Small-Cap Stock Picks

Concurrent – cash rich and transmitting growth

A cash-rich growth company expanding its margins, Concurrent Technologies is an under-appreciated small-cap gem.

Colchester-based Concurrent makes ‘high-end’ embedded computer products with low electrical power requirements, which offer high levels of reliability. As a result, they are perfectly suited for use in applications spanning the defence, telecommunications and aerospace sectors, as well as the industrial and scientific markets.

Last week, Concurrent cheered investors with sparkling interim results to June, showing 13 per cent profits growth to £1.37 million, as gross margins swelled to 61 per cent (2008: 54 per cent), on near-20 per cent turnover growth to more than £6.5 million. Generating cash and unfettered by debt, Concurrent closed the period with £5.22 million cash, supporting an 11 per cent increase in the dividend to 0.5p.

With demand from commercial customers weakening in these recessionary climes, Concurrent is drawing strength from the parts of the more resilient defence market in which it operates, seeing strong interest in its products for projects involving electronic, aerial and battlefield surveillance. Significantly, Concurrent recently launched its most sophisticated product to date, based on the latest Intel ‘quad-core’ processor technology, well suited for use in the defence and telecommunications sectors, as well as the homeland security market, and set to drive further growth.

Though Concurrent continues to scout for acquisitions, low-risk organic growth remains the focus. For the full year, Concurrent should be able to maintain pre-tax profits of £3 million and earnings of 3.3p despite the recessionary backdrop, while a 1.4p dividend looks on the cards.

The shares, at 35p, are therefore selling for around ten and a half times forward earnings, offer an attractive yield of 4 per cent and are a strong buy for income and growth.

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Bid approach stirs Redstone

Bombed-out IT equipment outfit Redstone says it has received an ‘early-stage approach’, which may or may not lead to a bid.

News of potential bid talks follows loss-making Redstone’s agreement to sell its telecoms arm for £17 million to ambitious AIM newcomer Daisy Group. This immediately provoked speculation that Daisy, whose chairman Peter Dubens has said he wants to make it a major telecoms supplier to UK small and medium-sized companies, could be the interested party, even though a Daisy spokeswoman insists the other parts of Redstone would be ‘non-core’ to its strategy.

Itself quoted on AIM, Redstone chalked up an interim loss of £1.8 million and has lately been seeking ways to reduce its debts. Two days ago, the company (which bought Symphony Telecom Holdings from Eckoh Technologies in 2006) said it had so far failed to reach agreement with Eckoh over repayments of a £2.7 million loan facility between Symphony and Eckoh.

Shares in Redstone, which plunged during the past 12 months from 46.75p to 3.25p, have bounced to 6p and could prove lively going forwards. As such, they could reward a punt.

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Stadium expands on new wins

Electronic manufacturing services group Stadium – backed here at 54p a year ago – has pulled through an alarming start to the year by retaining all its customers and is now expanding capacity to deal with new business wins.

Back in March, an update from the Hartlepool-based concern saw it teetering into an uncertain future, following an abrupt collapse in orders. To cope, redundancies and voluntary pay reductions were implemented and both pension pot and dividend payments cut.

As customer destocking ran out of steam in the second quarter, the company reached a plateau, according to finance director Colin Wilson: ‘We didn’t recover, but it stopped getting worse.’ As a result, Stadium’s financials for the six months to June were merely ‘solid’, with revenues 3 per cent lower at £22.3 million and profits down 37 per cent to £900,000 before tax.

More importantly, the company retained all its customers and made no reductions in its sales and marketing efforts. This has led to two significant business wins: one ‘a government-based’ three-year contract for electronic ‘traffic management’ signs, the other for a company rolling out its ‘smart’ water meters in Africa.

As a result of these deals, which will begin production in the second half and ramp up to full volume in 2010, a £250,000 expansion of the Hartlepool facility is being made that will, according to Wilson, ‘increase our capacity for turnover there from £10 million to £15 million a year’. He adds that such business wins have ‘taken us back to previous levels’ and will provide upside for the short term, while the recovery of existing customers will add even more.

House broker Brewin Dolphin forecasts full-year profits and earnings of £2.2 million, before tax and reorganisation costs, and 6p respectively. Depending on how new business wins play out, 2010 – given Stadium’s lower cost base and with debts cut by two-thirds to £690,000 – should be much stronger. Now lower at 40p, the shares are a buy/hold.

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Networkers – coping well, cutting debt

Global technology recruiter Networkers, whose backers include Jon Moulton and Nigel Wray, is coping creditably with weak overall recruitment markets while slashing debt.

Active across Africa, Latin America, Europe and Asia among other diverse destinations, Networkers suffered a 25.4 per cent drop in pre-tax profits to £2.2 million for the half to June, as net fee income (NFI) waned 9.7 per cent to less than £11.5 million.

‘For the first time as either a private or a public company, we failed to show growth,’ admitted CEO Spencer Manuel. However, he believes the performance actually represented ‘our best achievement ever’, given recessionary pressures: ‘To be profitable, and for those profits to only come off 25 per cent, was an excellent result.’

Bank borrowings – the bulk of which were incurred through the 2006 acquisition of MSB – were significantly reduced to less than £3 million, from £17 million a year earlier, on healthy cash generation and the cashing in on a Middle East joint venture.

Despite tough UK trading, gross margin expansion to 16.6 per cent (2008: 15.3 per cent) reflected Manuel’s focus on higher-value recruitment and emerging markets, where there is less competition and a shortage of skills. Significantly, international business now accounts for 55 per cent (2008: 41 per cent) of group NFI and the globally diverse, core contracting division is helping to mitigate poor performance in the permanent business, which is weighted towards the UK.

While the short-term going could be tough, Networkers’ long-term growth prospects remain attractive, notably in emerging markets. Flagged up here at 32p in 2007, the shares have fallen to 16.25p, at which level they sell on a meagre six times forecast earnings. There is no sense in crystallising losses at these lowly levels, and patient investors, prepared to hold for recovery, should be in the money over the longer haul.

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