I reckon many UK small-caps are attractive right now. That’s why I’m keen to invest in some smaller companies with the new money I can put in my ISA now that the allowance has reset.
Why I’d buy these UK small-caps
For example, SCS (LSE: SCS) is one of the UK’s largest retailers of upholstered furniture and floorings. And it has a market capitalisation of about £90m. I think the business looks well placed as lockdowns ease and people potentially flock back to the shops to spend some of the lockdown cash they’ve saved. The firm issued a bumper set of interim figures in March covering the period to 23 January.
Chief executive David Knight is “cautiously optimistic” about the outlook because the firm’s doors will reopen soon. However, the recent performance of the business underlines the progress SCS has made in developing sales through its digital channels.
But one risk is that the share price has already returned to its pre-pandemic level. And another is that pent-up demand could already have been released because customers were able to order online. And with more time on their hands during lockdowns, many people might have turned their attention to household matters.
It’s possible demand for SCS’s products could ease in the months ahead now that the lockdowns are lifting and people will be busy with other matters. Nevertheless, I’m tempted to tuck away a few of the shares to hold for the long term.
Growth on the agenda
February’s half-year results report from Finsbury Food (LSE: FIF) showed this UK small-cap’s business took a bit of a knock from the pandemic. The figures covered the six months to 26 December 2020 and revealed lower revenue and earnings.
But the speciality bakery manufacturer of cake, bread and morning goods for the retail and foodservice channels looks set to recover as restrictions lift. Chief executive John Duffy said the half-time performance was “resilient”. And looking ahead, he’s “confident” retail operations will bounce back when conditions normalise.
Organic growth is likely from emerging trends such as artisan and free-from food products. And Finsbury also enjoys a “leading position” in more established areas such as cake bites, buns and rolls. Duffy said growth is on the agenda for the long term. And the company is making progress in driving efficiency gains, synergies and scale benefits for the business and its supply chains.
Meanwhile, with the share price near 78p, the market capitalisation is around £100m. And the valuation looks modest with a forward-looking earnings multiple close to nine for the trading year to June 2022.
However, although earnings look set to bounce back in the current trading year, City analysts expect a modest, low-single-digit percentage advance in the following year. So the company’s ambitious growth plans could march to a slow tune when it comes to execution. And the company has a patchy record of earnings over the past few years and a history of volatility in the share price.
Finsbury Food isn’t a no-brainer. And the stock opportunity comes with plenty of risks. Nevertheless, I’m prepared to buy a few shares now and hold them for the long-term potential of the underlying business.
