British small-cap stocks: an unloved, overlooked sector awash with value
Three British small-cap stocks, as picked by professional investors Indriatti van Hien and Cassie Herlihy of the Henderson Smaller Companies investment trust
With a focus on British small-cap stocks, the Henderson Smaller Companies investment trust seeks to deliver long-term capital and income growth by investing in UK-listed companies at their most exciting stage of development. Our stock-picking approach is designed to identify this growth before others do, capturing the small-cap premium through disciplined valuation, ensuring we invest only where prices do not yet fully reflect a company's strong fundamentals in terms of growth and cash generation.
A tumultuous decade for British small-cap stocks, beginning with nerves around the EU referendum and culminating in an energy crisis and a sharp rise in interest rates, has left this part of the market unloved, overlooked and, most importantly, awash with value. We highlight three British small-cap stocks that are cheap compared with international peers, with precedent transactions (the price that peers have recently been purchased for in merger and acquisition deals) and with their own history.
Promising British small-cap stocks for your portfolio
Oxford Biomedica (LSE: OXB) is a contract development and manufacturing organisation (CDMO) specialising in manufacturing viral vectors for cell and gene therapy, treatments used to combat cancer and rare genetic diseases and used in a growing range of new applications. It is one of only a handful of players globally capable of developing these technologies at a commercial scale. The market is growing at more than 20% a year, and the firm has set ambitious targets to more than double revenues by 2028, underpinned by increased capacity coming online at its Oxford (UK) and Durham (US) facilities. The shares trade at about a 30% discount to internationally listed peers despite faster forecast sales and earnings growth. Meaningful consolidation across the CDMO sector in recent years and interest from private-equity firm EQT make the stock look even more attractive.
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In a world where financial-services firms are fighting to get closer to their clients, Rathbones (LSE: RAT), which provides financial planning and investment advice, is well-positioned. Ageing populations and rising personal and wealth taxes are driving demand. The shares trade on a steep discount to multiples recently paid by NatWest for smaller competitor Evelyn Partners and offer an attractive dividend yield.
Everplay (LSE: EVPL) is an independent video-game developer and publisher with a resilient business model, operating in a structurally growing part of an already large market. In the premium “AA” and “AAA” segment of the market, firms sink large sums into individual titles and need big hits to drive returns. The smaller, independent players are different. Everplay spends on average £1 million-£1.5 million per game, releasing about ten new titles a year, meaning risk is diversified and earnings are not dependent on any single release. About 75% of earnings are underpinned by a strong back catalogue of well-known titles that continue to generate revenue – Worms, for example, is more than 20 years old and still makes money.
It also owns simulation-gaming business Astragon, with its niche customer base, and StoryToys, a mobile “edutainment” division targeting younger players and recurring revenues. Everplay is a leading scaled player in its sector and, despite resilient growth and strong cash generation, a robust pipeline for this year and significant firepower to pursue mergers and acquisitions to drive incremental growth, the shares trade at just over seven times EV/Ebitda – a significant discount to peers, precedent transactions and its own history.
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