It has certainly paid to be patient because, since I first recommended buying the shares at 18.5p in my 2011 Bargain Shares portfolio, the company has paid out total dividends of 4.36p a share, generating a 94 per cent total return on the shares. The raised interim dividend of 0.35p a share announced in last week's interim results will be paid in mid-January and the shares go ex-dividend on Wednesday 16 December. Brokerage Arden Partners expects a final payout of 0.84p a share, implying a prospective dividend yield of 3.8 per cent.
Moreover, following a 70 per cent earnings upgrade post last week's half-year numbers, mainly reflecting a host of one-off factors and fees earned on sales from the property funds the company manages, the full-year dividend is covered almost four times by EPS estimates of 4.6p for the 12 months to March 2015. It's also covered more than two times by more 'normal' recurring earnings of 2.6p a share expected in fiscal 2016 when Arden predicts the company will report pre-tax profits of £4.6m. So not only is the dividend solid, but the shares are only rated on 12 times fiscal 2016 EPS estimates.
And there is hidden value in the balance sheet, too. That's because analyst Chris Thomas notes that once you adjust the reported net asset value per share of 22.8p to factor in the current market valuations of investments First Property owns, then book value per share is actually around 29p on a marked-to-market basis. That's bang in line with my previous estimate ('A shrewd value and income play', 4 June 2014). It also means that the shares are rated on a modest 10 per cent premium to book value.
That seems a low price to pay considering that the company has made significant progress in replacing the management fee income from its mandate on the USS Fprop Managed Property Fund, which is due to end next August. The £146m fund is estimated to generate annual fees of around £1.6m, according to Arden Partners, but, having completed a number of earnings-enhancing property purchases, First Property has been steadily replacing this income stream. For instance, the company has purchased and refinanced three Romanian properties which are expected to contribute around £1m of annual group pre-tax profits.
And with cash balances of £14m, up from £12m at the end of September 2014, the company is in a strong position to make further debt-funded opportunistic purchases of high-yielding commercial property in Poland and Romania to narrow the profit shortfall. True, the company has gross borrowings of £56.7m, or more than double shareholders' funds of £26.6m, but all of this non-recourse. So I am not concerned with the high gearing levels given that servicing the debt is not an issue and is underpinned by the high recurring income embedded in Arden's pre-tax profit estimate for fiscal 2016.
It goes without saying that on a bid-offer spread of 31.5p to 32p, I continue to rate First Property shares a decent income buy.
Making the right call
Having hit a 14-year high and my target price of 70p in September, Aim-traded shares in Netcall (NET: 60p), a small-cap business offering software to make telephone call-handling more efficient, have succumbed to profit-taking in the past couple of months. However, it would appear that the consolidation period is now complete and, on a bid-offer spread of 58p to 60p, I feel the shares are well worth buying in advance of an attack on that 70p price level once again. Importantly, the investment case is as strong now as it was when I last updated my view ('Dialling the right numbers', 24 September 2014).
At last week's annual meeting, chairman Michael Jackson noted that "our Liberty platform, which can be acquired as a comprehensive suite or on a modular basis, is gaining significant interest from both new and existing customers, resulting in a growing sales pipeline. Increasingly customers are purchasing a broader range of solutions across the Liberty platform and our multichannel capabilities are particularly in demand". In the period, new customer wins include West Mercia Housing Group and Hitachi Capital.
Moreover, high levels of recurring revenue combined with a strong pipeline and an enhanced product suite offer a fair degree of confidence that Netcall will achieve a successful outcome for the full year. Having lifted his estimates post the full-year results in September, head of research Andrew Darley at FinnCap expects Netcall to increase pre-tax profits by almost 9 per cent to £5m on revenues up from £16.9m to £17.9m in the 12 months to June 2015. And with cash flow robust, expect net funds to rise from £11.4m to £13.7m by the end of June, or the equivalent of 10p a share.
Strip out net cash and this means that Netcall's shares are priced on 17 times earnings, hardly exacting for a business winning significant contracts that are driving a near-double-digit rise in underlying revenues. It's also worth pointing out that earnings are well underpinned by existing contracts as two-thirds of revenues are recurring. In addition, two-thirds of all new business is from existing clients, reflecting the cross-selling opportunities across its 700-strong customer base.
Netcall offers a well-covered dividend, too: EPS of 2.75p last year covered the 0.9p-a-share payout three times over and FinnCap expects a payout of 1p a share in the current financial year, implying a prospective yield of 1.7 per cent.
So having caught the start of the bull run when I initiated coverage at 13p almost four years ago ('Queuebusters', 17 January 2011), and maintained a positive stance ever since, I feel another rally towards the 70p price level is warranted both on fundamentals and from a technical perspective, too. Buy.
Time to chip in for a recovery
The 20 per cent share price slump in Aim-traded wafer reclaim services provider Pure Wafer (PUR: 55p) since the company reported its full-year results a couple of months ago ('Chipping in a maiden dividend', 9 October 2014) is completely at odds with its trading performance since then. In fact, at last week's annual meeting the board confirmed that trading "continues to be strong and in line with market expectations". Recent engagement with major customers in the US and Asia has been "very positive" and the board attributes this "to Pure Wafer's continued focus on providing the best possible customer service and support". In other words, the company may be the cheapest, but its customers are happy anyway. A more detailed update on trading and the continued strength of the semiconductor market will be issued in January in line with previous announcements.
Ahead of that announcement, analysts believe that Pure Wafer should be able to maintain pre-tax profits at $3.9m (£2.5m) in the current financial year to end June 2015 after factoring in 4 per cent growth in revenues to $37.5m. On this basis, expect EPS of 12.3¢, or 7.8p at current exchange rates. This means the shares are priced on a forward PE ratio of 7. Moreover, guidance is for a raised payout of around 0.63p a share, up from 0.43p a share, implying a prospective yield of 1.1 per cent. It's worth flagging up too that the company's market capitalisation of £15.5m is only four times cash profits of $6m (£3.8m).
The investment case is further supported by strong industry trends: demand for integrated chips is predicted to grow by low double digits in 2015 and 2016, primarily driven by an increasing requirement for DRAM (dynamic random-access memory); the strong car market in the US and Asia; growth in wireless chips due to rising demand for handheld devices; and growth in internet-capable digital TVs and home appliances that interact via the internet.
So not only is the industry backdrop favourable, but Pure Wafer's bargain basement rating clearly fails to factor this in. Offering almost 100 per cent upside to my fair value target of 105p, I see the recent weakness as a strong buying opportunity. Buy.
Please note that I will be writing features all this week so unless there is an urgent update from a company on my watchlist, my next scheduled column will appear at 12pm on Monday, 8 December.
■ Subject to availability and for a limited period only, Simon Thompson's book Stock Picking for Profit is available to purchase at a special discounted price of £10.99, plus £2.75 postage and packaging, for all internet orders placed at www.ypdbooks.com. The book is priced at £14.99, plus £2.75 postage and packaging, for all telephone orders placed with YPDBooks (01904 431 213). Simon has published an article outlining the content: 'Secrets to successful stockpicking'
