Small Can Be Beautiful
Boring is best for most private investors, including me most emphatically, but we all like a little spice in our lives and it can be worth a trawl through smaller companies, including those on AIM, as long as you are particularly choosy.
I was reminded of the potential to spot tomorrow’s winners today when a company called Renew Holdings (RNWH) was brought to my attention. Let me make it clear that I have not bought shares in this company (and will not be doing so at this stage because I am looking to invest my ISA allowance and AIM companies don’t qualify).
Nor can I make recommendations for individual readers but it is worth looking at Renew because it ticks a few boxes and provides an object lesson of what investors should be looking for if they venture outside the comfort zone of the FTSE 350 index.
Renew is an engineering services group operating in the energy, environmental and infrastructure sectors that could well benefit from increased investment to get the country going again. It also has a specialist building division focusing on new build affordable housing, another area that the government is keen to promote.
Figures for the first half to 31 March, released in May, showed pre-tax profits up 8% and earnings per share up 10%. Chairman Roy Harrison said the order book had reached a record £361 million, up 19% from a year earlier. There is good visibility of earnings, with forecast revenue for the second half fully secured.
Equally important is the solid cash generation that has reduced net debt from £6.9 million to £3.2 million, with a further reduction in borrowings expected in the second half. This could be crucial when interest rates eventually start to rise.
Renew now has a progressive dividend policy, reflected in an increase in the interim dividend from 1p to 1.5p, implying a total for the current year of at least 3.3p, which should be covered more than four times by earnings.
The shares spiked at 107p after the interim results announcement but have sunk back below 100p, giving a prospective yield of about 3.5%. That is not mouthwatering but it is up with the market average and the prospects look solid and promising.
It is up to individual readers to decide on their investments. The point is that these are the sort of characteristics you should be looking for in a smaller, growing company.
Ups and Downs
Most, if not all, statistics can be twisted round to mean whatever you want them to mean but percentages seem to be particularly baffling for most people. I have in the past read and heard that prices had fallen when in fact what had happened was that inflation had fallen – prices still went up, just not as quickly.
Chris Hardcastle, a reader of this column, raises an interesting point about China, where the growth in the economy slowed from 7.7% to 7.5%. Or did it slow? All is not as it seems.
As he puts it, if we start at a base of 100, then growth the previous quarter (7.7% of 100) is 7.7 units. The growth in the latest quarter (7.5% of 107.7) is 8.0775 units. Thus growth has been greater, not less.
I argued in a previous column that we should not get too worried about any easing in GDP growth in China from very high levels. This calculation reinforces that view.
More Ups and Downs
I don’t think even the most cunning statistician could disguise the fact that prices went up faster in June, by 2.9% on the Consumer Price Index compared with 2.7% in May. The Retail Price Index similarly edged up from 3.1% to 3.3%.
Inflation now stands at its highest level for more than a year and it continues to outpace earnings. That situation will probably continue as the fall in the value of the pound against the dollar will push up petrol and diesel prices in coming months.
And yet it could have been so much worse. Recently departed Bank of England governor Mervyn King feared that the CPI would peak at 3.5% by the time he stepped down (and that would NOT in fact have been the peak because of higher fuel prices feeding through).
The latest figures prompted a fall in the pound against the dollar, which means more inflation looms. The peak may yet be 3.5% but it will take a little longer to arrive. I do not expect inflation to fall this summer.
Welcome
A warm welcome to readers of this column who have joined my followers on twitter @rodneyhobson. You have done so just in time to find I am taking a one week break, so there will be no column from me next week. Don’t go away. I will be back soon. In the meantime, get all the latest research and commentary via Morningstar.co.uk editor @mstarholly.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
