Questor: Aim is full of traps but we’ve had a good look at Inspecs and it seems promising

Russ Mould

This column’s record with Aim‑quoted smaller companies is patchy to say the least, with Strix and Franchise Brands notable successes, and Accrol, Hurricane Energy and Zytronic among a longer list of howlers (although we have not yet given up on the last-named stock).

A look at any firm quoted on London’s junior market must therefore come with a bit of a health warning, but Inspecs, a newcomer to Aim, does have an interesting look to it.

The company is a designer, manufacturer and distributor of eyewear frames. They are then sold by well-known chains, including opticians such as Vision Express and Specsavers, as well as retailers Next, Asos and Walmart.

The range covers optical, sunglasses and safety wear, and is sold either branded or on a private-label basis. Inspecs’ products are sold at more than 30,000 sites and the firm has four manufacturing facilities, in Britain, Italy, China and Vietnam.

The shares floated on Aim at 195p in February so investors have missed nothing so far, barring some price volatility. Although the company has hardly been helped by the pandemic, which forced most of its customers to close down and the company to focus on cash preservation so that it could come through the crisis and then emerge ready to benefit as stores reopened.

However, Covid-19 will not stop people needing to get their vision corrected, as Questor can attest after staring at a small laptop screen at home for the past four months.

Even allowing for the bad news from Boots, which is closing 48 of its opticians, shops across the sector are now opening again and it seems reasonable to assume that business could slowly start to improve, unless the virus returns with a significant second wave.

Last year gave some indication of Inspecs’ potential. Sales rose by 7pc and underlying profits climbed nicely as volumes increased by 20pc, helped by an expansion of the factory in Vietnam. Percentage returns on capital employed stood in the mid-teens, while cash conversion and cash generation were both strong.

There are dangers, over and above the near-term uncertainty created by the pandemic. By their very nature, smaller companies can be riskier than larger ones because their revenues are less well diversified and they can be more reliant on key individuals.

Inspecs is a case in point. Nearly half of its sales last year came from just five customers and the company needs to keep wooing clients, either to win them or to maintain existing licensing relationships with brands such as Superdry and Hype. Robin Totterman, the founder and chief, is clearly still a key influence and he also owns more than a quarter of the shares, so liquidity in the stock could be limited.

Anyone prepared to back Inspecs needs to think about doing so patiently for the long term rather than as a quick punt, although there is a good geographic sales mix: Britain generated 25pc of group sales last year and overseas markets the rest.

The firm did not pay a dividend in 2019 and is unlikely to do so this year either, which could deter income seekers. However, analysts’ forecasts do hint at a maiden dividend in 2021.

A forecast price-to-earnings ratio of nearly 70 for 2020 tells of the damage done to sales and profits by the virus, especially in the first half. However, Inspecs’ vertically integrated model means that margins should recover quickly as and when volumes return.

If we assume that earnings return to something like their previous trajectory in 2021 and 2022, the shares should trade on a much more reasonable mid-teens multiple of estimated profits in two years’ time. Growth should come from organic expansion, but could be supplemented by select acquisitions.

Patient fans of investing in smaller companies may well find that Inspecs is worth a second look. Buy.

Questor says: buy

Ticker: SPEC

Share price at close: 195p

Russ Mould is investment director at AJ Bell, the stockbroker

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