Companies: FFA    HEM    ITH    MUS    NCH    NES    PTS    ZEN   

Many cash-rich companies look good value – but some should be shunned. Ben Cobley reports

Cash is king' is an oft-repeated mantra in the City, but it is always true. Smaller companies that have plenty of cash are more alluring to investors than those that do not.

For some smaller ventures, a cash pile can turbo-boost growth by funding sensible organic expansion or acquisitions. It can also reassure commercial partners and investors. Quite simply, in the right hands, cash gives a company clout, strength and confidence – whether it is loss-making or not.

Conversely, it can be a company's undoing. The last few years are littered with examples of cash-rich chief executives who were too intransigent to change their business plans in the face of mounting losses. In this instance, cash merely fuelled their arrogance. Instead of returning cash to shareholders and admitting defeat, many squandered the lot.

For investors, accepting these points is as important as ever, because there are many companies at the small end of the market that still boast considerable cash piles.

Using Growth Company Investor's Company Insider database, we identified 37 such companies. We found many that were valued at considerably less than the value of the cash in their accounts. In other instances, many had a very low 'enterprise value' (the market value of the business when you strip out the cash). A happy collection possessed considerable cash resources and very profitable businesses, while some seem certain never to move into the black.

Valued at less than net cash

The crisis of confidence that has gripped the technology and internet sectors has ensured that many companies of this ilk are trading below their net cash position (see table). Good value is easy to identify.

Financial information stalwart Hemscott, for instance, has £9.4 million left of the £16.2 million it raised in August 2000. In 2001 it lost £3.9 million, and it expects to make a loss of £2,6 million in 2002. For 2003, it predicts a small profit on £10.4 million sales.

This makes its value of £8.8 million slightly absurd, especially in light of its leading market position in the distribution of financial and business data.

ControlP meanwhile is projected by Collins Stewart to come up with a £2 million pre-tax profit in 2002-3, following a loss of £700,000 for 2001-2. The print industry e-commerce provider had £4.6 million net cash at its interim stage at the end of last August, against the market's current valuation of £3.3 million. Imminent results are worth looking out for.

Telematics firm ITIS could also be worth investigating. Its 'enterprise value' is less than zero when you consider the cash. This is despite the contracts it has won for its NavTrak units from the likes of Toyota, General Motors Europe OnStar and BMW. Losses have been large, but the discount-to-net cash looks excessive.

Music Choice Europe presents an interesting case (see page ten); as does NetStore. The latter is forecast to report its first full-year profits in 2004, and has the advantage of a visible revenue stream. Both companies are for those who can afford to take a long-term perspective.

Special situations

On a short-term note, interesting situations have been developing at Patsystems and Zen Research. Derivatives trading software firm Patsystems has been in turmoil for some time. It has hit the market with a number of warnings, changed its management and culled staff to try to eke its way towards profit.

The difficulties are due to come to a head shortly at a EGM. A number of associates of the former management team are hoping to wrest back control of the company using their existing stakes. On top of this, corporate vultures are circling. Any take-out bid could be closer to its cash value (£27.2million) than its market value (£11.5 million).

Semiconductor licensing firm Zen is sitting on a net cash pile of £42 million. It is valued at less than half of that.

That the company has projected losses of around £11 million for 2002 does not inspire confidence. What does generate enthusiasm is the activities of its largest shareholder, JP Morgan Chase, which has been slowly increasing its stake. Hitching a ride could prove highly rewarding.

Not all companies trading at below their cash value are worth backing. Ffastfill, which offers 'user-friendly' share-trading and training platforms to traders and brokers, trades at less than a third of its net cash reserves – for a good reason. A loss of £5 million is forecast for 2002, eating up the discount-to-cash in one fell swoop. Future profitability is difficult to predict.

High hopes – high risks

A raft of loss making companies are actually valued higher than the cash they hold. The company with the biggest cash pile in our findings is budding IT security venture nCipher. At the end of 2001, it had an impressive £103 million tucked way.

Its customer base consists of the likes of Microsoft, Barclays Bank and the US Navy, and it is forecast to break into profit in 2003. The £15.6 million enterprise value of the business looks a mite undercooked.

For the longer term, Aussie pig iron and coal-mining hopeful AuIron Energy looks good. It completed Aim's biggest ever rights issue at 31p in summer 2001 (raising £18.5 million), but is now trading at only 17p. AuIron's plans for an iron smelting operation in South Australia are well advanced and a coal-electricity plant is on schedule in Northern Ireland.

Others for the future are telecoms firm Affinity Internet, which recently reported results for 2001 and is expected to move into profit this year. As is software firm Staffware, for which DrKW forecasts a pre-tax profit of £2.7 million in 2002, rising to £6 million in 2003. Both are worth picking up.

Much less attractive is automotive transmission hopeful Torotrak. It has suffered some big hits over the last year. Major manufacturers Toyota and General Motors have both opted not to take up options for the production licences that could be lucrative to the company. It has around £24 million of cash, but, future success is difficult to see.

A similar case can be made for Iomart, which has changed strategy repeatedly over the past few years, settling down now with network management software. A paltry turnover line, relatively large losses and little sign of any respite makes the £8.1 million market cap seen generous.

Shell hopes survive

The ghosts of companies past continue to haunt the market in the shape of cash shells. Aim especially is littered with those that have ditched poorly-performing businesses and are seeking the right deal to start afresh with something new.

e-xentric stands at about a 17 per cent discount to its £40.4 million net cash, the interest on which puts it into profit. As does Lionheart's £11.3 million pile.

Two old internet property failures, easier and Property Internet, also lie dormant with net cash and assets well above market value.

As with all shells, success depends on what is going to happen next. A gamble could bring rewards.

Cash and profits

The ideal position for a company is to have plenty of excess cash tucked away in addition to a high-rolling business generating plenty more. The benefits of this in terms of future growth are easy to see: they have greater clout and flexibility when it comes to acquisitions and other corporate activities – something best done in lean times when valuations are low and financing difficult to find.

UK market-leading environmental consultancy RPS (formerly Rural Planning Services) has been particularly rapacious in this respect. It made no less than four acquisitions during 2001 and in the process managed to increase pre-tax profits by 41 per cent to £14 million.

With a £36.4 million war chest, the company has considerable clout to continue its role as a consolidator. Its forward p/e of 25.5 is more than justified.

Equally attractive are social housing consultancy HACAS and e-learning firm Epic, both of which operate in growing markets and enjoy the security cash brings.

Metnor has £4.6 million in the bank, but it is wary of making acquisitions, preferring to recruit well instead. The policy is working. Its main subsidiary, mechanical and electrical contractor Norstead, has been roaring over the past six months. Its forward order book swelled to £20 million at the end of 2001, compared with £13 million the previous year.

Results are due soon. They should be excellent after a positive trading statement in January confirmed it was going to beat analyst expectations for the year just past.

Aussie iron ore miner Portman is also flush with cash and full of further profits, as it progresses on schedule to increase production at its core Koolyanobbing mine in Western Australia from 2001's 3.2 million to a targeted 8 million tonne in 2004.

Even in the battered telecoms sector, there are companies worthy of attention. Cheap-rate calls, gas and electricity provider Telecom Plus has preferred to return cash to shareholders (chief executive Charles Wigoder being first in line with a 30 per cent stake). At the interim stage it had cash of £8.2 million supporting its £55.3 million valuation.

Data network operator Fibernet also deserves respect for its profit-making history, despite a recent warning. In its last year it made £3.6 million, and its market value of £79.9 million is supported by £59.1 million cash.