22-Jul-2011
SILVER CHEF, FANTASTIC HOLDINGS
Silver Chef's Eureka moment
ASX Code SIV, FAN
Like Rupert Murdoch, Silver Chef's chief executive Charles Gregory sees the media as a fickle beast, claiming that his share price has moved about 30 per cent north and then almost 20 per cent south, after one report.

The company (ASX: SIV) has a strong niche in financial services operating in the small business segment, leasing kitchen equipment to restaurants. This time two years ago its shares traded under $1, and now they stand at $3.40 – yet its market cap is still relatively small at $79 million.

After the release of a Eureka Report item in late October last year extolling its virtues, Silver Chef's shares jumped 30 per cent to as high as $4.28. Then in mid-February the company announced a flat interim profit result. And it is Eureka's 15,000 or so subscribers that Gregory says deserted his company during its subsequent share price decline:

“The Eureka report didn't flag too much fundamental analysis, and we got a good increase in the share price, but they obviously weren't long term investors … These traders seemed to drop off just as quickly as they jumped on.”

Maybe they weren't expecting a “flat” interim profit?

Gregory's response is the refrain of many executives, pointing out that the $3.1 million profit (compared with the prior period's result of $3.2 million) was hit by a number of “one-offs”.

When you look at the actual result, there is no doubt that he is right. Silver Chef has experienced the hiccups that any number of small businesses experience when they go for growth.

Investors need to look through one-offs, but with small companies that don't often have long track records, they can hurt sentiment more easily.

This company has definitely produced the goods, managing to produce a compound earnings per share (EPS) growth rate of 23 per cent for its first five years.

The company's guidance for its annual result due next month is for an EPS of 31.2 cents, which implies an increase of only 6 per cent. But Gregory says that he envisages a positive announcement in relation to future growth at the company's AGM on 22 August.

The company looks cheap, trading on a fiscal 2011 price-to-earnings (PE) of just over 10 times, but the key to its performance is its capital expenditure spend, which needs to at least match depreciation – which means more than $20 million a year. Gregory says that the company has the financial capacity and debt facilities to keep paying out dividends and not embark on a capital raising for at least two years.

Silver Chef trades on a prospective dividend yield of almost 8 per cent, according to Wilson HTM forecasts, which could even be enough to temp Eureka's “traders” back in.

Fantastic's not so fantastic share price decline

Shares in furniture seller Fantastic Holdings have declined more than 20 per cent in the past two months, having been caught up in the perfect storm of profit downgrades afflicting retailers David Jones, Noni B and parent of fashion chains Katies and Millers, Speciality Fashion.

Based on JPMorgan forecasts, at $1.90, the company (ASX: FAN) is trading on a current year PE multiple of just over 7 times and a dividend yield of 9 per cent.

The question now must be asked whether this is a stock for deep value players – or as one fund manager put it, “is there light at the end of the tunnel, or is it a train?”

One factor also frustrating Fantastic is the feeling among many that being a manufacturer in Australia is like being a rice farmer in the middle of the desert.

But a point one of Fantastic's managers makes is that because it a domestic manufacturer it can produce a wide range of sofas for a low price point. In contrast there is a very small range of imported sofas at similar prices, due to the expense of transporting them.

Of course, he would say that, but another factor is that consolidation is widely anticipated in the fragmented furniture industry, which should help rather than hinder operations with economies of scale such as Fantastic. In the $7 billion furniture industry, Fantastic's market share is about 6 per cent.

After its first half result in February, JPMorgan increased its price target from $2.27 to $3.28. This now looks increasingly optimistic, but if the company can hold the line and deliver dividend growth, the stock doesn't need to do much to help investors ride out the current storm in global equities markets.

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