Having initiated coverage on the company a couple of months ago when the share price was 75.5p (‘Switch onto the Stadium of light’, 30 July 2014), and reiterated that advice three weeks ago when the company released its half year results (‘Recovery to growth’, 10 September 2014), the post results rally sent the price to a high of 110p, above my 105p target price. In the circumstances, it’s hardly surprising that some investors were tempted to book a 45 per cent profit.
That said, the subsequent pull-back looks to me like another buying opportunity in the maker of power products, intelligent interface & displays and wireless devices to the industrial, marine, aviation, automotive and security industries. The retracement took the share price back to the 50-day moving average, and as a result has completely unwound the previous overbought position. It’s also significant that the retracement ended at the 87p level too. That was the price point from which the shares rallied to that 110p high, indicating unfullfilled investor demand on the sidelines. For good measure, there was a bullish upmove on the daily candlestick chart yesterday.
A strong investment case
It’s understandable that investors are attracted to the investment case. Having reorganised and streamlined the business to cut overheads, and put in place a platform for growth, Stadium’s underlying pre-tax profits more than doubled to £900,000 in the first half. Factor in the contribution from debt funded acquisitions, better margins on the back of costs savings, and a robust order book, and analysts at brokerage N+1 Singer believe the company is capable of delivering a 20 per cent hike in second half profits to £1.8m. On this basis, expect full-year adjusted EPS up a third to 6.9p. In turn, this will easily support a 75 per cent hike in the payout to 2.1p a share.
It’s only reasonable to expect strong earnings growth in 2015 too. That’s because Stadium made the earnings enhancing acquisition of United Wireless, a specialist in wireless connectivity between devices, primarily cellular networks, after the June half-year end. Factoring in the profits from United Wireless, and N+1 Singer believe that the company can grow pre-tax profits by half again to £4.2m in 2015 to drive EPS up to 10.5p. Charles Stanley Stockbrokers are even more bullish, pencilling in 2015 pre-tax profits of £4.7m and EPS of 11.5p. But using the lower numbers, at 100p, the shares are still only priced on 9.5 times forward earnings and offer an attractive 2.7 per cent dividend yield assuming a payout of 2.7p in 2015.
Paying less than 10 times prospective earnings for a company expected to deliver 50 per cent earnings growth next year looks attractive to me. It also looks attractive to boss Charlie Peppiatt who bought 30,000 shares at 100p each post results. He was not alone as finance director Joanne Estell added 5,500 shares to her holding at the same price.
Needless to say, I continue to rate Stadium shares a buy on a bid-offer spread of 97p to 100p and have raised my target price to 120p, or the equivalent of 10.5 times the top-end fiscal 2015 EPS estimate of 11.5p of analyst William Game at Charles Stanley Stockbrokers. That target could yet prove conservative.
■ Simon Thompson's 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'
