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Exploiting valuation anomalies

Exploiting valuation anomalies
November 18, 2014
Exploiting valuation anomalies
111p

Insurance outsourcing group Quindell acquired a 25.3 per cent stake in Nationwide in September last year, paying up to 85p a share for part of the holding, and some investors had speculated that ultimately the highly acquisitive company would launch a bid. That scenario is unlikely to play out now given the controversy surrounding Quindell, the latest news of which emerged this week when founder and chairman Rob Terry resigned from his position after it transpired that he knew that joint broker Canaccord Genuity was resigning before he announced the multi-million pound sale of shares in his company. Finance director Laurence Moorse, who also sold shares in a controversial sale and repurchase agreement with finance firm Equities First Holdings, will step down after the 2015 annual meeting.

However, the ongoing troubles at Quindell have no bearing at all on the strong operational recovery at Nationwide. And even if Quindell wanted to offload its stake, I am sure there would be buyers around at the current price. In fact, absolutely nothing has changed since I updated the investment case a couple of months ago when the price was 79p ('Contracts boost Nationwide', 12 Sep 2014).

Following a bumper first half, Robin Sanders at corporate broker Westhouse still predicts Nationwide will deliver a 15 per cent hike in revenues to £180m for the full-year and deliver pre-tax profits of £4.9m, up from £3.1m in 2013. On this basis, the brokerage expects EPS of 8.4p and a maintained dividend of 2.9p. And after factoring the upside from acquisitions and some major multi-million pound contract wins with insurers Axa and Allianz Insurance, Westhouse still predicts Nationwide will turn in pre-tax profits of £5.7m, EPS of 10.1p and a raised dividend of 3.2p next year. On that basis, the shares are priced on a modest 7 times earnings estimates and offer a 4.5 per cent dividend yield.

Offering 50 per cent upside to my 105p target price, I continue to rate Nationwide's heavily oversold shares a strong recovery buy at 70p. Moreover, with the 14-day relative strength indicator reading 20, a strong technical bounce could be in the offing at the very least. It would also be fully supported by sound fundamentals. Buy.

A sound bolt on purchase

Trifast (TRI: 111p), a global manufacturer and distributor of industrial fastenings, has delivered half-year results way ahead of analysts estimates prompting a raft of earnings upgrades.

It's a company I have been following closely, having included the shares in my 2013 Bargain shares portfolio when the price was little over 50p. Offering a further 26 per cent upside to my 140p upgraded target price ('Try fast for gains', 18 August 2014), I have no reason to change that positive stance.

The key take for me from the results release was the 7 per cent organic sales growth Trifast reported in the six months to end September 2014. Interestingly, every geographic region delivered underlying revenue growth and the company has seen no evidence at all of a softening in demand from its key automotive, electronic/telecom, domestic appliance and distributor markets. Investment in sales engineers is clearly paying off as the number of multi-national accounts is growing (accounting for 40 per cent of total revenue). It’s also clear that the acquisition six months ago of VIC, an Italian manufacturer and distributor of fastening systems predominantly to the white goods industry, is delivering. Combine the benefits from that acquisition with an ongoing tight focus on costs, and the natural operational leverage in the businesses, and a 13 per cent rise in revenue produced a 45 per cent hike in adjusted pre-tax profit to a record £6.6m in the six-month period.

Importantly, the company is not generating this profit growth by over gearing its balance sheet: net debt of £17.5m only represents a quarter of shareholders funds and operating profit covers the interest charge more than 10 times over. Moreover, despite facing currency headwinds, which clipped £360,000 off profits, an adjusted operating margin of 9.55 per cent – up 210 basis points – has potential for further improvement. That spells good news for the company's return on capital employed – up from 15.2 per cent to 17.3 per cent – and the board’s focus on maximising shareholder value.

Importantly, the earnings upgrade story is still not fully priced in. Post the results announcement, analysts upgraded their March 2015 fiscal year-end EPS forecasts by around 7 per cent to 8p, up from 6p in the prior year. N+1 Singer now predict a near 40 per cent surge in the dividend per share to 1.9p, having factored in a 50 per cent uplift to the half-year payout. On this basis, Trifast shares trade on 13.5 times’ prospective earnings and offer a 1.8 per cent forward dividend yield. That seems a fair price to buy into this growth story given there is ample scope to generate cross selling opportunities, and earnings accretive ones, too, from the acquisition of VIC. Buy.

Profits ahoy

Shares in Aberdeen-based small-cap energy services company SeaEnergy (SEA: 30p) have yet to react to a bullish trading update earlier this month. That seems unwarranted given the company is on track to turn profitable this year.

This largely reflects progress at SeaEnergy's R2S's core service which offers a Visual Asset Management (VAM) technology that involves taking 360 degree spherical photographs of locations and then building up three-dimensional (3D) models. VAM enables oil rig operators to keep a visual record of all key parts of an oil rig, monitor its condition and changes to the fabric, with a view to carrying out maintenance. The technology is proving very popular: turnover hit a record level in the third quarter and the business boasts a strong order book for the rest of the year and for the first half of 2015. I understand that at "least one additional international major operator will adopt R2S by the first quarter of next year".

SeaEnergy's ship management business continues to make waves, too. The business now has three vessels under management on behalf of its joint venture partner, Singapore-based shipping company, Go Offshore (Asia), and is tendering for work on a large heavy lift and pipe-lay ship, operational in the Middle East. SeaEnergy is also in advanced stages of a tender process for the provision of service operations vessels for 'walk-to-work' inspection and maintenance support in the offshore wind market.

So with SeaEnergy about to move into profit it seems anomalous to value the whole enterprise at just £16.6m especially as the company has a 21.4 per cent stake, worth £3m, in Aim-traded North Celtic Sea-focused oil and gas explorer Lansdowne Oil & Gas (LOGP: 11.25p). To recap, Lansdowne has a 20 per cent holding in the Barryroe licence located in 100 metre deep water in the North Celtic Sea Basin and which has 346m barrels of oil equivalent of recoverable 2C resources. Aim-traded Providence Resources (PVR: 100p) is the operator of Barryroe, with an 80 per cent interest in the field, and has been negotiating a farm-out deal on behalf of its partners.

The farm-out is now in its final stages and any positive news flow can only be supportive of the value tied up in SeaEnergy’s legacy stake in Lansdowne Oil & Gas. SeaEnergy's board has earmarked this holding for disposal. It will also look to realise value from the company's UK royalty interest in Block 21/8a (located adjacent to the Forties field in the Central North Sea which contains the Scolty discovery).

So by my reckoning if you adjust for SeaEnergy's net funds of £675,000, the value of the stake in Lansdowne Oil and the royalty interest in Block 21/8a, then the company's current market value is valuing the R2S subsidiary at a bargain basement 6.5 times its annualised operating profits for 2014. Moreover, we are getting both SeaEnergy's marine and consulting divisions in the price for free.

Needless to say, having first recommended buying SeaEnergy’s shares at 29p ('Making waves', 20 February 2014), and last updated the investment at 37.5p ('Get on board for a profitable passage', 15 September 2014), I continue to rate them a value buy at 30p. My target price remains 60p.

Please note that a number of the companies on my watchlist have issued trading updates or financial results recently including constituents of my 2014 Bargain shares portfolio: Barratt Developments (BDEV), Taylor Wimpey (TW.), Record (REC), and Bloomsbury Publishing (BMY). Other companies reporting include GLI Finance (GLIF) and Communisis (CMS). Time permitting I will endeavour to update my view on all these companies.

■ 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'