Now that the annual results season is in full swing, chairmen of small companies are choosing their words with the utmost care. They want to be honest. And they have to be. Their reputation will be shot to pieces if they are accused of misleading the market. Heaven forbid that they should attempt to whisper little porkies into the ears of our financial lords and masters in the City.

But they have a problem. Because if they dare utter such phrases such as ‘we are cautious about the outlook for the coming year,’ or ‘some of our customers may consider deferring their orders by a month of two’, or ‘given that the great might of the economics profession, fund managers and the broking and banking community are predicting that the world is shortly to come to an end, we feel it only fair to point out that while we are presently enjoying record levels of business, a complete halt to consumer spending and global trade may have minor and temporary negative consequences at the periphery of our business…’ – then they know that their share prices will be hammered. Their investors will walk off in a huff and anyone who might have been contemplating an entry onto the shareholders’ register will put it off for another day.

Last September, John Kembery, chairman of Belgravium Technologies, had the task of delivering the right message to the market. Choosing his words with the utmost care he said, ‘Whilst we have fully met our expectations for the first half of 2007 and succeeded in building a full pipeline of sales opportunities for the second half of 2007 and beyond, recent economic uncertainty has introduced some caution into customers’ buying patterns. So, while we have every reason to believe that the Group will continue to successfully convert its pipeline of sales opportunities in the second half, there remains the prospect of some small delays in the timing of certain contracts. In overall terms, however, we remain confident that the progress achieved in the first half will continue into the second and that plans already actioned will continue to bring further benefits.’

Market overreaction…

Now I don’t know how that sounds to you, but to me it was an honest, unsurprising and by no means alarming description of Belgravium’s situation. And yet Kembery was rewarded for his candor by seeing an immediate 17% fall in the share price and watching it carry on falling until five months later the shares had lost half their value.

Everywhere I go I meet bosses of small companies who are terrified of the market’s reaction to even the hint of bad news. This is not just a matter of pride. Many small companies have rewarded their staff in the form of shares. It is not good for staff morale to see the share price slide. Others want to issue shares to companies that they intend to buy. If the share price is too low it simply does not make sense to do this, and deals have to be abandoned. Worse still – and this can be very serious – some companies are on the hook to pay for previous acquisitions by issuing new shares. And the lower the share price the more shares they have to issue.

The latter is not a threat to Belgravium. But all the same Kembery is understandably frustrated by the low share price and last week’s annual results showed why. Belgravium provides industrial mobile computing equipment that enables data from, for instance, bar codes to be recorded remotely and in real time and fed into the supply chain and other management systems. It is also a market leader in mobile retail systems, in particular for airlines which are increasingly making their money from on-board product sales rather than through selling tickets.

Consistent with the remarks that Kembery had made in September the annual results were very good. Belgravium’s profit grew for the fifth successive year, topping £2m. Earnings per share were 1.41p from which a 0.38p dividend will be paid, and net debt was cut by about a quarter. Despite this at the current share price of 10.75p Belgravium is valued at below £11m.

So what is Kembery now saying about the outlook? This time he has kept it simple. ‘Looking ahead, there are some attractive projects in the pipeline and we look forward to delivering organic growth in 2008 and beyond.’ In other words this is a small company that is financially strong, has an excellent record and clear prospects for growth. The question is – does anyone in the City want to know?

Until next time,

Tom Bulford
for The Penny Sleuth

PS: I write a newsletter each month called Red Hot Penny Shares which delivers exciting small company share tips to a loyal set of subscribers. My latest Red Hot company has a ‘Torpedo Technology’ that could unlock an energy supply bigger than Saudi Arabia’s! To discover more click here.

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