When it comes to the morass of dodgy companies at the bottom end of AIM, fishing in these waters can be a dangerous business. A lot of it is overleveraged, unprofitable crap. You’re much more likely to pull up an old boot than buried treasure.
And yet as investing enthusiasts we are always looking for undervalued companies. Ones that the market has ignored so far, but whose fundamentals suggest more profitable times ahead.
Service businesses like this law firm owner are never going to produce the kind of 10 or 20 bagger share price multiples that get AIM investors joyfully hot under the collar. But a tidy investment in a good business will do very nicely in your Stocks and Shares ISA and I think I’ve uncovered one in RBG Holdings (LSE:RBGP).
The group owns Rosenblatt, a leading UK law firm that concentrates on white-collar crime and fraud. In the trading and investing environment we’re heading into post-Covid-19, there’ll be no shortage of work.
The fact that it pays a 7.4% dividend is a handy bonus. It’s not the main reason I’m invested here. I usually leave the dividend growth investing for my FTSE 250 or even FTSE 100 firms, ones that I know I’m going to sit on for 10 or 20 years and let all that lovely compound growth stack up and up.
Follow the numbers
With a share price of 65p at present this looks majorly undervalued to me, especially because of its strong balance sheet. RBGP has net assets of £42 million, no debt, and cash of £1.9 million.
I like the look of the last couple of years of results. 2018 saw the firm produce £3 million of pre-tax profit on revenue of £12.5 million. This last set, released in late April and covering the period to the end of 2019, showed £7.65 million of pre-tax profit on £19 million revenue.
I tend to look at the ratio of pretax profits to market cap to see if all the value has been drained out of a stock or not. A ratio under 12 is usually worth buying, in my book. RGBP’s valuation at £57 million gives this one a profit to market cap ratio of 7.45.
The price has come down to a level I’m happy to jump in at. Investing in this in 2018, you’d be paying an overpriced 18 times earnings. Last year, the shares came with a more reasonable price tag of 12 times earnings. Right about now, RGBP is trading at a P/E ratio of 9.5. That’s not scary low, so that the bottom might fall out of it at any time, but small enough for me to think there’s 30%-40% upside in this one. I’ll probably stick 5 grand on this and watch it trickle up as the market comes around to my way of thinking.
I’m aiming for a price target of 85p, 30% up from its current 65p. If it does well, I’ll topslice on the way up and grab profits to use for any other more exciting shorter-term trades that crop up.
If it underperforms, I’ve got no problem quickly cutting my losses and moving on. That was one of the biggest mistakes I made back when I was a novice. I thought I was Warren Buffett and I would hold shares forever, gamely clinging to falling shares in the desperate hope that things would turn around and my thesis would be proven correct.
Anyway, I’m planning to slide this one into my ISA – I think it’s a solid shout.