Having initiated coverage when the price was 77p ('Time to motor ahead', 18 Feb 2014) and advised buying ahead of this week’s half year results (‘Contracts boost Nationwide’, 12 September 2014), the company did not disappoint.
Buoyed by acquisitions and the benefits of a slimmer cost base, underlying pre-tax profits surged 86 per cent to £2.5m in the six months to June 2014 on 14 per cent higher revenues of £90m. Adjusted EPS rose even faster from 2.3p to 4.4p, so the company is bang on track to hit analysts’ forecasts for fiscal 2014. Robin Sanders at broker Westhouse predicts a 15 per cent hike in revenues to £180m for the full-year to deliver pre-tax profits of £4.9m, up from £3.1m in 2013. On this basis, the broking house expects EPS of 8.4p and a maintained dividend of 2.9p, implying the shares are priced on a modest 9 times earnings estimates and offer a 3.7 per cent dividend yield.
But that rating is set to fall sharply once you factor the latest acquisition of Gladwins, a leading provider of crash repair services in the East of England and the eleventh largest independent bodyshop chain in the UK. The consideration of £9.5m will be entirely funded by net cash of £3.1m on Nationwide’s balance sheet and borrowing facilities, so will be earnings enhancing in the first full year. This acquisition is in line with the board’s strategy of expanding in selective regions, and benefitting from economies of scale and improved flow of work. The addition of Gladwins is complementary to Nationwide’s existing operations and provides it with a significantly enhanced presence in the Eastern region. It also follows on from two other acquisitions in the past year: Exway Coachworks, a vehicle accident repair business operating in the south west of England, and Howard Basford bodyshop chain in the north west of England, both of which are performing well
In the past few months, Nationwide also announced two major contracts worth a total of £20m in annual revenues from insurers Axa and Allianz Insurance, underpinning the 11 per cent growth in revenues Westhouse predicts next year. On this basis, pre-tax profits are forecast to rise to £5.7m in 2015 to deliver EPS of 10.1p and a 10 per cent higher dividend of 3.2p a share. If achieved, the shares are currently rated on less than 8 times earnings estimates and offer an enticing 4.1 per cent prospective yield.
In my opinion, it is the prospect of sharply rising earnings and a decent yield that is now attracting investor interest. Offering 33 per cent upside to my 105p target price, I rate Nationwide shares a cracking recovery buy on a bid-offer spread of 78p to 79p.
■ 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'
