Shares in pawnbroker, jewellery retailer and currency specialist Ramsdens Holdings (LSE: RFX) fell sharply as markets opened this morning after posting a “small but expected” drop in earnings over the six months to the end of September.
With its stock already trading on a low multiple, is this simply another example of an already-skittish market overreacting?
Growth and dividends
The initial 6% fall in the share price certainly seems a bit harsh, particularly as revenue rose 10% over the interim period to just under £24m.
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Ramsden’s jewellery business was arguably the best performer, growing revenue by 27% to £4.5m. The fact that this included a 126% rise in online sales is encouraging, particularly given the all-important festive trading period that lies ahead. Elsewhere, income from pawnbroking rose 5% and gross profit in its precious metals division climbed 6% to £2.6m.
On the downside, income from its currency exchange service — the biggest part of the market minnow’s diversified offering — declined 2% to £7.3m, due in part to the superb weather experienced across the UK in the summer motivating more people to stay at home.
All told, earnings before interest, tax, depreciation and amortisation (EBITDA) fell 3% to £5.7m — something the company attributed to “the absence of peak Easter holiday FX trading“, ongoing investment and new store openings. Hardly the stuff of nightmares.
Positively, the four new stores added to Ramsdens estate over the six months are already “trading ahead of initial expectations” when combined with those opened in the second half of the last financial year. Four more stores have been added since the end of September.
As mentioned, shares in Ramsdens were already looking pretty cheap at under 10 times earnings before this morning. In contrast to some listed companies, dividends are also growing with today’s interim payout, at 2.4p per share, 9% higher than in 2017. At the current share price, the 7.13p total cash return expected by analysts this year equates to a yield of 4.7%, covered more than twice by profits.
The above, when combined with the fact that Ramsdens continues to boast a solid net cash position of £12.4m, means that I’m in no hurry to sell my holding just yet.
Bargain for Brexit?
Another small company whose shares trade on a low earnings multiple while also offering a more-than-decent dividend is the UK’s second-biggest home collected credit lender Morses Club (LSE: MCL).
Back in October, the company reported a 6% increase in statutory revenue (to £57.5m) and a 20.6% rise in adjusted pre-tax profit (to £10.5m) over the six months to 25 August. Customer numbers remained stable at 230,000 and the number of live Morses Club Cards was 145% higher (at 27,000) than at the same point last year.
In addition to its growth potential, the business should also appeal to income hunters. A hike of 18.2% to the interim payout (to 2.6p per share) was over double that rewarded to Ramsden’s owners today. If analyst projections prove correct, the stock will yield 5.8% in the current financial year.
Having fallen over 20% in value since July, you can now pick up the shares for 10 times earnings. If you believe that the UK economy is likely to suffer post-Brexit (assuming, of course, we do end up leaving the EU) and that demand for the company’s services could rise, the current price of just over 137p looks a pretty attractive entry point.
