Waking up to the small-cap potential

Derek Pain: No Pain, No Gain

When the stock market overreacts to what is likely to be the merest hiccup in a company's progress, it is often the time to think about buying the shares. Multi Group, until last month called Multi Equipment Rental, is an example of too harsh a view being taken over one set of figures.

When the stock market overreacts to what is likely to be the merest hiccup in a company's progress, it is often the time to think about buying the shares. Multi Group, until last month called Multi Equipment Rental, is an example of too harsh a view being taken over one set of figures.

When it produced interim results, its shares were riding at 19p. They are now 15.75p, having touched 14.75p. The casual observer could be forgiven for believing Multi, which rents equipment to builders and others, had run into problems, perhaps even suffered a profits fall.

Nothing could be further from the truth. Admittedly, its rate of profits growth was poor but the company still managed a gain, £438,000 against £423,000.

The pause for breath - and I believe it is no more - stems from start-up costs involving new depots and developing a new division.

Evidence of the group's continuing growth is provided by a 42 per cent jump in turnover to £3.9m and a 90 per cent growth in assets. Gearing is only 24.5 per cent.

But the stock market, in its present mood, is not prepared to take prisoners. Any disappointment prompts a savage initial reaction, which is probably more the result of a mark down than any selling rush.

And as a very small business, capitalised at only £6.3m, Multi can expect to be subjected to exaggerated price movements, thanks to the inevitable thin market in its shares and the likelihood its two market makers do not want much stock on their books. The shares have been as high as 26.25p since the group arrived two years ago. Their low point is 11p.

Leslie Kent, an analyst at the company's stockbroker, Seymour Pierce, has marginally reduced his year's profits estimate and is now looking for just more than £1.1m, compared with £856,000 last time. His forecast for next year is unchanged at £1.35m. On his current year's prediction, the shares are selling at not much more than seven times earnings, although the dividend yield is only 2 per cent or so.

Still, unlike so many of today's new breed of quoted companies, it is in a position to service its shareholders, providing the fundamentals of investment. Mr Kent would describe it as a "proper" company in an age when most of us old-timers blink in astonishment at some of the businesses being fêted on the stock market.

Multi, started nine years ago, is ambitious. It plans to expand its operations from half-a-dozen hire depots in London and the South-east. Birmingham and Manchester are in its sights and a move into one or both could come within a year.

It is also thinking about tapping into the do-it-yourself market. A chain of high street hire shops, perhaps inter-relating with its tradesmen's depots, is on the drawing board. Each shop would operate under a franchise, which should reduce the group's costs.

There is also a significant takeover in the offing, which could give the company a hi-tech dimension. If the deal comes off, Multi would have the best of both worlds, a profitable, growing and assets-backed business enjoying the perceived excitement of the new economy.

Clearly, little Multi is keen to grow. The stock market has treated its shares harshly following the modest half-year disappointment. The start-up costs that blighted first-half profits are unlikely to be repeated in the second six months and, anyway, the balance sheet is strong.

Unfortunately, Multi is a small cap and as such suffers from the market apathy towards shares on the undercard. It has only one institutional shareholder with a substantial stake, Granville Investment Management, with 12.3 per cent. Directors have about 30 per cent.

Like so many tiddlers, its shares deserve a higher rating. One day the stock market's neglect of small-cap shares will end and there could be a general re-rating on the undercard. But Multi is one of those shares which, once the interim disappointment is absorbed, should enjoy new investment appeal, particularly when investors realise the group is still on the growth ladder.

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