Equity analyst John Borgars at research house Equity Development predicts Fairpoint’s pre-tax profits will have jumped from £8m to £9.1m in 2014 to boost EPS by 10 per cent to 16.5p. He also expects the board to declare a raised payout of 6.4p, up from 6p in 2013. On this basis, the shares are priced on a modest 7 times earnings and offer a prospective dividend yield in excess of 5 per cent.
Admittedly, this growth is down to some well timed acquisitions made last year which have diversified the company’s revenue stream away from its core individual voluntary arrangements (IVA) activities. That’s just as well as IVAs in England and Wales are a quarter below peak levels, having declined every year since 2010. That said, Fairpoint has managed to maintain its profit margins on a portfolio of over 19,000 fee paying IVAs under management despite this challenging industry back drop.
Still, to compensate for the lack of growth in IVAs, Fairpoint successfully entered the legal services market last summer by acquiring Simpson Millar LLP Solicitors, a consumer legal services business, and Fosters & Partners, a Bristol-based law practice specialising in all aspects of family law. This segment accounted for 40 per cent of the company’s gross revenue in the second half of 2014.
Fairpoint also doubled the size of its debt management plan (DMP) operation by making three acquisitions including Bournemouth-based Debt Line, a debt solutions provider with over 9,000 plans under its management. The company ended 2014 with around 29,000 cases under management, up from 15,688 cases at the start of the year.
Importantly, the board has the firepower to pull off further earnings accretive acquisitions as net borrowings were only £7.6m at the end of last year, up from a net cash position of £2.8m at the start of 2014, but well within its £20m five-year debt facility with AIB Group. Moreover, the £10.4m swing in the debt position is far less than the £14m cost of the acquisitions made, highlighting the cash generative nature of this business. Indeed, the company also paid out £2.5m in dividends to shareholders last year.
Another year of growth ahead
It’s worth flagging up too that even without further bolt-on debt funded acquisitions analysts expect another year of earnings growth reflecting a full 12 months contribution from those made in 2014. Research house Equity Development predict Fairpoint’s pre-tax profits and EPS will rise to £10m and 18p in 2015 to support a further hike in the pay-out to 6.8p a share. House broker Shore Capital has similar estimates. On this basis, the prospective yield rises to 5.7 per cent and the current year forward PE ratio drops to just 6.5. That’s hardly a punchy valuation for a company nailed on to grow EPS by almost 10 per cent this year and one with a relatively lowly geared balance sheet. Net debt equates to only 17 per cent of shareholders funds.
Taking all these factors into consideration, and the positive update on current trading, this looks like a decent buying opportunity to me even though the shares have drifted around 10 per cent in the six months since I last updated my view (‘Making a very fair point’, 18 August 2014). Offering 60 per cent upside to my target price of 190p, I rate Fairpoint’s shares a buy on a bid-offer spread of 117p to 119p.
Please note that I first recommended buying Fairpoint shares at 98.25p in my 2013 Bargain share portfolio since when the company has paid out total dividends of 11.85p a share, highlighting the solid income stream for shareholders.
Greenko sell off unwarranted
Shares in Greenko (GKO: 123.5p), the Indian developer, owner and operator of clean energy projects, have fallen 10 per cent since I last updated the investment case a couple of months ago (‘Energising growth’, 8 December 2014) and are now below the 138p level at which I initiated coverage ('Buy signal flashing green', 18 March 2013).
I have been scratching my head to ascertain why this has happened, but yesterday a plausible reason came to light when over 2m shares in the company passed through the market in block trades and quite possibly cleared a stock overhang. The fact that the shares have ticked up post those deals being executed would suggest this is a credible explanation for the underperformance.
In my view, the derating in the past two months is wholly unwarranted especially as last week’s pre-close trading update confirmed that the company is trading inline with analysts’ earnings estimates. Operationally, Greenko is progressing well with power generation up by 83 per cent to 1,565 GWh compared to the same nine month period in 2013, and 46 per cent ahead when compared to the previous twelve months. The wind portfolio contributed 660 GWh of this, with 640 GWh coming from the hydro portfolio.
Importantly, Greenko remains on track for its operational portfolio to exceed 1,000 MW this year, with all projects currently under construction being fully financed and within budget. Installed capacity increased by 154 MW to 715 MW in the nine-months to end December 2014, with all of the increase coming from new wind capacity commissioned. And the backdrop for renewable energy in India remains favourable, as conventional power assets struggle to supply power to the grid due to fuel supply and off-take price issues. Greenko's wind and hydro portfolios are able to profitably supply power to compete with conventional generation in many states of the country. Indeed, analyst Adam Forsyth at Arden Partners expects Greenko to report revenues of $97m for the nine months to end December 2014, adjusted pre-tax profits of $30m (up from $17.8m for the 12 months to end March 2014) and EPS of 10.1¢ (6.7p).
