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OPINION

Bargain shares updates

Bargain shares updates
November 24, 2014
Bargain shares updates
128p

It should hardly come as a surprise that the UK's leading housebuilders have been making hay given the benign economic and sector back drop: record UK employment levels, record low interest rates, and an unemployment rate below 6 per cent for the first time since 2008, have all accentuated a supply: demand imbalance that has led to rising house prices and bumper profits for the housebuilders. And with the major players all sitting on substantial land banks, they are in the fortunate position of being able to moderate land buying activity and focus on building out their land holdings to turn these substantial assets into cash.

For instance, Barratt’s has a land bank equating to 4.7 years supply of owned and contracted land and almost five years supply in its strategic land bank. In total that’s over 135,000 plots, or 9 times the number of homes the group built last fiscal year. It’s a similar story at Taylor Woodrow which has £37bn of potential revenue tied up in its land holdings, or 16 times last year’s group turnover of £2.3bn.

This means that with balance sheets in fine fettle – Barratt’s had net funds of £73m at the end of June, its first cash position for eight years, and Taylor Wimpey expects to end this year with net cash of £100m – shareholders are set to benefit from some bumper cash returns as their strong order books are built out. To put this into perspective, Taylor Wimpey and Barratt’s already have forward orders equating to 25 and 30 per cent, respectively, of their projected 2015 sales. Moreover, with private average selling prices rising too – Taylor Wimpey reports a 19 per cent rise year-on-year in its forward sales selling prices – then this underpins analysts’ earnings expectations. It also supports commitments to return significant amounts of capital back to shareholders from these profits.

 

Happy capital returns

Indeed, Barratt is expected to return £950m of cash through dividends and special cash payments over the next three years. Based on 984m shares in issue, that equates to a total cash return of 96.5p a share. The company’s board can certainly afford to be generous as based on consensus estimates, it is predicted to grow EPS from 31.2p to 42.3p in the fiscal year ending June 2015, rising to 50.2p in 2016 and 54.2p in 2017. In aggregate, that’s 146p a share of earnings which would cover the cash return 1.5 times over and still leave enough cashflow over to replenish the land bank. That cash return equates to 22 per cent of Barratt’s market capitalisation, so not only is the forward dividend yield attractive it’s well covered by a rising earnings stream too. It’s a similar story at Taylor Wimpey which plans to return £250m, or 7.68p a share, in July next year and is targeting an annual capital return of at least £200m for the medium-term.

Another positive for the housebuilders right now is that the City’s expectations for the Bank of England’s first base rate hike has been pushed out in the past few weeks from a rate rise in mid-2015 to the end of next year. That’s not to say the City’s economists will be right in the end, but what it does mean is that home buyers can lock into lower interest rates for longer than many had anticipated six months ago given the pricing in the mortgage market.

Needless to say, I remain a buyer of both Barratt (trading on 1.3 times book value) and Taylor Wimpey (1.7 times book value). Including dividends, the company’s shares have produced total returns of 15 per cent and 12 per cent, respectively, on the opening offer prices in my 2014 Bargain share portfolio.

 

Results worth recording

I noted with interest the half-year results from currency manager Record (REC:36p). Gains from mandate wins in the second half of the previous financial year offset the impact of the reduction in management fee rates offered to Dynamic Hedging clients and the company’s underlying profit margins have been protected through an ongoing focus on cost control. As a result, underlying pre-tax profit in the six-month period edged up to £3.4m on revenues of £10.1m to produce EPS of 1.23p and supported a half year dividend of 0.75p a share. That was better than I had expected when I flagged up the numbers at the start of the month (‘Profit from the end of QE’, 3 November 2014).

I was also interested to note the comments from James Wood-Collins, chief executive of Record, who stated that: "The six-month period has seen a continuation of the return to a more divergent monetary policy environment, and hence potentially a more 'normal' currency market environment including wider interest rate differentials, and stronger trends. As a consequence of these changes, Record is experiencing a level of new business enquiries which is more widely diversified across client geography and product type than for many years, and the group's diversified product suite is well placed to take advantage of any such opportunities."

