortunes, were going for a £13 million profit at the pre-tax line prior to the warning. Not so now.

If none of this is scaring you off and you still feel a contrarian urge to back the group at its current tiny market cap, make sure any decision you make takes account of Henlys' huge debt pile. As of September 2003 this was £284.7 million. A speculative stock for those with nerves of steel.

Mayflower's rough ride

Fellow bus maker Mayflower has also had a tempestuous voyage of late. The specialist engineer, which boasts operations in the car, bus and energy sectors was a Growth Company Investor speculative buy back in December 2002 when the share price was 24p and the market valuation £86 million. Since then, the company has endured a torrid time, capping it off recently with another profit warning – its second in just eight weeks – that sent the shares 5p lower to 20p. The stock has subsequently traded down to 16.8p, giving the business a scant market valuation of £59.9 million.

At first glance, this appears to be a whopping, and perhaps unwarranted, discount to sales – Mayflower turned over £314.2 million in the half to June alone, and had revenues of £633.8 million in 2002!

However, chief executive John Simpson said calendar 2003 numbers would again misfire against market expectations. Annual profits before tax, goodwill and exceptionals 'will be not less than £6 million' when the figures are announced no later than the end of March. This should produce dowdy earnings of 0.3p.

The profit forecast compares to the £23 million predicted in August, which was subsequently cut to £17 million by City experts after the first warning in December.

It seems most of the shortfall arose on a restructuring of its TransBus International operations in the US which had proved more expensive than expected. There were also continuing losses at its MVS (Mayflower Vehicle Systems) car parts business in Germany.

Mayflower also said it was 'keeping its lenders closely advised' of developments. The firm agreed a new £160 million facility at the end of December and net debt at the year-end was £176 million.

Graham Webster, analyst at Bristol-based broker Rowan Dartington, now forecasts a £4 million loss after exceptional charges for 2003 followed by underlying profits of £7 million, giving 0.4p of earnings, for 2004. This means Mayflower trades on 56 times underlying earnings, falling to 42 times 2004 estimates. 'I think the market value is too high,' comments Webster, 'and that's why I've got it as a sell. I don't think £6 million profit is enough for £176 million of debt.' We tend to agree.