I am sure many of you will have been having a good read of the company’s half year results today, since the share price has risen almost 50 per cent since early February when I reiterated the investment case when the price was 115p (‘Bargain shares update’, 8 February 2013). I subsequently upgraded my target price on the shares from 155p to 180p ahead of today's interim results (‘An e-commerce winner’, 2 October 2013). At the time the price was 151p, but within weeks the shares had surged to within a whisker of that 180p target price. Therefore, I now have to decide whether there is further upside potential even after factoring in these bumper paper gains, or whether all the good news is now in the price.
Bumper first half results
As expected Bloomsbury delivered a bumper trading performance in the six months to end August. Pre-tax profits were up a third to £2.8m, on revenues around 13 per cent higher at £49.2m, driven mainly by the company’s academic and professional publishing businesses. The unit now accounts for 43 per cent of profits, but only 28 per cent of revenues so is higher margin. Importantly, the contribution for this segment is likely to rise even further.
That's because post the half year end Bloomsbury used part of its £10m cash pile to make a smart looking acquisition of Hart Publishing, the Oxford-based legal publisher. The initial cash consideration of £6.4m was paid from Bloomsbury's own cash reserves last month and a further earn-out of up to £500,000 will be payable if certain revenue and title number targets are achieved for the period ending 31 March 2014. The acquisition is expected to generate cost savings and be immediately earnings enhancing, contributing £1.4m of revenue to Bloomsbury in the financial year ending 28 February 2014. Hart generated £2.6m of revenue and £500,000 of profit before tax in the year ended 31 March 2013.
Importantly, the acquisition is consistent with Bloomsbury's strategy to increase its proportion of academic and professional revenues to half of total sales within five years. That’s a sensible strategy to follow since academic and professional revenues are more predictable, and have lower related costs of sale with higher margins, and are much less reliant on retail bookshop sales. Around half of Hart's revenue is generated outside the UK, thereby diversifying Bloomsbury's revenue stream and offering upside from the global book market. It will also enable the company to further develop e-book publishing and expand its Professional digital suite of services. That's also important because the other major take for me was the continued strong performance of Bloomsbury's e-books.
e-books driving growth
In the UK, Bloomsbury’s sales from this segment increased by an eye-catching 58 per cent in the six month period. The momentum looks well underpinned too as the trend to use tablets and e-readers can only gain traction as the cost of tablets and e-readers falls and widens the net of potential consumers. In fact, according to the latest Neilsen Bookscan, almost a fifth of UK adults have now bought e-books, up from only 12 per cent in June last year. This uptake in e-books is also being helped by a raft of bestsellers published by Bloomsbury.
Major new novels such as And the Mountains Echoed by Khaled Hosseini, Flora by Gail Godwin, TransAtlantic by Colum McCann, MaddAddam by Margaret Atwood and The Bone Season by Samantha Shannon have all made bestseller charts around the world with critical acclaim. The proportion of e-book sales compared to print sales for these titles has been as high as 50 per cent in some markets.
Overall, Bloomsbury’s e-book sales rose 14 per cent year-on-year to £5.1m, and now account for over 10 per cent of revenues. The adult book division also generated strong growth with operating profit surging 77 per cent to £1.1m on revenues up 16 per cent to £23.2m.
Importantly, there has been decent growth from print too buoyed by best-selling titles including: Paul Hollywood's Bread and How to Bake, which led the continuing strong sales of cookery titles, Wisden Cricketers' Almanack and in the US, The Cooked Seed by Anchee Min. The second half pipeline of releases looks equally strong and includes The Signature of All Things by Elizabeth Gilbert, MasterChef: the Finalists, Paul Hollywood's Pies and Puds and Tom Kerridge's Proper Pub Food.
Fundamental case supportive
The fundamental case certainly supports the current valuation as based on bottom-of-the-range and conservative full-year EPS estimate of 12.5p from brokerage Peel Hunt, the shares are still only trading on 13.6 times earnings estimates. Analysts at Northland Capital are more bullish, pencilling in EPS of 13.4p for the 12 months to end February 2014, rising to 14p the year after. On that basis, the forward multiples are only 12.8 times earnings estimates, falling to 12.3 times February 2015 forecasts.
There is also a decent yield as Bloomsbury paid out a dividend of 5.5p last financial year and this is expected to rise to 5.7p this year. On that basis, the shares offer a safe looking 3.3 per cent yield more than twice covered by net earnings. A solid and cash rich balance sheet is supportive too. Bloomsbury had a net cash pile of £10m at the end of August, worth 13.5p a share, and even though it has paid out £6.4m since then on the Hart acquisition, I would not expect much change in the year-end cash position as stocks are turned into cash in the all important pre-Christmas trading period. Strip out the cash pile, and the forward PE ratio is only 12, dropping to 11.4 for the financial year to February 2015.
Technical set-up
Admittedly, the 14-day relative-strength index (RSI) became overbought at the recent high of 177p so it needs to unwind slightly before the next upwards move in Bloomsbury share price can commence. That said, the company’s share price can move sideways to enable this to happen and with the 20-day moving average close at hand around 163p, I would expect any pull back in the share price to be very modest. I would look to accumulate stock now.
Moreover, the odds still favour an assault on the next major resistance level: the 180p highs dating back to the autumn of 2008. If this can be overcome, as seems a very realistic possibility, there is very little resistance until the shares move into a range between 207p and 217p dating back to early 2007.
So, with a break-out above the 180p resistance a distinct possibility, and the valuation not at all stretched, I have no hesitation in reiterating my previous buy advice. My new price target is 210p which if achieved would value the shares on a sensible forward PE ratio of 14 net of cash for the financial year to February 2015. It would also provide us with a further 23 per cent share price upside. The timeframe for this trade is four months.
■ Finally, as a pre-Christmas offer exclusive to Investors Chronicle readers, all telephone orders placed with YPDBooks for my new book Stock Picking for Profit will receive complimentary postage and packaging. This offer is strictly for a limited period, is subject to stock availability and applies to only telephone orders placed until Friday, 15 November 2013.
Please note the book is only being sold through YPDBooks and no other source. Full details of the content of the book is available online at www.ypdbooks.com. If you would like to take advantage of this offer, please contact YPDBooks on 01904 431 213 and quote reference 'ICOFFER'. The book is priced at £14.99. Internet orders will continue to incur the normal postage and packaging cost of £2.75. I have also published an article outlining the content of the book: 'Secrets to successful stock picking'.
MORE FROM SIMON THOMPSON ONLINE....
I have published six other articles this week on the following nine companies:
■ Trifast ('A timely bolt on purchase', 21 Oct 2013)
■ Noble Investments ('Bargain shares update', 21 Oct 2013)
■ Stanley Gibbons ('Bargain shares update', 21 Oct 2013)
■ Cairn Energy ('Bargain shares update', 21 Oct 2013)
■ Eros ('Time for some price action', 22 Oct 2013)
■ PV Crystalox Solar ('Time for some price action', 22 Oct 2013)
■ BP Marsh & Partners ('BP Marsh cashed up to invest', 23 Oct 2013)
■ Moss Bros ('New highs beckon', 23 Oct 2013)
■ Molins ('Smoking away', 24 Oct 2013)
