What would you say to a tiny-cap prospect that's been losing money for the past few years and has seen its share price slump?
You might want to run for the hills, as that's what's happened to Sinclair Pharma(LSE: SPH), whose share price dipped a further 10% Monday after the firm release full-year results and warned that 2018 margins are going to be weaker than expected.
Although the company, which makes aesthetics products, recorded sales of £45.3m (up from £37.8m the year before), and saw sales of most of its products rising, we still saw an operating loss of £2.2m -- and net debt stood at £3m at December 2017.
The company is expected to make a very small profit this year, followed by something more substantial in 2019 when forecasts suggest a P/E of 12.5 on the latest share price.
The other news today, which is a bit of a double-edged sword, is the announcement of a new EUR23m debt facility. Part of that will be used to repay more expensive bank debt of £5m, and some will be used to fund growth.
On the upside, it should mean that Sinclair now has the funds to see it through to renewed profitability. But the downside lies in the potential effective dilution of shareholders' interest depending on how much of it is drawn. It has to be repaid by April 2023, and there's a risk now that the company might overstretch itself in the use of that facility. If it can't repay on time, there could be more funding needed.
I still think this is a buying opportunity if you can handle the risk, and I'd be looking for Sinclair to be as conservative as it can with the level of new debt it actually draws.
What better to accompany a risky growth pick than a big dividend payer? It's PayPoint(LSE: PAY) I'm thinking of, and the special dividends its been paying as it returns surplus cash to shareholders.
Forecasts for the current year suggest a total payment of 83p per share, which would provide a yield of 9.6%, and that should be followed by two more years of similar cash returns. It won't be covered by earnings, and it obviously can't go on for ever.
But even if payments should revert to last year's ordinary portion of 44p when the surplus capital is exhausted, that would still yield 5.1% -- and I can see the ordinary dividend doing better than that and at least keeping pace with inflation in the next few years.
Long term, I can only see PayPoint's business growing. It's already pretty much dominated the point-of-sale payment terminal business in the UK, and it's growing in other countries too, starting with Romania.
At the interim stage, the company was making gross margins of 48.5%. That's slightly down from 49.1% a year previously, but unless that should evolve into a long-term decline, it doesn't worry me.
The company enjoyed first-half pre-tax profit of £24.4m, with operating cash flows amounting to £29.5m.
Forecasts suggest a 4% decline in EPS for the full year, but it should soon turn back up again. And with the shares on a forward P/E of under 14, I'm seeing an undervalued cash cow here that I reckon could have a great decade and more ahead of it.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of PayPoint. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.