Zirax

Zirax dropped about 20% yesterday. Gave me the willies a bit, but there doesn't seem to be any bad news out there. On such a thinly traded stock it can be triggered by one small investor selling up - looks like there was a big trade of about 70,000 shares (which on the latest share price is only £7000!), and total volume of 200,000. Average volume is only 50,000 per day.

This prompted me to investigate the stock a bit further. Clearly I should have done much more research before buying in the first place - as per my post the other day, I should automatically be looking to increase my stake if the share price drops so precipitously for no reason.

So, what value do I place on Zirax?

• Post-tax profit in 2006 was about £1.5m.
• Increased capacity in 2007 should mean profit of around £2m (my own estimate).
• An extra 55k tons of capacity at the new Rosignano factory should mean dramatically increased 2008 profit. My estimate is £3m. I think that's fairly conservative.
• Until their recent acquisition they had a cash pile of about £4.5m. The acquisition price is based on an "earn-out" which I think means they don't have to pay up immediately. They are taking on some debt, and paying an initial fee, but I think they should still be sitting on several million £s.
• All their profit will be reinvested for the moment, and as above this should be significant. This gives them a strong engine for growth.

Downside:

• Russian company. Woah - must be a bit dodgy.
• Not sure how open they are to competition.
• It's difficult to increase profits without capex in new factories or acquisitions.
• Not many shares in private hands (<10%)

So what sort of value does this suggest for the company? I think £30m is reasonable. That would suggest a P/E ratio of about 15 this year, 10 next year. We don't want to go too mad. After the latest drop its market cap was £17m, so a discount of >40%. I bought in at a discount of ~20% - not too bad, but perhaps a bigger margin for error would have been nice.

I will think seriously about buying more at this price.

Footnote: here's the latest performance of my portfolio. I've added a red line adjusting for stocks that are ex-dividend but for which dividends have not yet been paid (currently RBS).