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SAGENTIA 26 December 2013

 

No doubt, there will be plenty of debate in the run up to the new year, as to what is likely to be hot, or perhaps not, in 2014.

 

I daresay that I will add my own views on the subject, when the next weekly column resumes on 6 January 2014, but for now, as we remain in holiday mode, I thought I would just take a look at Cambridge based SAGENTIA.

I say Cambridge, although the company’s HQ is actually five miles out of the city at Harston, where it operates from something of a significant asset, being cited on the large site of an old mill, which would fetch a tidy sum were it ever to go under the hammer.

Not that it is likely to happen, as the company is doing very well of late and I merely mention it in terms of an underlying asset, in conjunction with £20m of cash, both of which are key elements in what is a solid balance sheet.

The company is fairly familiar to me, having covered them in the past and there are a couple of previous comments here on the site.

But, while the shares which have certainly enjoyed an excellent run over the last year are now sitting at a current £1.41p, I nevertheless feel that I could do far worse than consider this one for further upside.

Leaving aside the robust balance sheet, there is a lot to like about the actual business of Sagentia and a closer look, gives me reason for confidence further down the line. 

The company, which in a former life was known as Scientific Generics, is very much a technology and product development based operation, which on the face of things, perhaps doesn’t give much of a clue as to what it is all about.  

The reality of the business it transpires, is very much at the forefront of innovation,  covering  medical, industrial and commercial markets and customers.

That sees Sagentia working for and with major blue chip clients who wish to stay ahead of the curve, forging new or adapted products to bring to the market.

 

While many company’s in differing sectors face a harsh struggle against low cost competitors from emerging territories, Sagentia’s position in a highly skilled and innovative field, effectively shields it from having to contend with issues such as squeezed or tight margins.

Whether it is designing and producing a prototype conceived from a novel idea, to expertise in advising a client in the best way to bring a product to market, the company has become adept at delivery.

Although there is of course competition, the sector it operates in has actually faired far better than others during the recessionary years and should continue to perform well as the wider economy goes on to recover.

Revenues and profits very much tell the story here, where sales in 2008 of £29m delivered a pre-tax loss of £2m, against last years revenue of £22m which returned a pre-tax profit of a £3m.

Stronger operating margins, cash flow and generation has enabled the company to put in a decent performance, which saw EPS for last year come out at 11.2p.

 

While it may be tempting to conclude that Sagentia’s share price may well have peaked, not least as current forecasts for 2014, point to a flat year that could be similar to the expected full year 2103 numbers due in March, longer term the shares may be worth keeping an eye on.

 

It is certainly well positioned to further capitalise on its own recovery and now employs around 150 scientists and engineers that are experts in various fields, while it also operates tech scholar schemes, bringing the brightest of the next generation forward from University.

 

The company also made two strategic acquisitions earlier this year in the form of Hertfordshire based Quadro Design Associates, along with OTM Consulting, the latter of which set the company back £6.5m.

 

Both look decent fits, with Quadro providing critical product design capability, while OTM enhances Sagentia’s exposure to the Oil and Gas sector bringing with it clients such as BP, ConocoPhilips and Shell.

The last interim numbers for the six months to June 2013 saw first half  pre-tax profits rise 49% to £2.7m against the previous £1.8m which saw strong organic growth feeding through. 

More recently, the company has stated that it is on course to deliver numbers in line with a previous upgrade and expectations are for pre-tax profits of £4.8m delivering EPS of 11.5p.

That puts the shares on a forward PER of 12, which is at a discount to the sector average of 16.5 and looks worthy of closer scrutiny to me.

There are of course potential issues, such major clients delaying or shelving projects, which has happened in the past.

But, with a broadening reach and appeal, Sagentia could continue to grow and maintain strong margins in the years ahead.

 

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