Shares in online musical instrument and equipment seller Gear4music (LSE: G4M) were down slightly in trading today as the market digested the latest set of full-year numbers from the York-based business. Given that a few highly-rated retailers, like ASOS and Superdry, have endured a difficult few months, such a reaction could actually be regarded as fairly encouraging. Indeed, following its “transformational year of growth and investment,” I still think the small-cap’s shares are worth buying.
Still on song
With new distribution centres now fully operational and the numbers of active customers rising 39% to 475,000, revenue jumped 43% to £80.1m over the 12 months to the end of February. Just under £36m (45%) of this came from the company’s international markets, which now include the US.
As a result of increased investment in staff, marketing and its customer proposition however, gross margin fell to a little over 25%. So while gross profit rose 34% to £20.32m, earnings before interest, tax, depreciation and amortisation (EBITDA) dipped 4% to £3.46m. Pre-tax profit fell 43% to £1.5m.
As Boohoo.com and the aforementioned ASOS have recently shown, companies working through a period of heavy capital expenditure often make previously bullish investors jittery. Nevertheless, those still holding Gear4music will likely be comforted by CEO and founder Andrew Wass’s comments that 2018/19 will be more returns-focused, “with the objective of delivering strong and sustainable revenue and profitability growth“.
To be sure, not everyone — including my Foolish colleague Roland Head — is a fan of the stock at its current valuation of 62 times forecast earnings. With a PEG of 1.3 however, one could argue that the shares still look a decent buy if management really is able to establish the company as the go-to musical instrument purveyor in Europe. I remain optimistic and continue to hold.
One to watch
Also reporting full-year results today was freight management service provider Xpediator (LSE: XPD).
Thanks to strong organic growth in all divisions (Freight Forwarding, Transport Services and Logistics & Warehousing), revenues at the 30 year-old business jumped 60% to £116.3m in 2017. Pre-tax profit also soared by 65% to £2.4m, albeit from a low base.
In addition to this, Xpediator raised £7.8m in new capital, secured “notable client wins” in Romania and the UK and made three acquisitions over the reporting period. In tune with its strategy of consolidating what remains a fragmented industry (and targeting e-commerce and fulfilment as growth areas in the current year), the firm also said that it has a “strong pipeline” of potential purchases going forward.
With signs that trading has continued to be buoyant over the last few months, Xpediator is starting to look like a very interesting proposition for those willing to venture into the small-cap universe.
A forecast price-to-earnings ratio of 16 for the new financial year means the stock isn’t exactly cheap relative to its peer group but — like Gear4music — the relatively low PEG ratio suggests investors will still be getting a good deal. The fact that the company has already started returning cash to investors (final dividend of 0.64p per share) is a positive sign, as is knowledge that substantial amounts of its stock still remain in the hands of its long-established management team.
The shares are already up 123% since listing on AIM back in August, bucking the trend experienced by many new entrants. I think there’s more to come.
