The insiders have certainly been availing themselves of the buying opportunity. A couple of months ago, before the company went into a closed period, directors Maurice Helfgott purchased 270,000 shares at 57.5p each to take his holding to 350,000 shares, while Zoe Morgan purchased over 19,000 shares at 56.5p and her husband a further 8,790 shares at the same price. A few days later, another director, Bryan Portman, purchased 20,000 shares at 57.5p each. If trends in the business when the company last reported are anything to go by, it is well worth following the lead of the insiders and buying ahead of the forthcoming financial results.
Upbeat trading news
That's because before the company went into a closed period, it issued a trading statement for the 18 weeks to 1 June 2013 which revealed a 2 per cent rise in like-for-like retail sales, including e-commerce, and an improvement in underlying cash gross profit. That represented a very decent recovery in trading after a sluggish performance in the first seven weeks of the period.
In fact, analyst John Stevenson at broker Peel Hunt estimates that underlying sales have risen by 4.3 per cent in the last 11 weeks of that trading period "after cold, unseasonable weather until mid-April proved a drag on performance". Mr Stevenson also points out that "coming up against weakening comparatives from last year's sporting events, we expect retail sales to remain robust over the summer". That prediction looks sound. For example, following the launch of a new retail website in January, e-commerce sales have ramped up sharply and were 138 per cent ahead year on year between January and late May. Internet sales now account for 3.3 per cent of Moss Bros's total sales and are likely to become an increasingly important sales channel given that trends for both traffic flow and conversion rates are improving strongly. In addition, a mobile-enabled website was successfully launched three months ago and a transactional website for the company's suit-hire business is planned for launch next month. Both developments augur well for future digital sales. Moss Bros is also using the web to maximise the margin it earns on clearance stock.
Boosting returns from high-street estate
Importantly, Moss Bros is making headway with its store refits. A further four stores have been refurbished this year as part of an ongoing programme, bringing the total number of stores trading on the new format to 24, comprising 18 refitted stores and six new stores out of a total portfolio of 136 sites. According to the company, the new format stores are "trading ahead of non-refitted stores and are on track to achieve their anticipated payback targets".
It's also worth pointing out that around half of Moss Bros's store leases expire over the next three years, so the company is in a very strong position to play hard-ball with landlords over the terms of renewal, or to take advantage of opportunities elsewhere to relocate to new space with better footfall. In the financial year to the end of January 2013, management negotiated an average reduction on the rent bill of around 17 per cent on stores with expired leases and demanded break clauses at five or even two years on these new leases.
Conservative profit forecasts
So, with the combination of accelerating growth emerging from new sales channels, a lower cost base, upside from store refits and soft comparatives to beat, then the business case is well underpinned. Mr Stevenson points out that Moss Bros has actually been trading ahead of the broker's forecast assumptions and notes that retail sales were growing at above 5 per cent at the end of the 18-week trading period to 1 June. This offer a fair degree of reassurance that Moss Bros is well on target to hit the broker's earnings estimates.
For the financial year to January 2014, Peel Hunt expects sales to rise from £104.6m to £106.6m, pre-tax profits to increase from £2.7m to £3.1m and adjusted EPS to rise from 1.9p to 2.3p. Having raised the dividend from 0.4p to 0.9p last year, Peel Hunt expects the board to raise the payout again to 1.1p a share in the current year. The company can certainly afford to as net cash is estimated to be around £24.4m, or 24p a share, or the equivalent of 37 per cent of the current share price.
So, with Moss Bros's shares trading on a bid-offer spread of 62.5p to 64p, valuing the company at £64m, this means that net of the low-yielding cash pile, the shares are trading on a prospective PE ratio of 17 and offer a forward yield of 1.7 per cent. However, with margins improving and further cost reductions expected as store leases expire and are renewed on far more favourable terms, Peel Hunt expects pre-tax profits to ramp ahead to £3.9m on revenues of £110m in the 12 months to January 2015. This largely reflects an improvement in the operating margin from 2.7 per cent to 3.3 per cent, which looks realistic to me. On this basis, EPS rises to 2.9p and the PE ratio net of cash drops to only 14. Mr Stevenson also sees scope for the dividend to be raised again to 1.3p a share, implying a yield of 2 per cent.
Positive share price action
Interestingly, the retracement in the company's share price has been more or less identical to other phases in the up-move over the past couple of years. Namely, the price peaks, falls back to the previous resistance level, tests it and then starts a new up-move to take out the previous peak. This process can take several months. However, it's my view that the test phase was completed after Moss Bros's share price found strong support in the range between 53p and 57p (the previous peak was 51p in April 2012) and is now making headway back to January’s high of 72p.
So, ahead of what are expected to be upbeat half-year results on Thursday 26 September, I rate Moss Bros's shares a decent trading buy at 64p and have a three-month target price of 80p. If achieved, this offers us 25 per cent potential upside.
