Zirax double-up

I more than doubled my Zirax stake today. I had wanted to buy at 11p, but had no spare cash in my dealing account. By the time the money was there it was up to 12p. I hummed and hawed and decided to go ahead anyway, because otherwise I'll kick myself if it goes back up (and I think it's good value at 12p, just like I thought it was value at 14p when I first bought).

ZRX - Zirax - 28/4/08 - 12p - 4.8% of portfolio, for a total of 9.6%, at purchase price. At current prices Zirax is now 8.7% of my portfolio.

So why do I like Zirax?

Value

• I think a fair P/E multiple is about 12.
• I estimate earnings in 2 years time at about £2.9m purely based on the imminent increase in capacity. I'll put it at £3.2m to include input from acquisitions and economies of scale. That equals 1.9p per share.
• That puts a fair value in 2 years as 23p.
• If I'm looking for 20% annual return, that makes it good value at anything up to 16p.

Diversity

• I don't have any other industrial shares, and I think Zirax adds some nice diversity.
• I think it should be recession-proof, unlike MXM, BDI, RBS, TW.

Concerns

• Zirax is tiny, but hopefully that will change over the next few years.
• There is a bid/ask spread of 1p, so about 10% at current prices. Ouch. If it stays at 1p and the shares double in price, it will be slightly less punitive.
• Most of its sales are in the Russian market, but it should be increasing its geographic diversity now its factory in Italy is coming online.
• A lot of the shares are controlled by insiders. That can make things difficult - they can essentially manipulate the share price to suit their own interests (if they want to take Zirax private they could drive down the price and buy out the other investors).

All in all, I'm pretty bullish about this little company. I think the shares are being held down by sustained selling from Pennygold Trading Supplies, who are one of its biggest shareholders and seem to be getting out completely.

Performance
Here's an update on my portfolio performance. Marginally profitable once future dividends are taken into account.