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OPINION

Making a very fair point

Making a very fair point
August 18, 2014
Making a very fair point
IC TIP: Buy at 132p

The company has completed the acquisition of Simpson Millar LLP Solicitors, a consumer legal services business; renegotiated an enlarged £20m bank facility with AIB; issued a positive trading update at the time of the annual meeting in early June; and made the complimentary acquisition of Fosters & Partners, a Bristol-based law practice specialising in all aspects of family law, from relationship breakdowns, finance and property to disputes about children and cases of domestic abuse or injury. Ahead of interim results on Thursday, 11 September 2014, the company has also issued a trading update for the half year to end June 2014. Shareholders can have no complaints about not being kept in the loop with this company.

The newsflow doesn’t end there either as Fairpoint has just announced the acquisition of Bournemouth-based Debt Line, a debt solutions provider specialising in the provision of debt management plans (DMPs), and one with in excess of 9,000 plans under its management. This represents the third DMP acquisition completed by Fairpoint this year, in line with the board’s strategy to take advantage of consolidation opportunities in this niche sub-sector. As a result of these three DMP acquisitions, Fairpoint now has 29,000 cases under management, up from 15,688 cases at the start of the year.

 

Sensibly priced acquisitions

The latest acquisition looks sensibly priced too. In the financial year ended 31 March 2014, Debt Line generated revenues of £5.1m and profit before tax of £900,000 after adjusting for non-recurring items. Debt Line is being acquired on a cash free/debt free basis, so I have stripped out interest payable on existing vendor loan notes to arrive at the above profit figures. Fairpoint is paying £3m in cash on completion and expects to incur exceptional transactional costs of £200,000 and restructuring costs of up to £1.1m associated with this acquisition in the second half of 2014. In other words, for a total outlay of £4.3m, all of which can be relatively cheaply funded through the AIB debt facility, Fairpoint has acquired a business that generated £0.9m of profit last year.

Importantly, the company has the firepower to pull off further deals as net debt was only £7.1m on 30 June 2014, up from a net cash position of £2.8m at the start of the year, but well within the AIB bank facility. The increase in borrowings reflects acquisition activity, with £7.5m of cash invested in Simpson Millar (in addition to the £2m settled in Fairpoint shares), and a further £4m cash spent on 9,000 DMP cases across two other back books acquired in January.

It’s worth flagging up that Fairpoint will benefit from a full six-month contribution from Simpson Millar in the second half of this year – the acquisition only completed in mid-June – and the deal will be immediately earnings enhancing on an adjusted basis in its first year. I understand that decent progress is being made on integrating the acquisition in areas including sales, marketing and support services and the “outlook is positive”.

I also understand that last month’s acquisition of Foster and Partners will be earnings enhancing in its first full year too. The business strengthens Simpson Millar’s presence in the south west of England and the cash consideration of upto £400,000 is payable on a deferred basis over two years.

Strategically, these deals make a lot of sense as it offers Fairpoint an entry point into legal services to generate cross-selling opportunities with the rest of its operations. For instance, Fairpoint’s core individual voluntary arrangements (IVA) activities incorporates over 19,000 fee paying IVAs under management, including 4,500 new IVAs written in 2013. There is scope for further cross selling on the claims management services business too. In fact, this division has already been benefiting from PPI claims generated from both the company's core IVA activities and DMP portfolios.

 

Lowly rated

Factoring in some moderately useful cross-selling opportunities in 2015, and more so in 2016, analysts at research house Equity Development predict Fairpoint’s pre-tax profits will rise from £8m last year to £9.1m in 2014 to boost EPS by 10 per cent to 16.5p. The respective forecasts for 2015 are pre-tax profits of £10m and EPS of 18p. It’s worth noting though that these estimates were made before the acquisition of Foster and Partners and Debt Line, so it’s only reasonable to expect the risk to earnings to be on the upside. House broker Shore Capital estimates adjusted pre-tax profits of £9.3m this year, increasing to £10.1m in 2015, inline with Equity Development’s forecasts.

On this basis, analysts from both firms expect Fairpoint’s full-year dividend to rise by 7 per cent to 6.4p this year and by a further 6 per cent to 6.8p in 2015. This means the prospective yields are very healthy at 4.8 per cent and 5.1 per cent, respectively. It also means that dividend cover is robust at over 2.5 times. A current year forward PE ratio of 8, falling to 7 for 2015, is hardly exacting for a company nailed on to grow EPS by 10 per cent both this year and next and one still with a lowly geared balance sheet. Pro-forma net debt of £11m post this month’s Debt Line acquisition equates to around 25 per cent of shareholders funds by my calculations, although the reported figures in the forthcoming half year results will show balance sheet gearing nearer to 16 per cent as the Debt Line and latest DMP acquisitions were announced post period end.

Ahead of the interim results on Thursday, 11 September, brokerage Shore Capital expects the company to report adjusted pre-tax profits of £3.4m in the traditionally seasonally quieter first half, up from £3.2m in the first half of 2013, before accounting for £700,000 of exceptional charges associated with the acquisition of Simpson Millar and £500,000 associated with the AIB debt re-financing. However, the real profit growth will come in the second half when all these acquisitions start to contribute. In fact, guidance is for second half adjusted pre-tax profits to rise from £4.8m in 2013 to £6.7m, and it is this earnings momentum that makes the shares an attractive proposition.

It also makes the 20 per cent pull back in the share price from the six-year high of 164p in late April look like an ideal buying opportunity to me. So, offering in excess of 40 per cent upside to my target price of 190p, I have no hesitation in reiterating my buy advice ahead of the company’s forthcoming results with the shares trading on a bid-offer spread of 130p to 132p.

Please note that I first recommended buying Fairpoint shares at 98.25p in my 2013 Bargain share portfolio since when the company has paid out total dividends of 9.55p a share.

■ 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'