With a market cap just north of £70m and a business model covering everything from providing farmers with food stock, delivering fuel to petrol stations, and providing grocers with ambient warehousing, its little surprise that NWF Group (LSE: NWF) is relatively unknown to most investors. However, as its shares trade on just 11 times trailing earnings and offer a respectable 4% dividend yield, I reckon this small-cap is well worth taking a closer look at.
The company is a bit of a classic conglomerate of yesteryear with its focus on so many disparate business lines that all have little overlap. And while many City analysts would rightly find flaws with this business model it has worked wonders for NWF by diversifying and smoothing out the lumpy profits that come from the feed and fuels business, which are highly dependent on commodity prices.
Indeed, in the year to May the group was able to achieve record earnings despite operating profits from the core feeds business falling from £2.1m to £1.5m year-on-year (y/y) due to rising commodity prices impacting margins. The food business, which provides warehousing for grocers, recorded another year of enviably dependable profitability with operating profits rising from £2.7m to £3m y/y as capacity was maintained at record levels. Finally, the fuels business benefitted from increased volumes shipped from its depots and raised operating profits from £3.9m to £4.5m.
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Now, it must be said that these businesses all have very low margins with group underlying operating margins just 1.6% last year. This provides little room for error, but NWF’s management team has proved adept at growing the business even through tough trading conditions by acquiring smaller competitors. And with cash flow safely covering last year’s dividend payouts several times over and net debt just one times EBITDA, income investors who aren’t afraid of a little volatility may find NWF an appealing long-term holding.
Selling Britain abroad
A second small-cap income stock worth looking at is porcelain maker Portmeirion (LSE: PMP), which offers shareholders a 3.4% dividend yield and is valued at 14 times forward earnings. Since listing in 1988, the group has never had to cut its dividend thanks to a management team that has successfully sought out overseas markets that demand the quintessentially British porcelain it can produce.
Growth in overseas markets and continuous small acquisitions have proven a winning combination for Portmeirion with revenue up 16% y/y in H1. That said, it did run into some problems last year as lapping a tough comparative period in India and falling demand for luxury products in South Korea dented sales growth. Still, despite problems in these two large markets, total revenue increased 11.7% y/y due to an acquisition and growth in more developed markets.
There is still plenty of room for expansion through acquisition to complement organic growth as the company had net debt of just £2.4m at year-end, compared to operations that generated £8.7m in cash. With decent cash flow, high growth potential and very safe dividend payments, I believe Portmeirion could be a hidden gem for income and growth investors alike.