This was very much the theme I was anticipating to emerge and specifically as the divergence in monetary policy being pursued by the world’s major central banks leads to interest rate differentials that are likely to lead to more currency volatility and demand for Record’s hedging and currency for return strategies.

I remain very positive on the shares as I see the company as a great way of playing the likely interest rate tightening cycle in the US, which in turn will drive further dollar appreciation against the euro, yen and to a lesser extent sterling. Priced on a modest cash adjusted PE ratio of 11, the shares rate a buy at 36p, slightly below my recommended buy in price of 37p.

 

PV shares hit a floor

Shares in solar wafer maker PV Crystalox Solar (PVCS: 16p) have proved to be very volatile this year and at the current price are trading 25 per cent below the level of cash on the company’s balance sheet. By my reckoning, PV Crystalox’s net cash position of €35.4m (£28.2m) at the end of June 2014 has been boosted by a cash payment of €8.7m (£7m) from a firmer customer last month to give pro-forma net funds of £35.2m, or 22p a share.

The reason for the deep share price discount to the company’s cash pile is down to the tough trading conditions in the PV market although spot prices have seen very modest gains from their low point in August when I last updated the investment case (‘Glimmers of light for PV’, 21 August 2014). It’s really not a demand issue here as global installations in the fourth quarter this year are expected to hit record levels and analysts are predicting further growth next year.

The key issue oversupply and anti-competitive activities of Chinese and Taiwanese rivals that culminated in a new round of US anti-dumping duties in July on modules manufactured in these two countries. Wafer prices are still below industry production costs, so part of PV Crystalox’s cash pile will have been eroded by operating losses in the second half of this year, although the strengthening of the US dollar and the weakening of the yen in recent weeks will positively impact the company’s gross margins.

Still, with PV Crystalox’s shares trading 40 per cent below the company’s last reported net asset value of 26p, consisting of mainly plant, equipment and that 22p cash pile, there is a margin of safety built into the current price to compensate for second-half losses. The company’s share price also seems to have found a floor around the 15p level, which most likely reflects a tighter pricing in the solar wafer market. The shares are down on my 19p advised buy-in price, but I still see them as a medium-term recovery buy at 16p.

 

Pledged for recovery

I feel that investors have missed out on an investment opportunity resulting from the changes in credit regulations announced a fortnight ago for payday lenders. Undoubtedly, the new rules will have dealt a death nail to a large number of these credit firms that have been preying on vulnerable cash-strapped consumers unable to access credit at normal rates of interest. But there are opportunities from a tightening of regulation, too, and in particular for pawnbroker H&T (HAT:156p), one of the constituents of my 2014 Bargain share portfolio.

Following the transfer of regulation of Consumer Credit from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA) in April, the FCA has now confirmed that its proposals relating to a cap on the interest rate and charges that apply to 'High Cost Short Term Credit' will become effective from the start of January 2015. The new lending rules provide for: a maximum daily charge of 0.8 per cent on the amount borrowed; a maximum of £15 fees on default; and a cap on the total costs incurred over the life of the loan of 100 per cent of the amount borrowed.

The cap will cover debt collection, debt administration and other ancillary charges; and charges for credit broking for a firm in the same group or where the broker shares revenue with the lender. However, having waded through the 154-page FCA document it is clear to me that that the new rules provide a specific exemption for pawnbroking and certain other credit products. The FCA had looked at changing the definition of ‘short-term’ to cover ‘longer term’ products and considered whether to include other forms of high-cost credit which are excluded from the current definition (home collected credit, pawn broking, log-book loans and overdraft charges). However, the document clearly states that the FCA have decided not to extend the definition.

This is very good news for H&T because it means that a number of alternative lenders will be unable to comply with the tighter regulation and will close their doors to business at the end of the year. In turn this is likely to provide H&T with new customers attracted by the pricing of its loan products which are amongst the lowest in the sector. I see this as a major positive for H&T and one that investors have yet to cotton onto. In time, I am sure they will and I would be using the attractive valuation – the shares trade on a 40 per cent discount to book value, on little over 10 times 2015 earnings estimates and offer a 3 per cent plus dividend yield – as a buying opportunity. At 156p, the shares are trading inline with my advised buy in price in February’s portfolio.

■ 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'