RESEARCH SHOWS THAT LOWER RATED SME STOCKS REPRESENT GREAT VALUE

New research shows time is ripe for acquiring small and mid-cap listed companies

Lower rated SME stocks represent great value, says DC Advisory Partners

27 JULY 2010, London – Current market conditions have resulted in small to mid-cap[1] stocks in the FTSE All-Share having significantly lower ratings than their large cap counterparts, presenting a compelling opportunity for corporate or financial buyers to acquire attractive companies at reasonable valuations, according to research by DC Advisory Partners (formerly Close Brothers Corporate Finance).

The analysis by DC Advisory Partners reveals that small to mid-cap stocks in the FTSE All share index currently trade at a 26% discount to large cap stocks.

The findings show that the UK market is attaching a lower rating to small and mid-cap stocks despite the fact that good quality smaller companies often have better growth prospects than their larger peers.

Market cap between		Average Multiple
£0m	£100m	5.0x
£100m	£500m	6.1x
£500m	£1,000m	7.7x
Above £1,000m		7.3x

Large caps do not always trade at a premium to small caps and the current situation is likely to be driven by investor risk aversion due to the economic downturn. Conducting the same analysis as at 1 July 2005, showed significantly different results; at that time, average multiples were 8.2x for small and mid caps and 8.0x for large caps.

 

Market cap between		Average multiple
£0m	£100m	9.1x
£100m	£500m	8.1x
£500m	£1,000m	8.1x
Above £1,000m		8.0x

According to DC Advisory Partners, the market is currently attaching a premium to larger cap stocks due to: their perceived ability to better control their pricing and margins; their often more diversified and therefore stable revenue streams; and the benefits that many gain from international operations which include access to higher growth emerging economies.

However, DC Advisory Partners notes that good quality smaller companies frequently have better growth prospects than their larger peers and are able to grow revenues and profits at much faster rates.

The ratings ascribed to small and mid cap stocks are further influenced by stock market mechanics. The lower trading volumes and lack of liquidity associated with many small companies tends to deter investors, particularly in a downturn, thereby suppressing value.

Commenting on these findings, Guy Ballantine, a Director at DC Advisory Partners, said:

“During buoyant economic times investors are more likely to seek out high growth, and often higher risk, small and mid cap companies. The discount presently being applied to many of these stocks reflects the current economic environment and investor risk aversion. Many good quality small and mid cap stocks are being over-looked by investors. This represents an excellent opportunity for trade or financial buyers to make strategically compelling acquisitions at attractive prices.”

DC Advisory Partners notes that whilst in such instances the shareholders of unloved small and mid cap stocks may demand a significant takeover premium from potential suitors, the absolute multiple may still provide a good value opportunity.

Ballantine concludes, “Our analysis indicates that institutional risk aversion due to the economic downturn continues to adversely impact valuations for small and mid-cap stocks. Consequently, we believe that the current market provides a rare opportunity for corporate and financial buyers.”

- Ends -

 

For further information please contact:

DC Advisory Partners

Justin Clark 020 7856 0930

justin.clark@dcadvisorypartners.com

 

Citigate Dewe Rogerson  

Alistair Kellie 020 7282 2850

Georgiana Varey 020 7282 2806

Jo Skinner 020 7282 1092

 

Notes to editors:

¹ The DC Advisory Partners study defines small and mid cap stocks as having a market cap of £500m or less. Source of data: Factset

The following entities / subsectors were excluded from the sample:

• Banks
• Equity Investment Instruments
• Financial Services
• Life Insurance
• Non-life insurance
• Real Estate Investment and Services
• Real Estate Investment Trusts
• Companies where no rating is available from Factset
• Companies with multiples over 50x or negative multiples

DC Advisory Partners is a leading corporate finance house, offering independent advice on:

• Mergers and acquisitions
• Debt raisings
• Restructuring
• IPOs
• Financial sponsors

Headquartered in London, it has a strong European and regional presence, employing over 200 staff across offices in Barcelona, Frankfurt, Lyon, Madrid, Manchester, Paris, Warsaw and Zurich.

Through its parent company, Japanese investment bank, Daiwa Capital Markets, DC Advisory Partners also has access to a global network of relationships in Daiwa’s existing markets, including Japan, Asia (China, Hong Kong, Singapore, India and other countries), Russia, Bahrain, Dubai and other Gulf territories as well as into the US through Daiwa’s alliance partner, Sagent Advisors.