Firstly, shares in clothing retailer Moss Bros (MOSB: 93p) are at a very interesting juncture, having rallied from a low of 79p when I updated my view in mid-December ('Platforms for growth', 16 December 2014).
Indeed, on a bid-offer spread of 92p-93p, the shares are within pennies of printing a point-and-figure break-out on the swing chart on a close of 95p or above. Moreover, the steady share price decline from last May's highs around 126p to the December low of 78p at the time of my last article appears to have been well and truly arrested. And with the 14-day relative strength indicator (RSI) showing a reading in the mid-60s - so not anywhere near extreme overbought territory - and the moving average convergence divergence (MACD) momentum oscillator above its signal line, in positive territory and posting a buy signal at the end of last week, then the technical set-up from my lens at least favours a continuation of the share price recovery.
Also, the fact that the company did not need to issue a pre-close trading update last month - Moss Bros has a financial year-end of 26 January 2015 - ahead of the release of its full-year results on Wednesday 25 March 2015 is reassuring. Moss Bros's board issued a robust fourth-quarter trading update in early December and noted at the time that it was confident in the outlook for the full year and that trading was in line with analysts' profit expectations.
In the circumstances, it's only reasonable to assume the company has hit those expectations of pre-tax profits of £4.5m, EPS of 3.5p and a dividend of 5.5p in the fiscal year just ended. On this basis, the shares offer a prospective dividend yield of nigh on 6 per cent. Admittedly, some investors may be deterred by a PE ratio of 26, but not me because there are other factors to consider when determining what’s a sensible valuation for the company’s equity. It has certainly paid to do so over the years because having advised buying the shares at 39p (‘Dressed for success’, 20 February 2012), the shares are 138 per cent ahead of that buy recommendation.
Cash generation is key
For starters, the company has a cash-rich balance sheet with net funds of £20m equating to 20p a share. Strip this sum out and the cash-adjusted PE ratio for the year just ended falls to 21. That may still seem high, but Moss Bros is also hugely cash generative, so a far better measure of the profitability of the business is its cash profitability relative to its enterprise value (market capitalisation less net cash). On this basis, the company’s equity is currently being valued on 8 times annual cash profits of £9.5m. The £5m difference between the pre-tax profit figure of £4.5m and cash profits can be accounted for by non-cash depreciation and amortisation charges and ones that deflate the reported pre-tax numbers. That’s worth considering because it is this robust cash generation that is enabling the board to carry out value-enhancing store refits, fund investment in new brands - Moss London, Moss 1851 and Moss Esquire - and reward shareholders with a bumper cash dividend.
It’s a virtuous circle because upgraded stores immediately deliver a sales uplift of 8 per cent and upwards in the first year, and outperform in the second and third years too. This not only means that the cost of the refurbishments can be recouped within a three-year time-frame, but the cash can then be recycled back into more refits across the business. In fact, around 40 per cent of Moss Bros’s 131-store estate has now been refitted. This helps explain why the company’s underlying sales shot up 7.8 per cent in the first 19 weeks ending the first week of December 2014.
Add in robust growth in online sales (albeit from a low base as this segment only accounts for 7 per cent of group turnover) and geographic expansion through new country websites and it’s only reasonable to expect another year of growth across the business. Indeed, the backdrop for consumer spending has improved markedly in the past six months, given the dramatic fall in energy and fuel costs, and now that wage increases in the private sector – a segment accounting for 83 per cent of the UK adult workforce - is outstripping a declining inflation rate.
So ahead of next month’s financial results, I continue to rate Moss Bros’s shares an income buy on a bid-offer spread of 92p-93p. Risk-averse investors who missed the buying opportunity I flagged up in mid-December may wish to wait for a confirmed chart break-out above 95p. However, I feel the odds favour such an upmove and a return to last May’s highs and my fair value target range of 120p-130p. Buy.
Dialling in the right numbers
As I screened my watchlist for potential chart break-outs, I noted that the high-yielding Aim-traded shares in Isle of Man telecom company Manx Telecom (MANX: 189p) are on the cusp of breaking through the January all-time high of 190p to take them into blue-sky territory.
On Monday, the MACD indicator had a bullish cross-over buy signal with the momentum oscillator above zero for good measure, making this an official buy reading. The 14-day RSI is in the mid-60s and way below the overbought mid-80s level that ended the previous rally at 190p in late January. The price is not overextended above its short-term trend line either, as the 20-day moving average is around 182p. In my book, the odds firmly favour a continuation of the rally and one that could easily take the shares to my 210p target price in the next couple of months.
