Insiders buy at KBC
Directors at Aim-traded KBC Advanced Technologies (KBC: 90p), a consultancy and software provider to the global hydrocarbon processing industry, have been taking advantage of a sharp share price derating since the summer.
In fact, in the past four weeks, investment manager Kestrel Partners, a company of which KBC non-executive Ollie Scott is a partner and holds a beneficial interest, has made six sizeable share purchases on behalf of discretionary clients. In total, these transactions amount to 330,000 shares at prices ranging between 88p and 106p. Kestrel now has an interest in 12.73 per cent of KBC’s equity.
And the company’s board have been taking advantage of the market sell-off too, having bought back 106,000 shares at an average price of 92.5p on Tuesday last week, and bought a further 108,000 shares at an average of just below 90p each on Thursday.
These share purchases make sense too because those buy in prices equate to less than 10 times historic earnings per share and will be earnings per share accretive. So although KBC’s shares have drifted since the company released results last month (‘Contract wins boost KBC’, 25 September 2014), fundamentally the business is sound. Interestingly, having fallen from a summer high of 142p, KBC shares appear to be finding support at a previous resistance level around 85p. They are massively oversold too and priced on a bid-offer spread of 88p to 90p I maintain my buy recommendation and my 165p target price.
Far Eastern value
KBC is not the only company where both the insiders and company have been taking advantage of the market sell-off. The same is true of London-listed property developer and closed-end investment fund Macau Property Opportunities (MPO: 232p).
Shares in Macau Property have held steady since the company released a bumper set of financial results last month (‘Play on Macau property’, 23 September 2014). Since then the company has purchased 500,000 shares, or 0.63 per cent of its issued share capital, at prices between 230p and 235p. In addition, Sniper Investments has purchased 250,000 shares at similar prices. Tom Ashworth and Martin Tacon, directors of the company's fund manager, Sniper Capital, both have a beneficial interest in Sniper Investments. I also note that Lazard Asset Management have increased their stake in Macau Property from 19 to 20 per cent.
With the share price trading 23 per cent below spot net asset value (NAV), these share purchases are accretive to NAV per share and I expect the board to add to its repurchases in the coming weeks to take advantage of the value on offer. It certainly has the firepower to do so as the company had a cash of $46m (£29m) on its balance sheet at the end of June, and a very modest loan-to-value ratio of 24 per cent at the end of September. The fact that the shares have held up so well in the recent market rout send a strong signal about the significant value on offer underpinning the investment case. I maintain my buy recommendation and 290p target price.
Netplay’s losing streak
Directors have been have been digging deep too at Aim-traded online gaming company Netplay TV (NPT: 8.25p). Non-executive Andrew Lapping purchased 250,000 shares in the company at 8p each on Friday 10 October to take his beneficial interest to 3.14m shares, or 1.06 per cent of the issued share capital. Four weeks ago Mr Lapping purchased 200,000 shares at 10.8625p and Northern Edge, a company he is associated with, matched that purchase. He was not alone as finance director Akshay Kumar bought 83,333 shares at 11p at the same time.
It therefore came as a shock to see the company issue a profit warning on Friday, 17 October, and one that sent the price tumbling 20 per cent. But this has not stopped the directors from buying. In fact, Mr Lapping purchased a further 250,000 shares at 7.4p each last Friday to take his beneficial interest to 3.39m shares, or 1.14 per cent of the shares in issue.
The cause of the profit shortfall has been lower than expected levels of new customer acquisitions in the third quarter. In fact, due to the high level of marketing spend to recruit new players, revenues were pretty much flat year-on-year in the three month period. Analyst Johnathan Barrett at brokerage N+1 Singer notes that this mainly “reflects fierce level of marketing by rivals” ahead of the introduction of a Point of Consumption (POC) tax at the end of this year. As a result Netplay has “reined in the level of marketing and has adopted a more conservative strategy in the short-term, ahead of the POC, to focus on driving returns from existing customers via better retention rates and higher spend levels.”
Although it is clearly disappointing, it seems the right decision as there is no point chasing uneconomic business for the sake of it. However, the earnings downgrades are significant as Mr Barrett at N+1 Singer has slashed his 2014 and 2015 revenue estimates by 11 per cent and 25 per cent, respectively, and now expects Netplay’s turnover to fall from £28.5m in 2013 to £27.3m this year, declining again to £26.7m in 2015. On this basis, instead of producing flat profits over the next couple of years as was the previous guidance when I last updated my view at the end of last month (‘Betting on a recovery’, 16 September 2014), Mr Barrett now predicts that Netplay’s pre-tax profits will fall a third to £3.3m in 2014, dropping again to £2.7m in 2015. This is a major downgrade as it means adjusted EPS of 1.6p in 2013 declines to 1.1p this year, and to only 0.9p in 2015.
One positive is that having raised the interim payout by 22 per cent, analysts still predict a 20 per cent hike to 0.6p a share in the full-year dividend. N+1 Singer are also maintaining their dividend forecasts at 0.6p a share for 2015 and 2016. They have reason too because even if earnings fall to 0.9p a share in 2015, then the payout is still covered 1.5 times over. A cash pile of £13.4m, equating to 4.5p a share, is also comforting. Netplay’s board have committed to reviewing the use of the company’s growing cash pile after the December year-end, and in the absence of acquisitions, expect some of the cash to be returned to shareholders. I also believe that the directors will have realised that the company is a now a likely bid target with its equity so lowly rated.
In fact, after the share price sell-off on Friday, Netplay now has a market capitalisation of £24.5m, or only £11.2m more than its current cash pile. On a cash adjusted basis, the shares are trading on just 4 times downgraded 2015 EPS estimates and offer a historic dividend yield of 6 per cent and a prospective yield of 7.2 per cent. Moreover, with the directors buying there is every reason for them to maintain the payout too, not to mention consider a possible distribution of the bumper cash pile back to shareholders. N+1 Singer are pencilling in a year-end cash pile of £15m, or 5p a share.
So, although I have badly underestimated the impact of the uneconomic marketing activity by rivals who are desperate to secure new business before the forthcoming tax changes, I am not bailing out of Netplay. I would recommend you continue to hold the shares and await news from the board early next year on how the company plans to use its cash. Hold.
Please note that I have written three specific articles on financial markets in the past week, all of which are available on my home page:
Equities: Eurozone growth scare spooks investors (13 October 2014)
Monetary policy: Normalisation is coming so plan ahead (17 October 2014)
Bond markets: Lessons to learn from bond market flash crash (17 October 2014)
■ 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'
