That's one reason why Noble Investments (NBL), the international rare coin, banknote, medal and stamp dealer and auction house operator, proved an attractive proposition to Stanley Gibbons (SGI: 323p), the most famous name in stamps and a company that has been around for 156 years. Noble was one of my 2013 Bargain shares when the advised buy in price was 199p and Stanley Gibbons made it into my 2012 portfolio at 178p a share. Shareholders in Noble received 192.5p a share in cash and 0.2118 Stanley Gibbons shares as consideration for their equity, so if you followed the recommendations to buy Noble in February last year you have a free run on Stanley Gibbons' shares. You have also done well on Stanley Gibbons, too.
It's well worth holding onto those consideration shares as last last year I advised buying shares in Stanley Gibbons at 303p ('A stamp of authority', 16 Sep 2013), and again at 317p ('Bargain shares update', 21 Oct 2013), to play the upside from this niche area of the alternative investment market. My last update was in January this year when the price was 380p since when the shares have drifted back on profit taking. However, in my view this represents yet another great buying opportunity as on a bid-offer spread of 320p to 323p, I can easily see 25 per cent upside to my fair value target price of 400p.
Indeed, a trading update from the company at the end of last month alongside financial results for the 15 months to end March 2014 only reaffirms my positive view. The benefits of the acquisition are clearly being realised through cross-selling opportunities between Stanley Gibbons and Baldwin's (Noble's highly respected brand in coins, established in 1872). Moreover, the strength of the combined operation can be illustrated by a number of high-quality consignments won for the company's auction business. In fact, the February public auction was one of the strongest in recent years.
There are cost benefits from the tie-up, too, as the company is on course to deliver integration annual cost savings of £900,000 in the first full-year, rising to £1.8m in the second-year post acquisition. For instance, the company's Fraser's autograph business has been integrated with Bloomsbury Auctions and relocated from Stanley Gibbons head office on The Strand, London, to Bloomsbury's Maddox Street premises in the West End. Baldwin's team will move from their freehold premises in Adelphi Terrace, just behind The Strand, and the property will be sold before March next year. I understand that the property will be marketed for around £4m, or £1m above the carrying value in the accounts.
Fundamental drivers
Integration benefits aside, the fundamental drivers of the business remain strong. Stanley Gibbons may have been around since 1865 – just 16 years after the first stamp was issued, the Penny Black, in May 1840 – and held the Royal Warrant for services to philately since 1914, but the company is not stuck in some bygone age. In fact, it has been embracing new age technology and the beta version of the new Stanley Gibbons branded online marketplace is currently undergoing rigorous testing ahead of launch later this year. This is a great opportunity to exploit since internet sales accounted for less than 10 per cent of total revenues last year.
Importantly, stamps, rare coins and collectables continue to appeal to investors as an alternative asset class. It's hardly surprising given the long-term returns they have been making over the years. For instance, a selection of the top, traded 250 Great Britain stamps has produced a compound annual growth rate of almost 12 per cent over the last 12 years based on the performance of the GB250 Index, listed on Bloomberg Professional (STGIGB25 Index). The GB30 Rarities Index (STGIGB30) has generated a compound annual growth rate in excess of 10 per cent over the past 40 years.
In particular, Chinese rare stamps are in high demand, and are likely to remain so given the significant wealth creation in the country. The company's China Market Study tracks the prices of 200 rare investment-grade Chinese stamps and shows that prices have increased at a compound annual rate of 10.7 per cent between 1989 and May 2014. Stanley Gibbon's highly profitable Hong Kong office is ideally placed to exploit this opportunity. The office contributed total sales of £3.3m and profits of £700,000 in 2013 primarily by trading with local residents.
However, the company is investing in new premises to showcase a selection of its high quality collectables and deliver a more professional presentation of its brand. There are also plans to attract business to the Hong Kong office from Mainland China, representing a much larger potential market. The relatively new office in Singapore represents an important element of the move into the Far Eastern market place, too. The unit should turn profitable in the current financial year. The international growth opportunities are not restricted to the Asian market alone as Stanley Gibbons is investigating potential opportunities in Geneva, New York and Sydney.
Furthermore, it's not just stamps that have been doing well as Stanley Gibbons Rare Coin Index of 200 British coins has produced an average compound return of 13.3 per cent over the past decade based on published auction realisations. Like rare stamps, the value of rare British coins continues to rise on a steady upward trend with no volatility, which highlights the attraction of the investment class on a risk-adjusted basis.
Sound finances
Stanley Gibbons' finances are in rude health, too. Stocks at the end of March are in the books for £42m, to account for exactly half of net assets of £84m. However, retail analyst Charles Hall at brokerage Peel Hunt believes that "the value of the stock is over £100m at current retail prices". In other words, there is at least £58m of hidden value on the balance sheet. That's a significant sum of money for a company with a market capitalisation of only £150m. It also means that if you mark stock to market value the company is only being valued on a 10 per cent premium to book value. That premium could be even less since property is conservatively valued too as I have noted. In other words, there is substantial asset backing including a cash rich balance sheet with net funds of £8.7m.
There is a growth story too since the combination of the aforementioned cost savings from the Noble acquisition, combined with decent underlying growth in the alternative investment market for coins, stamps and collectables is expected to deliver pre-tax profits from the combined entity of around £11.2m this financial year, rising to £13.3m in next fiscal year according to Mr Hall. On that basis, expect current year EPS of 20.3p, rising to 23.9p the year after. This means the prospective PE ratio is 12.5 net of cash for next year, hardly an exacting valuation for a company predicted to grow EPS by over 20 per cent. The underlying earnings multiple is actually even lower since Mr Hall calculates that the internet investment is depressing profits by around 15 per cent. There is a decent prospective yield of 2.3 per cent based on a payout of 7.5p a share, up from 7p last financial year.
Needless to say, I continue to rate Stanley Gibbons' shares a buy at 323p and still believe my fair value target price of 400p is both reasonable and achievable.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
