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OPINION

Exploit value opportunity

Exploit value opportunity
July 21, 2014
Exploit value opportunity
IC TIP: Buy at 69p

The detailed sell-side research issued by Gotham three months ago included allegations about the integrity and quality of Quindell's income stream. It led to a share price collapse that resulted in almost £1bn being wiped off the company's market value in a single day. Quindell has since rejected the assertions raised in Gotham City's note and considers the content to be "highly defamatory, deliberately misrepresentative and entirely rejects the conclusions that are made". Quindell’s lawyers have since initiated legal action against those responsible for this "co-ordinated shorting attack", but the damage has been done in the minds of some investors. In fact, a further £700m has been wiped off the company’s market value and Quindell’s equity is now being valued on little over three times forward earnings estimates. It hasn’t helped sentiment, either, that another one of Gotham's targets, Spain's Gowex, has admitted to falsifying accounts.

An indirect consequence has been to dampen expectations that Quindell, a highly acquisitive outsourcing company, will launch a bid for Nationwide Accident Repair. Quindell purchased 10.93m shares in the company, representing 25.3 per cent of its issued share capital, in a series of share deals in late September. The last of the purchases put a value on Nationwide Accident Repairs' shares at over 85p.

At the time Quindell's board stated that it intended raising its stake to 29.9 per cent in due course, although it "has no intention of making an offer for the company". But, given its acquisition-led business model, it is only reasonable to view Quindell’s strategic stake as a precursor to a takeover of Nationwide Accident Repair Services once the latter’s earnings recovery has taken hold. With a market value of only £30m, the company would be easy pickings for Quindell, which has a market value of £827m.

But, irrespective of whether this ever happens, what is clear is the sell-off in shares of Nationwide Accident Repairs has gone too far. In fact, the share price has fallen by over a fifth since Gotham City produced its scathing note on Quindell even though it has no bearing whatsoever on the business on Nationwide Accident Repair.

In fact, Nationwide Accident Repair's operational recovery in its business is ongoing and at last month’s annual meeting the board noted that trading in the current financial year, which started on 1 January 2014, has been "encouraging and in line with management expectations". The board added that following the successful integration of last summer’s acquisition of Exway Coachworks, a vehicle accident repair business operating in the south west of England, the Howard Basford bodyshop chain acquired in February is also performing as anticipated.

It certainly makes sense for Nationwide Accident Repair to bulk up its operation by making selective acquisitions in order to target the fleet and retail accident repair market. Revenue generated from the fleet market increased by almost a quarter to £31.2m last year, but with a market share of less than 4 per cent there is scope to increase exposure to a market worth £900m in the UK alone. There is also potential to make gains in the £500m retail funded market where the company has a market share of less than 1 per cent.

The company has been winning new business, too. In fact, only a few weeks ago it announced a major contract with AXA UK for additional work worth an estimated £10m a year.

Funded for growth

Moreover, even after factoring in a £1.7m cash outflow for the Exway acquisition, and a £2.6m payment to its pension fund, Nationwide Accident Repair has a cash-rich balance sheet. Last year, net funds increased by £1.2m to £6.3m, or the equivalent of 15p a share. In addition, the company has a bank facility of £20m, including a £15m three-year revolving credit facility to make further strategic acquisitions.

And the company didn’t even need to tap that facility to make the acquisition of Howard Basford, a leading provider of crash repair services in the north west of England and the eighth largest independent bodyshop chain in the UK. The initial cash consideration was £4.1m in cash and there is an earn-out of up to £1.75m. Howard Basford made an operating profit of £500,000 on revenues of £16m in 2013, so the deal is earnings enhancing.

Indeed, having factored in a £600,000 upgrade after the Howard Basford acquisition, analyst Kevin Fogarty at broker Westhouse Securities expects current year adjusted pre-tax profits to surge by almost 60 per cent from £3.1m in 2013 to £4.9m to generate underlying EPS of 8.4p, up from 5.1p reported last year. In other words, with the shares trading on a bid-offer spread of 66p to 69p, the prospective PE ratio is only eight for 2014, a very modest valuation for a recovery play and one doing smart strategic deals in what is a consolidating industry.

There is a dividend support, too, as the board declared a full-year payout of 2.9p, although this was down on the prior year. This sensibly reflects a more conservative payout ratio as the board implements a policy to make bolt-on earnings-enhancing acquisitions. Westhouse predict the dividend will rise to 3.8p a share this year, covered more than twice over by post-tax earnings. On that basis, a forward yield of 5.5 per cent is clearly attractive.

True, the company has a deficit of £18.7m on pension obligations of £92m, with £52.8m of the pension fund invested in equities - split a 70:30 between and overseas and the UK - and £16.5m in corporate bonds. A further £4m is held in other investments. Currently, the company makes a £2.6m annual contribution to its pension fund, which is already factored into the aforementioned analysts' pre-tax profits estimates.

Target price

Admittedly, the uncertainty caused by the bear raid on Quindell has dampened investor enthusiasm that Nationwide Accident Repairs will be taken out by the FTSE 250 company any time soon. But with the shares trading on a forward PE ratio of eight, offering a forward dividend yield of 5.5 per cent, and the company having no financial concerns whatsoever, then the current rating is clearly a buying opportunity in my opinion.

So, if you followed my initial advice to buy Nationwide Accident Repairs' shares at 77p ('Time to motor ahead', 18 Feb 2014), and at 84p when I last updated the investment case three months ago ('Buying into recovery', 17 Apr 2014), then I have no hesitation at all in maintaining my buy recommendation. My target price remains 105p, or the equivalent of 12 times 2014 prospective earnings. Ahead of the half-year results in September, the shares continue to rate a recovery income buy.

■ 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'