Are these small cap bargains too cheap to ignore?
Shares of parcel firm UK Mail Group (LSE: UKM) are worth 40% less today than they were one year ago. But while teething problems with a new automated sorting facility made 2015 a year to forget for the firm, 2016 is looking much better.
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The group has a new chief executive and appears to have put last year's profit warnings behind it. May's final results didn't flag up any new problems and profits were as expected. The firm's latest trading statement suggests performance so far this year is in line with expectations.
Improving outlook
UK Mail's new chief executive, Peter Fuller, previously spent 19 years at Parcelforce. The Royal Mail parcel business is currently delivering double-digit percentage growth, so Mr Fuller's credentials look strong.
Analysts expect UK Mail's profits to continue their recovery this year. The balance sheet is strong and adjusted earnings per share are expected to rise by 20% in both the current year and next year.
This puts UK Mail shares on a 2016/17 forecast P/E of 13.5, falling to 11.5 in 2017/18. There's also an attractive forecast dividend yield of 5.8%.
This modest forecast valuation gives UK Mail a P/E growth -- or PEG ratio -- of just 0.7. A PEG ratio of less than one suggests that the current share price may not reflect the full value of expected earnings growth.
At about 300p, I'd rate UK Mail as a buy.
Taking a longer view
The global shipping industry is currently suffering from a combination of low rates and having too many ships. Braemar Shipping Services (LSE: BMS) also has exposure to the oil sector, where the market for offshore services is understandably poor.
However, the group has a long and successful record in the shipping business. It operates a mix of technical, broking and logistics services that add diversity to the firm's revenue and profit. Braemar is also a people business, so it's not burdened with high levels of debt and ships that may be falling in value.
Like UK Mail, Braemar has a strong balance sheet. The group had net cash of £9.2m at the end of February and almost no debt. A key element of the stock's appeal is its high dividend yield, which currently stands at 6.4%.
An income champion?
The dividend yield is attractive, but it's worth remembering that Braemar's dividend of 26p per share has been unchanged since 2010. The payout is only expected to be covered 1.3 times by earnings this year, so an increase is very unlikely.
Indeed, I'd say Braemar's dividend is pretty much the maximum the group can afford. But there are signs that trading is improving. Braemar's operating margin recovered from a low of 3.7% to 6.5% last year.
Earnings per share are expected to rise by about 5% to 33.2p this year, with a similar increase pencilled-in for the following year.
Braemar shares are probably priced about right on a short-term view. However, it has been trading since 1982 and is a quality business, in my opinion. I'm fairly confident that buying now should deliver decent long-term gains.
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Roland Head owns shares of Royal Mail. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
