Misunderstood and undervalued

The most frequent complaint from small-cap chief executives is that their companies are misunderstood and their shares are undervalued. Occasionally, this frustration spills over – as in the case of Laurence Orbach, founder and driving force of Quarto, the international book publisher.

In his chairman’s letter accompanying the recent 2010 results, he writes: “I know that it is considered inappropriate for executives and directors of publicly traded companies to stick their necks out and proclaim that their businesses are not understood by investors and should be more highly rated.

“I risk opprobrium for voicing my dismay that Quarto shareholders have not been better served by my explanations of the company’s virtues to the investing community. We have grown our business over the years, but could do much more if we were trading on a higher multiple of earnings.”

I concur, and happily declare my own interest as a long-standing shareholder.

Over the years, I have made 20 purchases – mainly for my personal equity plan (Pep) and individual savings account (Isa) – at prices between 211p and 88p.

Quarto is one of the largest international co-edition book publishers with two main strands of activity: its publishing segment publishes books, under imprints owned by the group; and its co-edition publishing segment creates books that are licensed to third-party publishers for publication under their own imprints.

Overall, 85 per cent of its total revenues derive from outside the UK. It is focused and risk averse, with a business model honed conservatively over the last 35 years.

Essentially, it publishes books of an enduring interest: “not looking for the next big thing, but the next lasting thing”.

Quarto’s top five sellers in 2010 give a flavour: Complete Guide to Wiring, 1001 Movies you must see before you die, Anatomica Revised, 1001 Songs you must listen to before you die and Art: The Whole Story. None of these exceeds 1 per cent of group revenues – most sales are made through large arts and craft store chains and home improvement retailers.

Recent results showed encouraging profits growth, debt reduction and a welcome 5 per cent dividend increase – with current trading described as “interesting and exciting”.

But Quarto’s real value is in its niche business model and its £30m backlist of titles from which it derives substantial royalties – its books are sold in 35 countries and 25 languages. At 155p, a price/earnings (p/e) of 6 surely seriously undervalues this £31m capitalised business – offering a 5 per cent dividend yield covered 3.5 times.

Elsewhere, markets have inevitably been unsettled by the Arabic uprisings and consequent rise in the price of oil, but thankfully the majority of announcements emanating from my holdings have been positive.

There have been dividend increases from THB, Town Centre, and Wynnstay, and encouraging statements and newsflow from Capital Pubs, the Cable & Wireless duo, Christie Group, Dairy Crest, Gooch and Housego, MS International, Norcros, Park Group, Primary Health, S+U and United Drug, with “old friend” Dawson Holdings seemingly engaged in takeover talks.

John Lee is an active private investor writing about his own investments. He may have a financial interest in any of the companies and trading strategies mentioned.

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