This subject is relevant to me right now because shares in one of my long-standing buy recommendations, marketing services company Communisis (CMS: 63p) came within a whisker of hitting my upgraded fair value target price of 70p on three occasions last month ahead of half-year results on Thursday 1 August. And although analysts upgraded their 2014 and 2015 earnings estimates post those results, I still feel that 70p is a full valuation for the shares.
That's because based on full-year EPS estimates of 4.5p, Communisis's shares were priced at 15.5 times calendar 2013 forecasts at that recent high. True, analyst Andrew Blain at broking house Cenkos Securities expects EPS to rise to 5.4p in 2014 and 6.8p in 2015 as the benefits of contract wins and a change in the business mix to higher-margin contracts comes through. I am comfortable with these estimates and, on a medium-term basis, the shares have potential to re-rate further as investors are attracted to the potential 50 per cent earnings growth forecast over the period. Pending an official upgrade, analyst Johnathan Barrett at broker N+1 Singer has very similar forecasts for 2014 and 2015.
However, right now I feel the shares are correctly priced on around 12 times next year's earnings estimates and yielding around 3 per cent. Furthermore, clearly some investors are thinking the same as the shares sold off by around 10 per cent post results despite earnings upgrades of 4 per cent for 2014 and over 9 per cent for 2015 from N+1 Singer. In other words, the good news is in the price.
Handsome rewards
Still, we have been handsomely rewarded over the past 18 months after I initiated coverage when Communisis's share price was 28.5p ('Small-cap trading buy', 13 Feb 2012). I subsequently reiterated that advice when the price was 40p ('Communisis shares to fly', 19 Oct 2012) and at 36p ('Happy Capital returns', 17 Dec 2012). In fact, I was so convinced that full-year results would not disappoint in March that I advised buying again twice in January ('Jumping the gun', 14 Jan 2013 and 'Bumper trading gains', 23 Jan 2013). And when Communisis raised £20m through a placing and open offer the following month ('A fundraising well worth backing', 18 Feb 2013), I had no hesitation advising that you take up your allocations of new shares at 40p. At the recent high of 69.5p, you will have made a 75 per cent return on the open offer shares in little over five months. I also reiterated my buy advice ahead of the aforementioned half-year results when the price was 61.5p and targeted fair value at 70p ('Repeat buying opportunities', 11 July 2013). As I have stated, that target price was to all extent and purposes hit last month.
So, although medium-term holders may wish to stay on board, I have decided to bank profits and will look for a more attractive entry point in the coming months to play what still remains an attractive earnings growth story.
A Noble Investment
I read with interest yesterday's trading update from Noble Investments (NBL: 210p). Shares in the international rare coin, banknote, medal and stamp dealer and auction house have yet to enjoy the rating they fully deserve, mainly because the company is off the radar of most investors. The share price has been relatively weak, too, since the company reported half-year results in May. This prompted the board to formally announce yesterday that they knew of no reason for the price decline.
In fact, Noble's board went one step further and confirmed that the business has been enjoying "a healthy flow of consignments of collectibles for auction during the remainder of 2013 and into 2014". Moreover, significant progress has been made integrating the Dreweatts and Bloomsbury Auctions businesses with Noble's other auction activities following the acquisition of The Fine Art Auction Group. A new e-commerce-ready website will be launched in the coming weeks.
It's also worth noting that following the settlement agreement reached with a Qatari collector, in the form of a court approved Tomlin Order, Noble's directors expect full recovery of the £2.2m commission due, together with all associated costs. This sum is expected to be paid before the announcement of the company's financial results for the 12 months to the end of August 2013. The outstanding commission relates to the outstanding fees earned by Noble from the Prospero Auction of rare Greek coin in New York when the well-known Qatari collector failed to settle up having bought $20m of the $25m (£15.6m) of coins sold.
Earnings boost from acquisitions
Investors also seem to have overlooked the fact that the full benefits from The Fine Art Auction Group acquisition should be seen in the financial year to August 2014, when analyst Eric Burns at broker WH Ireland expects Noble to report pre-tax profits of £4.1m and EPS of 20.3p. That would represent 16 per cent growth on the 17.5p a share forecast in the 12 months to August 2013 and supports a further rise in the dividend to 5.5p. In May's half-year results, Noble's board lifted the payout by 11 per cent so the dividend is certainly going in the right direction, having been lifted by a fifth to 5.2p a share last year.
So, with the acquisition taking Noble into the wider collectables market to add to its expertise in coins and stamps, and the shares rated on a modest 10 times current year earnings estimates net of cash pile worth 25p a share, the valuation is hardly exacting. And if Noble grows earnings as expected in 2013-14, that earnings multiple drops sharply to nine times net of cash. There is also hidden value in the company.
Hidden value in the accounts
That's because Noble's last set of accounts reveal that the London headquarters are in the books for £1.13m, whereas the market value of the property is nearer £3m. Inventories of coins acquired as part of the takeover of AH Baldwin seven years ago are being undervalued, too. Factor in annual price appreciation of 10 per cent since the acquisition and, if these stocks are marked to market value, this adds a further £1.8m to the company's book value. That's important because if you value inventories and property assets at market value, then Noble's net asset value rises to well over £23m, the equivalent of 145p a share.
In other words, at the current price the shares are only being rated on 1.4 times book value, hardly an exacting valuation for a business whose earnings are well underpinned by investors' increasing demand for alternative investments in a low growth, low interest rate environment. In fact, Noble calculates there are now around 30m stamp enthusiasts worldwide and over 10m rare coin collectors. It's a highly profitable business to be operating in, too, as I have pointed out.
So, ahead of a pre-close trading update next month, I have no hesitation at all in reiterating my buy advice ('Bargain shares for 2013', 8 Feb 2013). In my view, a run up to the 12-month high of 227p and beyond is a very realistic possibility especially as investors are likely to react positively when the outstanding Qatari commission, worth 14p a share alone (excluding costs), is paid. The shares are well worth buying on a bid-offer spread of 207p to 210p. My price target is 250p.
Please note that I published another article yesterday: Secrets to successful stock picking. Last week, I updated the investment case on 18 small-cap shares in nine online articles: Small-cap wonders; Deep value plays; Small-cap trading buys; Undervalued and Unloved; Running profits;Capitalising on capital returns.; Indigovision shares slump on warning; Expecting seismic gains. and Broking for a successful recovery.
