In turn, this is creating the potential to build watchlists of shares where the fundamental case for investing is sound, but where the market fails to price in the positive investment case. Yesterday, I spotted no fewer than three such value opportunities.
Amino has the ammunition
In the market fall-out, investors have failed to spot this week’s earnings beat from Aim-traded Amino Technologies (AMO: 82p), a company I have been following for some time. They have also missed the important news that the Cambridge-based set-top box designer of digital entertainment systems for IPTV, home multimedia and products that deliver content over the open internet such as video on demand, is looking to take advantage of its depressed share price by using a cash pile worth £19.7m to buy back its shares.
It would make sense because that low yielding cash pile equates to 36p a share, or 44 per cent of the current market price. Moreover, following a 10 per cent earnings upgrade this week, analyst Andrew Darley at broking house finnCap now expects Amino to report EPS of 7.4p for the 12 months to end November 2014, up from 6.3p in 2013. In other words, with the share price inline with my original buy advice (‘Set up for a buying opportunity’, 10 June 2013), a share buy-back programme would be significantly earnings enhancing.
There is a decent dividend too as the board are committed to raising the payout by 15 per cent to 4p a share. Analyst Pia Tapley at N+1 Singer is pencilling in a dividend of 4.4p next year, implying a prospective yield of 5.4 per cent. Furthermore, by buying back shares in the market the company could easily raise that payout by even more. That’s because its net profits would be divided across fewer shares in issue, so lifting EPS and offering the board scope to lift the dividend while still maintaining the payout ratio. It would be a win-win situation.
So, although the shares have retreated since I last updated the investment case (‘Amino has the ammunition’, 11 June 2014), I feel that on cash adjusted PE ratio of 6, and underpinned by a chunky dividend yield, they are still worth buying ahead of January’s results release and potentially another upbeat pre-close trading update next month.
Plotting a profit
Amino is not the only announcement that investors have overlooked. Aim-traded brownfield land developer and housebuilder Inland (INL: 47p) has revealed that the Judicial Review of the Ministry of Defence’s decision to sell the Wilton Park site in Beaconsfield has been withdrawn. The site has allocated development plans for 300 new homes from South Buckinghamshire Council and is in a very affluent part of the country. Inland has already agreed heads of terms with Wilton Park Development Limited for development of the site based on an 80 per cent profit share.
The company can now complete formalities with partners and make progress with the local council to secure planning permission. Analyst Duncan Hall at broking house finnCap notes that Wilton Park will prove “a high value, low rise development and although following the same financing structure as the Drayton Garden Village development in West London, it will enjoy significantly higher average prices.” This is clearly good news for Inland’s development pipeline and I have no hesitation repeating my positive stance and my 60p target price. Inland’s share price is little changed since I updated my view at the time of the full-year results (‘Break-out looms for small cap winner’, 29 September 2014).
A peg for success
Around the same time I also advised buying the Aim-traded shares of Tristel (TSTL: 75p), a maker of infection prevention, contamination control and hygiene products, ahead of this week’s results (‘Targeting a profit surge’, 2 October 2014). The company didn’t disappoint with full-year pre-tax profits surging from less than £500,000 to over £1.8m, the payout quadrupling to 1.6p a share and, with the benefit of robust cash flow generation, net funds rose fivefold to £2.6m, or the equivalent of 6.5p a share.
No fewer than 2.2m instrumentation decontamination procedures were carried out by hospitals and clinics using Tristel’s Wipes product in the 12 month period. That was 30 per cent higher than in the previous financial year and reflects growth both domestically and overseas. In fact, I understand that Tristel’s high margin consumables patent protected product is now the most widely used decontamination method in ear, nose and throat, cardiology and ultrasound departments of UK hospitals. Human healthcare accounted for 85 per cent of Tristel’s revenues of £13.5m last year, of which a third was international business.
The company has clearly gained significant traction in the past year, hence five profit upgrades from brokers in this time. And there is every reason to expect the double digit revenue growth to continue as analysts at finnCap and Equity Development predict by pencilling in turnover of £15m in the financial year to June 2015. Factor in the operational gearing of the company and those higher revenues should propel pre-tax profits up 30 per cent to £2.3m and lift EPS from 3.25p to 4.3p. In turn, shareholders can expect a further sharp boost to the dividend. finnCap and Equity Development are pencilling in a payout of 2p and 2.2p, respectively, implying a prospective dividend yield as high as 3 per cent. It also looks a sound forecast in light of the fact Tristel has a high conversion of operating profit into cashflow. That’s why analysts expect its net funds to swoon again to £3.7m by June 2015, or the equivalent of 9p a share.
Offering the rare mix of double digit earnings growth, high rates of cash conversion, strong dividend growth and a low PEG ratio, I feel a cash adjusted forward PE ratio of 16 is hardly exacting.
■ 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 stockpicking'
