Sweet Unrecognized Small-Cap Value

LONDON -- I like buying shares in food companies. Our needs don't get more fundamental. So when such companies exhibit a few value fundamentals, it's always worth taking note.

I think AIM-listed confectioner Zetar (LSE: ZTR.L  ) fits the bill. My view was reinforced by Wednesday's final results to the end of April.

On sales of 128 million pounds, the company made underlying pre-tax profits of 5.5 million pounds and earnings per share of 33.8 pence. At the improved price of 210.5 pence, this places the shares on a price-to-earnings (P/E) of 6.2 for the year just gone. Zetar also managed to bring net debt down by over 4 million pounds to 10.8 million pounds and had net assets of 47 million pounds/3.55 pounds per share at year's end. Take out the intangibles, though, and this falls to 129 pence per share. There was also a very welcome 33% rise in the once-a-year dividend to 3 pence.

The overall tone is one of optimism despite a difficult trading environment. We had already been told that Zetar had a disappointing Easter across both the Kinnerton and Lir divisions. Kinnerton specializes in licensing children's characters such as Peppa Pig, Thomas the Tank Engine, Disney's "Cars" and Hello Kitty, while Lir makes top-end chocolates whereby " ... each one is hand crafted and individually shaped from the finest ingredients" no less!

Growing through innovation
Brokers' expectations for this time next year now place the shares on a P/E of 5.1. If the company can do this well during such lean times, it surely deserves a higher rating. OK, its foodstuffs aren't exactly basic staples, and Zetar has clearly suffered something of a setback due to cash-strapped parents buying fewer or cheaper Easter eggs, and so forth. But the valuation still factors in too much future fear.

The company itself certainly doesn't seem diffident about its prospects. It is expanding into France, where it has established a small marketing and distribution subsidiary, and has signed a number of character licenses in that country and Belgium.

Overall, Zetar ticks a lot of the basic boxes of investing for me. I also like the fact that the group managing director holds a decent stake with 11.5% of the shares. It is more than holding its own in a competitive market, and seems to have found a decent niche for steady growth via its creativity and licensing agreements. As the company says: "Innovation is at the heart of everything we do."

Zetar deserves a higher rating and until that happens, I'm happy to hold the shares and enjoy the steady growth.

If you're looking elsewhere in the food sector for decent value in the provision of essentials, I think banana importer Fyffes (LSE: FFY.L  ) looks like a solid investment at 33.5 pence for its 6.5% yield and P/E of 5, though it's one I haven't made as yet. I also like the look of pork provider Cranswick (LSE: CWK.L  ) at 830 pence as a long-term investment with a prospective P/E of 10.1, yield of 3.9% and solidly defensive nature.

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David owns shares in Zetar. He doesn't own shares in any of the other companies mentioned. The Motley Fool has a disclosure policy.

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