DCC, Grafton, IAWS and Paddy Power have been singled out as "core quality" stocks for 2003 in a small-cap review conducted by Goodbody Stockbrokers, writes Una McCaffrey.
The four have been selected from a group of 38 public companies with a market cap of less than €1 billion on the basis that they are creating good value for shareholders, have a solid track record, a strong balance sheet, a clear strategy and a high return on capital employed (ROCE).
The four core quality picks are those which the broker expects to outperform the market this year. Goodbody has also identified two firms - Jurys Doyle and Kingspan - as offering fundamental value, despite currently trading at depressed levels. Both companies have been chosen because of their clear strategies and strong market positions.
Goodbody measures each small-cap company according to ROCE and weighted average cost of capital (WACC).
The broker says any company offering a ROCE that exceeds 15 per cent and runs more than 5 per cent above its WACC is earning "a very good return for shareholders".
Of the 38 companies measured, 14 fall into this category, including Icon, McInerney, United Drug and Kingspan.
Four companies - Gresham Hotels, Independent News & Media, Qualceram Shires and Ardagh - are highlighted as stretching, or "distressing" their balance sheets to generate returns.
The worst-performing stocks in terms of ROCE and balance- sheet strength among the 38 companies were found to be Gresham Hotels, IFG and Independent News & Media.
The five companies which have seen no revisions to forecasts over the past 12 months and have produced uninterrupted growth over the past five years are IAWS, United Drug, Grafton, Icon and Abbey.
In general, Goodbody has concluded that when the technology sector is excluded, the Irish small-cap sector offers good value against its international peers, despite having declined by 13 per cent in 2002.
In some cases, the Irish discount runs as high as 50 per cent, the review states.
The Irish small-caps also offer "competitive dividend yields", according to the broker's Digging for Emeralds research, which calculates that the average dividend yield in the sector is running at 3.4 per cent or close to the middle of the international average.
The top five dividend-yielding companies in the group of 38 are identified as Waterford Wedgwood, Heiton, Donegal Creameries, Readymix and Abbey.
