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Taking stock of being unloved.

Byline: John Revill Business Staff

Several Midland firms are shunned by the stock market despite outperforming their larger rivals, according to a new league table. Despite excellent growth, 'hidden gems' such as construction firm Morgan Sindall and Enterprise Inns are not recognised by an appropriate stock market value.

Headlam, South Staffordshire Group and iSoft are also among the regional entries on the RSM Robson Rhodes 2004 Unloved Companies Index.

Mid-cap companies, the smaller quoted businesses listed on the UK stock market, have outperformed the market by three times but receive less than half the valuation for their impressive cash-flow generation by the City, according to the report.

Companies are warned that it could all impact on their ability to raise funds. It could also make them vulnerable to hostile takeovers because their market value did not reflect their true worth.

'Unloved' companies have been identified as those whose free cash flow growth record (three years historic, two years forward) is greater than the market average but whose price to cash flow per share relative to the market is less than the average.

In effect, a company whose cash flow both grows and is expected to grow at a faster rate than the wider market but whose valuation is lower than the wider market, is defined as 'unloved'.

The most 'unloved' company with Midland connections was construction firm Morgan Sindall.

It is expected to increase its annual cash flow by 35 per cent between 2000 and 2004, against a national average of around ten per cent.

But the company's ratio between cash flow and share price is expected to be only 6.7, compared to a national average of ten. Bob Hale, managing partner of RSM Robson Rhodes' Midlands office, said many companies were 'unloved' because they operated in unfashionable sectors which investors have historically shied away from, like leisure and construction.

Many of their FTSE 100 rivals had a higher rating because they had more analysts reporting on them and many institutions would only invest in them.

This effect was compounded by firms not communicating their strengths or their future strategies.

Mr Hale said: 'These companies are doing very well and are very profitable, but they sometimes need to blow their own trumpet a bit more.

'This, our fourth annual survey, continues to explain the frustrations felt by many directors of smaller companies; namely that their excellent cash flow growth is not recognised by the markets in their valuation.

'That 94 per cent of those in the Unloved Companies Index are FTSE 250 or smaller is clear evidence of this.

'These 'hidden gems' continue to lose out from the lesser following by analysts with only seven on average versus 17 for the FTSE 100 companies.

'To achieve the necessary financing, boards need to effectively convey their strategic vision otherwise the continued low valuation will hamper acquisition or finance raising activities.'
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Title Annotation:Business
Publication:The Birmingham Post (England)
Date:Mar 10, 2004
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