A crisp acquisition
Walker Crips Group (WCW: 47p), the financial services group with activities covering stockbroking, investment and wealth management, has pulled off a smart-looking acquisition of London-based Barker Poland Asset Management (BPAM), a private client wealth management business. The initial consideration is £2m in cash and £200,000 in Walker Crips shares and there is a £2m maximum earn-out, subject to BPAM's annual revenues averaging £1.6m or more over the next three years.
Factoring in likely cost savings by reducing office costs and by moving BPAM's client base over to Walker Crips' own in-house platform and services, then the deal will be immediately earnings enhancing in its first full year. It's a sensibly priced acquisition too as BPAM generated recurring revenue of £1.5m and profits of £564,000 in its last financial year. BPAM currently has £227m of assets under management (AUM), of which discretionary-managed funds account for £192m. Rodney FitzGerald, Walker Crips' chief executive, notes that on completion his company will have £3.5bn of assets under management and administration (AUMA), up sharply from £2.66bn at the end of September 2014 and only £1.4bn three years ago, illustrating the transformation in the business.
It also vindicates my decision to recommend buying Walker Crips’ shares a month ago at 45p (‘Delivering on a plan’, 12 February 2015) when I suggested the board of the £16.5m market cap company would be looking to deploy some of its £7.8m cash pile to make earnings-enhancing acquisitions and to scale up the investment and wealth management operations. Although the company is not covered by equity analysts, I feel that the business should be able to turn in an underlying pre-tax profit of around £400,000 for the second half to end-March 2015, up from £270,000 in the first half. After factoring in the BPAM deal, a pre-tax profit in the region of £1m for the March 2016 fiscal year should be achievable, too. Add to that pro-forma net funds of £5.8m (worth 15p a share), offering scope for the board to pull off more deals as it aims to grow AUMA to £5bn, and providing an attractive rolling 12-month dividend yield of 3.5 per cent, and Walker Crips' shares are well worth buying.
Foundation for bumper profits from Granite city
Investors are warming to Henry Boot (BHY: 232p), the 129-year-old Sheffield based construction and property company, and with good reason after Aberdeen City Council approved the master plan and business case for the new Aberdeen Exhibition and Conference Centre (AECC), a development that will be more than twice the size of the existing exhibition centre.
Henry Boot had the site, on which the scheme will be built, under contract and will act as development partner, alongside Aberdeen City Council, to deliver this project. Construction work is set to start by the middle of next year and is due to complete in late 2018. It is estimated that the gross development value of the first phase, including the 750,000 sq ft exhibition and conference centre, two hotels and an anaerobic digestion green energy centre, will exceed £300m. Analysts at brokerage Investec estimate that Henry Boot will make a development profit of £30m on the first phase alone, phased in from the 2016 fiscal year to 2019. The master plan envisages a further 400,000 sq ft of business park accommodation and the redevelopment of the existing conference centre site.
Investec now expects Henry Boot to lift its gross trading profit from £41m in 2014 to £44m in 2015, rising again to £46m in 2016. On this basis, the shares are still only trading on 12.5 times 2016 EPS estimates of 18.5p and offer a near-3 per cent forward dividend yield, too. The value on offer aside, the AECC deal shows how the company is releasing value from its substantial land bank and is using commercial partners to front the development costs to de-risk the investment. In fact, Henry Boot is making no capital investment in the AECC at all.
So having advised buying the shares at 202p (‘A bootiful investment’, 19 February 2015), I strongly feel there is scope for them to rise to my 249p target price and beyond. Analyst Alison Watson at Investec has a 277p target price, and Nick Spoliar at WH Ireland has a 317p target price. Buy.
New investors on board at Nationwide Accident Repairs
There has been a flurry of activity on the share register of Nationwide Accident Repair Services (NARS: 85p), the largest dedicated provider of automotive crash repair services in the UK, after insurance services outsourcer Quindell (QPP: 91.5p) offloaded its entire 25.3 per cent stake to a number of institutions. River and Mercantile Asset Management has acquired a 5.78 per cent shareholding; Miton has raised its stake from 4.17 per cent to 12.27 per cent; new investor The Diverse Income Trust has taken a 3.58 per cent stake; and Henderson Global Investors trebled the size of its shareholding to 11.4 per cent.
I am not at all concerned about the 65p selling price given the reasons for the sale: Quindell will use the £7.1m raised for its working capital needs. More importantly, there are now a number of solid investors on board who will have been attracted by the strong progress Nationwide has been making. Indeed, ahead of its fiscal 2014 results scheduled for later this month, analyst Robert Sanders at brokerage Westhouse Securities predicts the company will report underlying pre-tax profit of £5.26m, up from £3.1m in 2013, on revenues of £184m, to drive EPS up to 9p and support a dividend of 2.9p. Factoring in the benefits from acquisitions and major contract awards, Westhouse is maintaining its 2015 pre-tax profit and EPS estimates of £5.7m and 10.1p, respectively, based on £200m of revenue. On this basis, the shares are rated on eight times forward earnings, and offer a 3.3 per cent dividend yield.