Cash in on a Russian property play
It was difficult not to be impressed by the half-year results from Russian warehouse developer Raven Russia (RUS: 73.5p). Underlying earnings after tax almost doubled in the six-month period; operating cash inflow in the period shot up 50 per cent to $74.4m (£48m); and fully diluted book value per share rose by 6¢ to 131¢. For good measure, the board announced another tender offer to buy back one in 37 shares at 75p, equivalent to a 2p a share dividend, a third higher than at the same stage last year. The rolling 12-month total distribution is 4.25p, which represents a yield of 5.8 per cent, and analysts at Equity Development expect a total payout of 5p for the year to boost the yield to 6.8 per cent.
There's plenty of scope for the distribution to rise to 5.5p next year as analysts predict, too. That's because 97 per cent of Raven Russia's total of 1.4m square metres of its portfolio of Grade 'A' warehouses in Moscow, St Petersburg, Rostov-on-Don and Novosibirsk is now let out. In total, this generates an annualised net operating income (NOI) of $191m, including pre-lets. And with the warehouse and logistics market still very strong, tenant demand in Raven Russia's portfolio is still robust.
Despite this positive backdrop, Raven Russia's share price trades at a 13 per cent discount to diluted net asset value. That seems anomalous to me considering rental income is rising, vacancy rates are narrowing, and there is obvious scope for further valuation uplifts. Offering an attractive prospective yield of 6.8 per cent, the shares are a decent medium-term buy and my fair value estimate of 90p is not unreasonable.
Randall & Quilter's attractive yield
Investors seem to have misunderstood the half-year figures from specialist non-life insurance investor Randall & Quilter (RQIH: 140p). It's a complex business to get to grips with, but with the company returning 8.4p a share this year in total distributions to shareholders, a running yield of 6 per cent makes it worthwhile.
My key take from the figures was that the restructuring of the US insurance services division is paying dividends. A lower costs base combined with credit write-backs meant the prior half-year's operating loss of £0.2m turned into a profit of £3.7m. In turn, the insurance services unit as a whole more than doubled profits to £6.26m. That was just as well because profits on the insurance investments operation slid from £6.5m to £0.8m mainly due to a decline in the investment return earned. That fell from 2.7 per cent to 1.2 per cent and cut investment income from £5.6m to £2.3m. Still, investors have overreacted because read through the lengthy results statement and the board clearly state that the £1m loss in June on the portfolio was "fully recouped in July as markets recovered". Moreover, the annualised investment yield was 2.75 per cent at the period end, which offers obvious scope for better second-half returns from the portfolio.
Investors also seem to have overlooked the fact that profits would have been higher but for accounting rules, which stipulate that a £1.5m gain on Alma Insurance (acquired in December) had to be booked as a prior year adjustment instead of a first-half profit. It is also clear that having raised £24m in a placing in the period, of which a third has been invested so far, the company is well placed to take advantage of a healthy acquisition pipeline. As these deals are done this should positive for newsflow in the second half, not to mention future earnings of the company.
Moreover, even without factoring in any more acquisitions the full-year payout of 8.4p a share is still well covered by likely EPS of 14.2p this year, according to analyst Nick Johnson at broker Numis Securities. Expect a 3.4p a share interim payout in November. So, having first advised buying back in February in my 2013 Bargain Share Portfolio, I still remain positive on the shares, which are well supported by that 6 per cent yield.
A noble investment
As markets were taking fright over a likely conflict in the Middle East, investors completely missed the positive news that certain Middle Eastern investors had settled up in full with Noble Investments (NBL: 238p). The international rare coin, banknote, medal and stamp dealer and auction house has now recovered all of the £2.2m commission due, together with all associated costs, relating to the outstanding fees earned by Noble from the Prospero Auction of rare Greek coin in New York last year.
That payment is worth 14p a share alone (excluding costs), which is significant, representing about 6 per cent of Noble's share price. It also means that Noble's cash pile could be as high as 40p a share at the end of its August financial year - or the equivalent of a sixth of its share price. Strip that cash out and by my reckoning the shares are trading on a modest 11.3 times EPS estimates of 17.5p forecast in the 12 months to August 2013 by analysts Eric Burns at broker WH Ireland. It also supports a further rise in the dividend to 5.5p, up from 5.2p last year.
Moreover, investors also seem to have overlooked the fact that the full benefits from The Fine Art Auction Group acquisition should be seen in the current financial year to August 2014, when Mr Burns expects Noble to report pre-tax profits of £4.1m and EPS of 20.3p. On that basis, the forward PE ratio net of cash drops below 10. I continue to see upside in the shares on a bid-offer spread of 235p to 238p and my price target of 250p is likely to prove conservative.
Please note that my next column will appear tomorrow at 12pm. In response to requests from dozens of readers, I have published an article outlining the content of my new book, Stock Picking for Profit: 'Secrets to successful stock picking'
