A BOOST FOR TRIO - The 0.50 rate cut on the US

Just a few observations.

After last years finals were published on 11th December 2001, and after the market had time to digest the bottom line EPS of 1.66p, the stock finished the year at 12p, on a P/E of 7.22. This year, after the market has had time to digest the bottom line EPS of 2.66p we finish the year at 19p, on a P/E of 7.14. Pretty much the same earnings ratio, so on a historic P/E basis, it looks fairly valued at 19p.

Interestingly, from January to end of April 2002 (just prior to interim release) the stock rose from 12p to 15p giving a P/E of 9. On this (P/E) basis we should see 24p just prior to interim release end of April. Further forward, and always assuming that EPS will grow by the same 60% to give EPS December 2003 of 4.2p, then using the historic P/E of 7 would see a share price of 30p, December 2003.

Of course a company growing profits at this rate deserves a much higher earnings ratio. 15 wouldn’t be out of the way IMHO for a company like this. But what it deserves and what it gets of course are two completely different things. Being such a small cap, the institutions won’t take an interest for a while.

They really need to do something with that cash pile, and quickly. A bidder could quite comfortably take £ 9 m cash from the bank without it adversely affecting liquidity – net cost of acquisition £ 6.8 m – for a company producing pre-exceptional profits of £ 4m – and growing. I’d buy It myself if I had a spare 16 mill !

What to do with the cash ?

A share buy-back isn’t the best use of surplus cash. If they could buy 57.9m share @ 19p (cost £ 11m) the P/E would drop to 2.2, yield rise to 12.9%. Pure theory, as pointed out by Farsight, since the share price would rocket. Shareholder value begins to be destroyed once they start paying 32p or more per share. Net asset value per share reduces whatever price they pay, albeit partly compensated for by improved return on equity.

Special dividend, well we’ve already had one, so clearly management aren’t adverse to the principle. Interestingly they could pay a special div of 10p per share without adversely affecting liquidity. Well worth remembering.

The net interest received in the year of £ 267,000 represent a very poor return on the cash position of just 2.3%. So whatever they do with the cash, it can only enhance shareholder value.

Undervalued and too small to be spotted – for now. I’m certainly very comfortable with my holding, which I intend to increase substantially before end of April.