Importantly, the fundamental case for investing is just as strong as it was when I last updated my view at 180p (‘A jewel in the Irish Sea’, 29 October 2014). Having paid an interim dividend of 3.3p a share in November, expect a final dividend of 6.6p a share to be declared alongside the full-year results on Tuesday, 14 April 2015. On this basis, the current prospective yield is 5.2 per cent. There are growth prospects from this income play, too, as the telecoms company exploits its favourable demographic.
For instance, a 4G mobile network was launched last summer for pay-monthly mobile customers and this will shortly be extended to pay-as-you-go users, too. 4G subscribers use on average 3.5 times more data than 3G users on a daily basis and 4G has driven a 28 per cent increase in mobile data usage for pay-monthly subscribers overall. More than 88 per cent of Manx Telecom's pay-monthly customers that have renewed or taken out a new contract have opted for a 4G smartphone tariff, highlighting how the company has taken advantage of its first-mover advantage with this new technology.
Furthermore, Manx Telecom will launch a new superfast fixed-line broadband service later this month and one initially covering around 50 per cent of homes and businesses on the island. The new VDSL Plus service, which uses a new frequency on Manx Telecom's existing fibreoptic network, will deliver the fastest fixed-line broadband on the Island with speeds of up to 80 Megabits per second (Mbps) download and up to 10Mbps upload. The increasing number of households using multiple devices such as smartphones, tablets, laptops and internet-enabled TVs should support anticipated strong demand for higher broadband speeds for home entertainment.
Needless to say, having recommended buying Manx Telecom’s shares at 164p six months ago ('High yield telecoms play', 15 May 2014), during which time they have risen by 15 per cent in an Aim market down 12 per cent, I continue to rate the high-yielding shares an income buy on a bid-offer spread of 187p-189p. My target price remains 210p, valuing the company’s equity at £237m and on a multiple of 10.5 times annual cash profits to an enterprise value of £295m.
Oakley undervalued
There have been a couple of interesting announcements from Aim-traded private equity investment company Oakley Capital Investments (OCL: 155p). Firstly, in a pre-close trading update the company has disclosed that its net asset value has risen by around 5 per cent in the second half of 2014 to between £255m and £257m, slightly ahead of my calculations when I last updated the investment case (‘Oakley Capital: Cashed up for investing, 21 October 2014). This performance was enhanced by the £34.8m cash proceeds from the takeover of Daisy Group by a consortium including Matthew Riley, Daisy's chief executive and owner of 24.5 per cent of its share capital.
Following completion of that deal, I estimate that net cash now accounts for more than 20 per cent of Oakley’s net asset value of 200p a share. So not only are the shares trading almost a quarter below book value, but once you strip out cash then the discount is nearer 30 per cent to the underlying value of the private equity investments held, a harsh valuation in my view considering Oakley has been profitably exiting its investments.
In fact, since its inception in 2007, Oakley’s realised investments have returned an aggregate gross money multiple of 2.6 times capital invested and generated an internal rate of return of 45 per cent. And in the six years to end 2014, Oakley Capital's net asset value per share has increased by 85 per cent. This steady progress is clearly not being reflected in the share price, which is why the board announced yesterday that it had used some of its cash to buy back 7m shares at 152p each, a 24.8 per cent discount to the 2014 year-end book value per share. By reducing the issue share capital to 121.1m shares, this buy-back has enhanced spot net asset value to 204p a share.
Moreover, I would expect further asset sales this year to release further capital for new investments, including the disposal of Oakley’s £27.5m financial interest in German business Verivox, a leading consumer energy and telecommunications price comparison website. In fact, since my last update Oakley has sold off its interest in intergenia, a leading supplier of internet hosting solutions, a deal that realised cash proceeds of £16m and generated an internal rate of return of 38 per cent on the investment.
Some of that cash will have been used to fund Oakley’s investment last month in Damovo II Sarl, a provider of information communication technology services which is undertaking a European roll-up strategy and interestingly is being led by the founder of Daisy Group, Matthew Riley. Other relatively new investments made by Oakley include a stake in Italy's largest car insurance broker and price comparison website Facile.it, and North Technology, the holding company of North Sails, a world leader in sailmaking with operations in 29 countries.
It’s worth noting too that Oakley shares appear to have been forming a base formation since my last update and a close above 157p would signal a chart break-out on the point-and-figure chart, taking the share price through the top of the tight 146p-157p trading range that has capped and supported the shares since mid-October. The forthcoming full-year results next month could prove the catalyst for that chart break-out and one to spark a rally to my price target of 180p. On a bid-offer spread of 152p-155p, I continue to rate Oakley shares a medium-term buy.
■ 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'
