A case in point is Aim-traded Tristel (TSTL:74p), a maker of infection prevention, contamination control and hygiene products. In a pre-close trading update this week the company has announced a surge in pre-tax profits for the half year to end December 2014. In the six-month period, revenues are expected to be “in excess of £7m, which is at least 9 per cent ahead of last year, and pre-tax profits will be no less than £1m, compared to £700,000 in the same period in 2013.” For the full-year to end June 2014, Tristel reported pre-tax profits of £1.8m on turnover of £13.5m, so given the seasonal second half bias to its sales, even if it only matches last year’s second-half performance then we are guaranteed full-year pre-tax profits of £2.1m in the 12 months to end June 2015. But with “growth continuing to come from all areas of the business, both within the UK and overseas”, then the company is clearly going to do better than a flat second-half performance.
Analysing the revenues and profit split
In fact, analysts predict second half pre-tax profits of £1.3m on revenues of £8m to give full-year pre-tax profits of £2.3m and EPS of 4.3p, up a third from 3.25p in fiscal 2014. If anything the risk is firmly skewed to yet another earnings beat as is the view of analyst Keith Redpath at broking house finnCap, and Paul Hill and Hannah Crowe at research firm Equity Development. They have a point as with gross margins nudging 70 per cent, and second half seasonality to come, then the operational gearing of the business means that second half earnings estimates are probably too conservative. That’s because in the second half of the last fiscal year Tristel reported revenues of £7m and profits of £1.1m, so an additional £1m of revenues this time round is likely to generate more than a £200,000 profit uplift.
And demand is clearly strong. For instance, the company’s high-margin consumables patent protected product, Tristel Wipes, is now the most widely used decontamination method in ear, nose and throat, cardiology and ultrasound departments of UK hospital. Including overseas product sales, it was used in 2.2m instrumentation decontamination procedures carried out by hospitals and clinics last year, a 30 per cent increase year-on-year. In terms of the revenue mix, human healthcare accounted for 85 per cent of Tristel’s revenues, of which a third was international business. And with health authorities under pressure to balance their books, then demand is only likely to increase for Tristel’s cost effective patented products (chloride dioxide based sprays, gels, foams, liquids and disinfectants).
We will not have long to wait if this bullish scenario pans out as we can expect another trading update at the time of the first half results on Wednesday, 25 February 2015. I expect good news.
Cash rich and cash generative
But even without an earnings beat, the company is still attractively priced. Net funds of £2.6m at the June year-end are likely to have grown strongly in the first half of the current financial year on the back of robust cash generation. Equity Development is pencilling in net cash of £3.7m by June 2015 which seems a sensible forecast in light of the fact that Tristel’s non-cash depreciation and amortisation charge was almost £900,000 last fiscal year. This means that cash flow from operating activities will be way above reported pre-tax profits of £2.3m in the current fiscal year – operating cashflow of £3.25m dwarfed operating profit of £1.8m last year – even after allowing for a generous payout to shareholders.
In the 12 months to June 2014, Tristel’s board quadrupled the dividend per share to 1.6p at a cost of £650,000. For the current financial year, analysts predict a payout of between 2p and 2.1p, rising to between 2.2p and 2.6p the year after. If anything the risk to the dividend is to the upside as that burgeoning cash pile is forecast to equate to 9p a share by the June year-end. In any case, current year cash profit estimates of £3.3m cover the £850,000 cost of a 2.1p a share payout almost four times over.
So not only is a prospective dividend yield of 2.8 per cent attractive for the current year, but there are sound prospects of a raised payout in fiscal 2016 too. And it’s not as if the shares are highly rated: strip out net funds and the forward PE ratio is 16, falling to only 13.5 in fiscal 2016. For a company expected to boost EPS by over 60 per cent in the next two financial years, that’s hardly a high rating.
Target prices
I advised buying Tristel shares earlier this year at 60p (‘Clean up on superbugs’, 6 May 2014), and they duly rose to my upgraded target price of 90p. My last update was post the full-results when I rated the shares a buy at 75p (‘Small cap updates’, 14 October 2014). I still feel a return to 90p and beyond is on the cards if Tristel overdelivers as has been the case all this year. finnCap have a target price of 85p but sees the “risk here to the upside”. Equity Development raised its target from 92p to 100p post this week’s pre-close trading update. Needless to say, ahead of the half-year results at the end of February 2015, I continue to rate Tristel’s shares a buy.
Communicating well
The re-rating I predicted at small-cap marketing communications company Creston (CRE: 129p) has worked out a treat and last week the shares had now run up into the middle of a historic price band between 130p and 135p, and to within pennies of my year-end target price of 135p (‘Buy the break out’, 4 November 2014). In the current market environment a 10 per cent gain during which time the market is down around 4 per cent is not to be sniffed at. That said, there are sound reasons to continue to run with the position.
Interims at the end of last month demonstrated solid organic growth: like-for-like revenues rose 4 per cent to £37.1m and drove up pre-tax profits by 9 per cent in constant currencies. True, the strength of sterling clipped 3 percentage points off that profit growth rate when Creston reported its numbers, but with sterling falling back almost 4 per cent against the US dollar since the September half-year end, and around 7 per cent below its first half average, this first half forex headwind has turned into a second half tailwind for Creston.
Operationally, the company is performing well. Significant new business wins include contracts with Danone, McCain and insurer Allianz. Digital is a key component of this growth as this segment now accounts for over half of all revenue. It's higher growth, too, as global internet advertising spend is forecast to grow by almost half in the next four years. Creston domestic bias is also working in its favour as over two-thirds of revenue is generated in the UK, a country with the highest economic growth rate in Europe and also the largest internet advertising market.
And there are obvious cross-selling opportunities across the business to create a more integrated agency group, an area the board are targeting with its Unlimited brand. A £6.3m cash pile, worth 10p a share, provides ample funding to pursue organic growth and make selective acquisitions in the digital marketing.
Trading on 11 times full-year earnings estimates, and underpinned by a 3 per cent yield, I would continue to run your profits if you followed my buy advice last month.
Fire hits Pure Wafer
Aim-traded wafer reclaim provider Pure Wafer (PUR: 48p) has been hit by a fire at its facility in Swansea which has caused material damage and impacted production. A contingency plan is being put into place, which will involve moving production where possible to the company’s other facility in Prescott, Arizona, helping to mitigate both the disruption to customers, as well as the financial impact. The plant accounted for 56 per cent of revenues last fiscal year, so until the damage has been assessed – the fire started at 9am on Sunday morning – it’s impossible to quantify the impact on profits.
Shares in Pure Wafer fell 21 per cent to 48p this morning in a thin pre-Christmas market, but I would point out that the facility is “fully and comprehensively insured”. If you followed my advice to buy earlier this month (‘Income stocks with capital upside’, 1 December 2014), I would continue to hold on and await a full statement from the company following an assessment of the damage and potential insurance pay-out. Analysts’ earnings estimates for the fiscal year to end June 2015 are under review pending a further announcement, but prior to today’s unfortunate news Pure Wafer’s shares were trading on only seven times EPS estimates of 7.8p. Hold.
Please note that on Friday I published two column on European Politics, Economics and Markets ('Europe's plight weakens...but that's good', 19 December 2014) and on the financial implications of monetary policy being pursued in Japan and Europe ('Fireworks to set markets alight', 19 December 2014).
I also discussed these features with the editor John Hughman in our free podcast, available here.
My next column will appear on Monday, 29 December 2014.
■ Subject to availability and until 31 December 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'
