Investing in small-cap shares is different from investing in larger companies. Trading results can be more volatile, and share-price movements can be fast and furious.
It’s common for small-cap share prices to halve or double within just days or weeks.
Some smaller businesses are better than others
Speculative or risky underlying businesses don’t power all small-cap shares, though. Sometimes we find a solid and well-financed business with a good business model and an attractive trading niche or franchise.
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We have three such solid small-cap firms in Tasty (LSE: TAST), Bioventix (LSE: BVXP) and Alkane Energy (LSE: ALK), each of which, in my view, looks attractive now in terms of upside potential for investors.
Rolling out a successful concept
Tasty is rolling out a restaurant expansion programme. Recent full-year results revealed the firm added seven new outlets during 2014 and a further three since the end of the year, bringing the total number of outlets to 39 as of 30 March 2015.
After testing the concept mainly in the South and East of the UK, recent openings are farther afield, such as Nottingham and Bristol. The mainly Wildwood-branded pizza, pasta and good-times restaurants seem to be popular, and the rollout programme is gathering pace at a time when the macro-economy is improving in Britain.
An experienced management team with previous successful rollout experience heads the company, and the firm shows every sign that it executes its business well — a focus on getting the basics right seems to be paying off. The numbers tell the story: for 2014 the company posts revenue up 28%, gross profit up 26% and pre-tax profit up 46% over the previous year’s figures.
Financial progress is steady and solid on most important measures:
|
Year to June |
2010 |
2011 |
2012 |
2013 |
2014 |
|
Revenue (£m) |
10.56 |
14.56 |
19.32 |
23.19 |
29.73 |
|
Net cash from operations (£m) |
1.22 |
1.74 |
2.4 |
3.24 |
5.31 |
|
Adjusted earnings per share |
0.56p |
2.67p |
2.67p |
2.95p |
3.88p |
In my opinion, Tasty’s expansion remains in its infancy, and the pace of expansion may accelerate from here given the favourable economic backdrop and the proven success of the firm’s restaurant concept.
Drivers from here could be:
- Improving like-for-like sales as the economy continues to strengthen;
- Acceleration of the firm’s rollout programme.
Hard to imitate
Bioventix specialises in the development and commercial supply of high-affinity monoclonal antibodies and occupies a profitable niche market. The company’s in-house development programme produces some of the tools scientists need to tackle the diagnosis or monitoring of a broad range of conditions, including heart disease, cancer, fertility, thyroid function and drug abuse. New start-ups don’t challenge the firm’s profit margins every day, as the company’s operations demand a high degree of specialist knowledge. A small team works to develop ongoing forward revenue and profit streams, which suggests growth potential. Meanwhile, royalties on previously licensed developments drive impressive financial results:
| Year to June | 2011 | 2012 | 2013 | 2014 |
| Revenue (£m) | 2 | 2.4 | 2.7 | 3.35p |
| Earnings per share | 17.59p | 24.62p | 30.28p | 36.53p |
Drivers from here could be:
- Newly developed antibodies increase forward royalty earnings;
- The firm might increase its workforce and accelerate development activities.
Electricity-generation from gas
In a trading update released today, Alkane Energy reports an encouraging step change in performance, driven by acquisitions during 2014. The firm uses methane trapped in abandoned coalmines to drive engines that turn generators. The company then feeds the electrical energy produced to the grid. When methane runs out, Alkane buys in gas to drive the engines for power-response, where the grid needs temporary energy quickly to cover as larger plants start-up or when demand peaks.
Output in the first three months of 2015 has increased by 26% and the share price is heading up, breaking a period in the doldrums. The fallen oil price seemed to pull down Alkane’s strategic investment in Egdon Resources (LSE: EDR), where Alkane transferred its shale rights. A weaker power selling price environment also weighed on Alkane’s shares. However, operational progress remains steady:
|
Year to December |
2010 |
2011 |
2012 |
2013 |
2014 |
|
Revenue (£m) |
6.62 |
9.5 |
14.66 |
20.57 |
15.96 |
|
Net cash from operations (£m) |
3.46 |
4.37 |
6.53 |
5.56 |
4.64 |
|
Adjusted earnings per share |
2.01p |
2.26p |
2.96p |
3.01p |
2.61p |
Drivers from here could be:
- Further growth from acquisitions;
- Organic efficiency gains;
- Firming electricity-selling prices;
- A recovering oil price lifting Alkane’s Egdon Resources investment;
- Egdon Resources adds value to the shale licences on Alkane’s operating areas;
- Better forward uptake of Alkane’s power-response offering.
