Britain’s smaller stocks will ultimately recover and our IHT portfolio is poised to benefit

Investors in smaller companies are entitled to feel thoroughly fed up with their returns. The FTSE Aim All-Share index has fallen by 15pc since the start of the year, against a 2pc decline for the FTSE 100, as nervous investors seek relative safety among larger companies.

Interest rate rises are also encouraging the investment herd to head towards other mainstream assets such as cash and bonds, reducing demand for smaller stocks.

In addition, Britain’s high inflation and weak economic growth vis-à-vis other developed economies are holding back investor sentiment towards smaller London-listed companies, which tend to be relatively exposed to domestic demand.

Questor’s Inheritance Tax Portfolio has not escaped the poor performance of smaller companies more generally since its formation roughly six years ago.

Our portfolio of Aim stocks has fallen by around 6pc, although this is a significantly better performance than that of the FTSE Aim All-Share index, which has slumped by more than 30pc over the same period. Crucially, the prospects for smaller companies are very likely to improve.

An end to the era of high inflation and interest rate rises is in sight and looser monetary policy should stimulate the economy, stock market and sentiment towards Britain’s smaller companies. We therefore expect dramatically improved performance from our IHT portfolio over the coming years.

Some holdings, such as Tristel, have bucked the wider market trend to produce high returns. Shares in the company, a supplier of disinfectant products to hospitals, have risen by 70pc since their addition to our portfolio in December 2018.

The company’s recently released full-year results reported that sales rose by 16pc year-on-year, while adjusted earnings increased by 39pc on a per-share basis. Encouragingly, the gross profit margin moved one percentage point higher to 81pc; higher profitability allowed the dividend to rise by 10pc and the shares now yield 2.5pc.

Overseas sales grew by 17pc and now represent almost two thirds of total revenues. International sales are likely to become increasingly dominant following approval by America’s drugs regulator of the company’s high-level disinfectant for ultrasound probes.

This not only provides access to the key US healthcare market but also opens up growth opportunities in other countries that follow at least to some extent the American regulator’s stance on specific products.

Tristel’s annual results also showed that its financial position remained sound; it has a modest net cash balance. This provides it with the capacity to invest further in its pipeline of new products and to overcome a continued period of weakness for the world economy.

Trading at 39 times earnings, the company’s shares are by no means cheap at a time when many smaller companies are lowly valued.

However, the stock’s growth potential has improved following that favourable decision by the American regulator and the share price multiple of forecast earnings is significantly lower at around 32.

Tristel therefore continues to offer upbeat capital growth prospects. Its solid balance sheet and encouraging financial performance, and the presence of clear catalysts for share price appreciation, earn it a continued place in our IHT portfolio.

Questor says: hold

Ticker: TSTL

Share price at close: 417.5p

Update: FD Technologies

While Tristel’s shares have soared, our holding in FD Technologies has slumped: the software company has fallen by 78pc since it joined our portfolio in June 2018.

Its recently released half-year results reported that revenue declined by 3pc against the same period of the previous year, while underlying earnings per share of 14.2p were replaced by a loss of 4.3p.

Its deteriorating bottom line was due to the disappointing performance of two of its three divisions: its First Derivative consulting services arm and MRP enterprise sales segment posted revenue falls of 1pc and 33pc respectively.

Although its AI-focused KX division produced sales growth of 12pc, it accounts for only 27pc of total revenues. The company’s half-year results also included a downgrade to full-year guidance.

It now expects revenues of £285m-£295m, compared with previous guidance of £315m-£325m. Earnings before interest, tax, depreciation and amortisation (“Ebitda”) are expected to be £24m-£26m, compared with earlier forecasts of £38m-£40m.

While its financial and share price performance has been thoroughly disappointing thus far, FD Technologies is likely to benefit from an improving operating outlook over the coming years. Although it is undoubtedly a risky stock to own, it retains its place in our portfolio. Hold.

Questor says: hold

Ticker: FDP

Share price at close: 973p

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