Join our community of smart investors
OPINION

Jumping the gun

Jumping the gun
January 14, 2013
Jumping the gun

This is exactly the situation I find myself in with marketing services provider Communisis (CMS: 44.5p), which continues to win new contracts. In early December, the company announced a five-year contract with BT for the production of all the telecom group's billing and associated customer communications. This work will use Communisis's high-speed colour digital technology to make the billing formats clearer, more personal and more dynamic.

And only last week, Communisis was awarded a nine-year contract by Nationwide Building Society for the development and production of its customer communications, including transactional, marketing and regulatory mailings. This follows a strategic review by Nationwide to determine the best way to deliver its outbound customer communications. Importantly, the new business win significantly extends the company's relationship to include all of the transactional documentation that is currently produced in-house by Nationwide. All of this activity will now be transferred to Communisis's centre of excellence in Liverpool, again using high-speed colour digital technology.

True, these contracts will have no impact on 2012 estimates and, although analyst Jonathan Barrett at broking house N+1 Singer has left his 2013 estimates unchanged, clearly the extra revenue is highly supportive of those forecasts. For 2012, the broker currently expects pre-tax profits to rise from £9m to £10.5m, based on a 10 per cent rise in revenues to £229m. On that basis, adjusted EPS rises from 4.75p to 5.7p, which offers scope for the board to increase the dividend from 1.5p to 1.6p share. It's worth noting that if Communisis was unable to hit these forecasts then its management team has had ample opportunity to say so already. In my view, these numbers look very realistic and should underpin what should be a very positive update from the company when it releases a pre-close trading statement at the end of this month ahead of its full-year results in late February or early March. It should also bring into focus the fact that the shares, at 44p, are now only trading on a PE ratio of 7.7 for 2012 and yield around 3.6 per cent based on Mr Barrett's estimates. That's hardly an exacting valuation.

Moreover, given the new business won in the past month, I now feel that the risk to earnings estimates for 2013 is firmly on the upside. Currently, N+1 Singer expects revenues to rise to £235m and pre-tax profits to increase to £11.2m this year, which would produce EPS of 6.1p. On that basis, a further rise in the company's dividend to 1.8p a share, as the broker predicts, is hardly unrealistic, especially as earnings per share would cover that payout more than three times over.

It's worth noting, too, that Communisis - which is now reaping the benefits of a lower and more efficient cost base following a major restructuring effort in 2011-12 - is well into bargain basement territory as its shareholders' equity of £128m is only being valued at £60m. This means that the shares, at 44p, are being priced on a huge 53 per cent discount to net asset value of 93p. Now that would be justified to some extent if there were financial concerns. But, clearly, this is not the case as net borrowings and finance leases total around £27.5m, which only equates to 21 per cent of shareholders' funds of £128m. This is well within the company's revolving credit facility of £45m, which runs until August 2014. Communisis also has a £5m overdraft facility that is renewable annually. Moreover, the board would not have increased the half-year payout by 10 per cent to 0.55p a share last summer if there were any pressing financial concerns.

It's equally important to note that the share price has momentum. In fact, having first advised buying shares in Communisis at 28.5p ('Small cap trading buy', 13 Feb 2012), I reiterated that advice when they were at 40p ('Communisis shares to fly', 19 Oct 2012) and at 36p ('Happy Capital returns', 17 Dec 2012), the shares have now risen to 44.5p. That's significant from a technical perspective as the share price has now taken out the high of 41p hit in February last year and, from my lens, there is absolutely no technical resistance at all until the price hits 55p. This level acted as a major support in both August 2006 and April 2007, before giving way in the autumn of 2008 when markets fell out of bed following the collapse of Lehman Brothers. I would expect some significant resistance if the price rallies that far.

But that's something to concern us at a later date, because if the price does get as high as 55p in the current upleg, which looks a realistic possibility, this would provide us with another 25 per cent share price upside. The immediate catalyst to send the price higher will undoubtedly be the trading update later this month ahead of the company's full-year results announcement at the end of February or in early March. Priced on a tight bid-offer spread of 44p to 44.5p, I rate Communisis's shares a trading buy on seven times earnings estimates for 2013 and offering a prospective yield of 4.1 per cent based on a dividend of 1.8p. I have a two-month target price of 55p which, if hit, would give the company a more realistic forward earnings multiple of nine and mean the shares would be priced on a prospective yield of 3.3 per cent. Strong trading buy.

A chic performance

High-street retailer Moss Bros (MOSB - 69.5p) has turned yet another very chic performance in the 24 weeks to 12 January 2013 and looks well attired to deliver a sharp rise in profits in the next couple of years. In the latest trading period, like-for-like sales rose 2.7 per cent and underlying cash gross profit was up almost 10 per cent on the comparative period a year earlier. Moreover, careful management of the level of discounting over Christmas and ongoing tight control of costs means that profits for the 2012/13 financial year will now exceed market expectations.

As a result, analysts at broking house Peel Hunt have upgraded their full-year pre-tax profit estimate for the 12 months to 31 January 2013 by an eye-watering 47 per cent to £2.5m, giving EPS of 1.9p. And with gross margins better than expected they have upgraded their numbers for the financial year to January 2014 by around 8 per cent and now expect profits of £3.1m and adjusted EPS of 2.3p. This is based on revenues rising from £105m to £109.7m which could prove conservative considering management intend refurbishing a further 25 units this year and the business will also benefit from new online initiatives: its new transactional retail website has just launched and the new Moss Bros hire site is expected to launch this quarter. These are exciting developments because it will enable Moss Bros to tap into its huge database of customers in a smarter way, which should boost cross-selling opportunities, generate incremental sales and offer customers a 'click and collect' service on the hire side.

Store refits are clearly helping as 24 of the 132 stores will have been spruced up in the 12 months to end January. On average the refurbished units see a sales uplift of around 8 per cent. The plan is to refit 90 stores at a cost of £11m in the next four to five years. Interestingly, around 45 per cent of the estate is facing lease expiries in the next three years, which is playing into the company's hands given the weak retail environment. In fact, of the stores facing expiry this year the average reduction negotiated by Moss Bros on the rent bill has been around 17 per cent and that's after management has stipulated break clauses at five or even two years on new leases. And if landlords don't want to play ball, management can play hard ball, too, and simply relocate stores. In turn, this offers scope for further cost reductions in the current year which would fall straight down into profits.

True, this progress has not been lost on investors as shares in Moss Bros have soared 75 per cent to 69.5p since I first recommended buying at 39.5p (Dressed for success, 20 February 2012), having reiterated the advice three months ago when they were trading at 48.5p (Small cap wonders, 1 October 2012). But strip out a healthy cash pile estimated to be £24.6m at the end of January 2013, worth 25p a share, from the company's £69.5m market value and the business is being valued on a miserly 4.7 times broker Peel Hunt's current-year cash profit estimate of £9.5m. In my view, that gives ample scope for the re-rating to continue and, ahead of the full-year results 22 March, I am upgrading my target price from 60p to 80p to provide us with a further 15 per cent of potential share price upside. Trading buy.

Finally, I will be producing an online exclusive column on Tuesday 15 January which will be available on my home page at www.investorschronicle.co.uk/comment/simon-thompson