Smaller Irish public companies will have to show they can deliver earnings growth as well as have a clear acquisition strategy if they are to attract the interest of international investors, says ABN AMRO Stockbrokers in a detailed review of the small capitalisation sector.

The broker warns that the technical position facing the small caps remains negative because of the high level of domestic institutional shareholding and the continuing focus by investors on larger companies.

ABN AMRO has, however, four key "buy" recommendations - Grafton, Green, Jurys and Kingspan - on the basis that these offer strong organic growth prospects, acquisition upside, the critical mass to attract investor attention and the potential to benefit from a recovery in the British economy. The "buy" recommendation on Grafton was given before Grafton bought a 4.9 per cent stake in Heiton, fuelling speculation that Grafton may be lining up a bid for its smaller rival.

The broker warns that Irish companies with a market capitalisation of under €150 million (£118 million) may struggle as investment thresholds have been raised. Companies in this category will either have to deliver clear growth strategies, create critical mass by merging or "release value to seeking trade acquirors", says ABN AMRO.

The broker also believes the most likely acquisition targets are companies with cyclical sector exposure and strategic positions in the Irish market.

It adds that a number of companies have the financial capability to finance share buy-backs and that Adare, Abbey, Clondalkin and Ryan could boost earnings per share by more than 15 per cent while maintaining interest cover above five times by buying back 25 per cent of their shares at a 25 per cent premium to current share prices.