And with output being significantly ramped up, Mr Forsyth expects revenues to surge to $185m in calendar 2015 to generate adjusted pre-tax profits of $61.1m and EPS of 22.4¢ (14.9p). On this basis, the shares are priced on only 8 times 2015 earnings estimates. There is a realistic prospect of an income stream for investors too as the board plan to declare an inaugural dividend in next month’s financial results. Mr Forsyth predicts a first payout of 2.5¢ a share (1.6p) “with more substantial payouts going forward”.
True, the company is carrying high levels of debt: analysts predict net borrowings are currently around $723m, and this is expected to rise to $961m by the end of 2015. However, the company’s balance sheet is well funded following successful refinancing last year including a $550m (£367m) five-year bond issued on the Singapore Stock Exchange and a US$125m (£83m) six-year credit line from EIG Global Energy Partners. Moreover, net debt of close to $1bn at the end of this year equated to only eight times forecast operating profit, so debt service is hardly an issue.
No matter which way I look at this, I strongly feel that the shares are woefully undervalued offering almost 100 per cent upside to my target price in the range 225p to 230p. I also feel that investors are likely to warm to the investment case following the release of next month’s bumper full-year results. And with the share price decline halted by the upbeat trading statement, and a potential overhang cleared, the odds favour buying now in anticipation of a likely share price recovery driven by those financial results. Buy.
Clear route to profitable growth
Shares in Aim-traded Safestyle (SFE: 165p) are down slightly cent since I last updated the investment case (‘Exploit an open buying opportunity’, 22 September 2014), even though the company has delivered on analyst earnings estimates. A pre-close trading update ahead of results on 26 March 2015 confirmed that adjusted pre-tax profits are set to grow from £15m in fiscal 2013 to £16.7m last year. On this basis, expect EPS of around 15.3p to 16p, up from 13.6p in 2013. And with cash generation strong – the company ended the year with net cash of £8.5m, up £3.3m on 12 months earlier despite paying out dividends of £6.7m to shareholders in the second half of 2014 – then expect a full-year payout of around 9.3p a share. This means Safestyle’s shares are currently valued on a modest 10 times earnings and offer a dividend yield of 5.6 per cent.
Based on a rise in revenue from £135m to £143m in the current financial year, analyst Matthew McEachran at broking house N+1 Singer predicts that Safestyle should be able to lift pre-tax profits to £18.1m and deliver EPS of 16.7p. That’s below consensus EPS of 18p, but there should be scope for upgrades. Mr McEachran notes that “the risk is to the upside” and I would agree as Safestyle continues to grow market share – up from 7.85 per cent to 8.48 per cent in 2014 – but N+1 Singer are conservatively only factoring in a further 10 basis points increase in market share this year. Moreover, uPVC input prices will have benefited from the sharp fall in the oil price which will benefit gross margins. Safestyle also increased unit prices last month, and it’s reasonable to expect these to hold in an increasingly favourable environment for consumer spending.
Investors also seem to be missing the point that with cash generation robust, there is scope for Safetsyle to announce a special dividend. In fact, analyst Adam Smith at brokerage Charles Stanley believes that “looking further ahead we believe there is the potential for a special dividend of between 10p-15p a share without putting undue pressure on the balance sheet”. Mr McEachran at N+1 Singer notes that with “cash generation strong at the very least a higher payout will be needed to return surplus cash”.
In the circumstances, I feel that N+1 Singer’s forecast for a raised payout of 9.6p a share this year could prove too conservative especially as the £7.5m cash cost of the payout represents only 40 per cent of forecast operating cashflow of £18.9m. By my calculations, by the end of this year the company’s net cash pile could easily rise to £15m, or 19p a share, giving the board the opportunity to raise the normal payout or declare a special dividend. Director Christopher Davies and his wife Carol are clearly upbeat on Safestyle’s prospects, having purchased 45,000 shares at a cost of £77,690 at prices between 166p to 178p in the past couple of months. I am too and remain a buyer of the shares on a bid-offer spread of 163p to 165p ahead of next month’s full-year results. Please note that I initiated coverage on Safestyle when the price was 138p ('Window of opportunity', 23 December 2013).
■ 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'
