ALMOST three years ago to the day I penned a piece for the Financial Mail about direct retailer Verimark, where I argued the share could offer a rare yield opportunity for investors willing to risk shopping outside the mainstream retail stocks. Thankfully I won’t need to resort to semantics to wiggle out of this prediction, even though the distributions were not quite as sumptuous as I expected. Then again, who could have predicted the rand’s precipitous drop?

Two dividends were declared (including the financial year to end February 2016), making a grand total 8.9c/share over this three-year period. Perhaps readers who bought shares at 80c won’t be too pleased — I mean, who is, when faced with a capital loss of over 40%? But those who scooped shares at under 50c won’t be too unhappy with the yield.

Still, it is with some trepidation that I approach Verimark again at the time of the release of its year to end February results. At face value the results were not fantastic, with earnings lower than last year’s. But the company was trading in the red in the interim period to end August 2015, so there was a dogged fight-back in the second half to register earnings of 8c/share. That’s a stout effort during a lean trading period when a competitor even went belly-up. The second half, it must be said, is the stronger trading period, and this time included some bumper Christmas month sales growth from Verimark’s “store-in-store” concept inside some of the bigger retail chains. Still, the profit performance puts Verimark, at the time of writing, on a trailing earnings multiple of around five.

The dismissive rating is understandable. Unlike other retailers, Verimark has been inconsistent in its earnings track record. What’s more, the share is illiquid, and scrip too tightly held to warrant much participation by institutional investors. The biggest drag on enthusiasm for Verimark is, of course, the weak rand. The business imports almost all of its array of weird and wonderful gadgets, and it is near impossible (especially now) to pass on price increases to customers.

Verimark, I think, has done rather well extracting efficiencies (especially via its new distribution centre), but there is only so much management can do to keep a lid on costs and curtail marketing expenditure.

There is now a concerted effort to delve into selected offshore markets. I doubt Verimark will rush this effort, so it may be some years before hard currency flows strongly into the revenue line. What is encouraging is that Verimark’s cash generated from operations improved by a chunky R22m to R31m.

That’s equivalent to around 29c/share. If the rand holds steady, or even firms, and Verimark can ease through a price increase, then we might see a better interim period to end August. If Christmas sales are sprightly then Verimark should at least post earnings of around 16c/share for the new financial year. With a balance sheet that is not stretched dangerously, dare we envisage a dividend payout of 8c/share? On the ruling share price that would be a very handsome yield.

Unrealistic? Perhaps. But it’s interesting to note that the dividends declared by Verimark since 2010 tally up to 44c, which is the share price at the time of writing. For investors able to endure the best and worst of times, Verimark could prove to be a real X-factor in a small-cap portfolio.

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