That shouts value in my book and I have no reason to change my positive stance, having initiated coverage when the price was 77p ('Time to motor ahead', 18 February 2014). I last updated the investment case following an earnings beat (‘Breakout looming’, 12 January 2015). Offering a further 23 per cent upside to my 105p target price, I rate the shares a buy at 85p.
H&T positive surprises
The board of pawnbroker and money lender H&T (HAT: 179.5p), a constituent of my 2015 Bargain Shares portfolio, has surprised analysts by announcing a maintained dividend of 4.8p a share despite pre-tax profits falling 18 per cent to £5.5m in what was a tough year for the sector.
But with net debt cut by more than half to £9.7m, and the pledge book stabilising at £38.5m, an early indication that the downturn in the business has bottomed, then the directors felt confident enough in future prospects to reward shareholders for their loyalty through the tough times. The balance sheet is rock solid: net debt only equates to 11 per cent of shareholders' funds of £91m, and the company has an enviable working capital position with net current assets of £78.8m. In any case, what would appear to be bottom of the cycle EPS of 11.8p covers that payout 2.5 times over.
The other key take for me was the strength of the company's retail proposition, with sales up by a quarter to account for more than a fifth of H&T's gross profits; and the move into other services such as foreign exchange and "we buy anything proposition". In fact, the increase in gross profits from these two sidelines, combined with a higher contribution from retail, compensated for the profit shortfall in pawnbroking scrap. Of course, a lower pledge book resulted in lower lending and hit the interest component of the pawn service charge to the tune of £1.1m. Gold purchasing was hit, too, by a lower gold price.
But a more diversified revenue stream including a new personal loan product and offers H&T a decent platform to underpin a return to earnings growth, which is one reason why analysts at brokerage N+1 Singer predict a bounceback in pre-tax profits to £7.1m in 2015 to deliver EPS of 14.9p and a dividend of 5p a share. On this basis, the shares are rated on 12 times earnings estimates, offer a near-3 per cent forward dividend yield and are rated 27 per cent below book value per share of 246p. From my lens at least, that's a harsh valuation for a recovery play, and I continue to rate shares in H&T a buy.
Capitalise on an investor overreaction
I feel that investors have massively overreacted to results from marketing service provider Communisis (CMS: 56.5p). Having run up from 56p to 63p after I advised buying ahead of the full-year release (‘Catalysts for re-ratings’, 24 February 2015), the shares have given back all the gains despite the company reporting profits in line with analysts' estimates - adjusted EPS increased by 10 per cent to 4.75p in 2014 - and announcing a six-year contract with AXA UK for incoming and outgoing marketing and customer communication services.
The dividend was hiked by 11 per cent to 2p a share as anticipated, the £4m cost of which is covered almost three times over by annual free cash flow of £11.6m. True, net debt increased by £10m to £35.9m, but this was the result of acquisitions made and year-end borrowings are well within a £65m revolving credit facility, committed until March 2018, and a £5m overdraft that is renewable annually. Earn-outs of around £10m due on acquisitions over the next five years are easily covered by internal cash flow. Moreover, the company has negligible bad debts as 85 per cent of contracts are underpinned by multiyear agreements averaging five years and the top five clients, including Procter & Gamble (PG.), Lloyds Banking Group (LLOY) and Nationwide Building Society, are all blue-chips and account for 63 per cent of the group's annual revenues.
As I see it, the only reason for the share price slide is a £21m non-cash writedown of goodwill on acquisitions made in the early years of the last decade and before the current management team took over. True, that was unexpected, and it would have been preferable if the board had communicated this in advance as it's hardly insignificant in terms of a fixed asset base of £205m. But let's not lose sight of the fact that the non-cash impairment charge doesn't impact at all on the future earnings expectations of the company.
Indeed, analysts have maintained their revenue, profit and earnings forecasts for this year and next. That's because the key for Communisis ramping up its earnings is for it to deliver on higher-margin business already won from a raft of new clients, and it's these contracts that are substantially underpinning a 20 per cent rise in forecast cash profits to £31.7m this fiscal year, up from £26.5m in 2014, on revenues 8 per cent higher at £370m. Of course, the acquisitions made last year will contribute, but the lion's share is down to the large contract wins with the aforementioned multinationals.
Moreover, a large chunk of the increase in cash profits will drop down to the pre-tax line, which is why analysts predict Communisis is capable of growing its underlying pre-tax profits by a third to £18.2m in 2015 to deliver adjusted EPS of 7p and reward shareholders with another double-digit hike in the payout to 2.2p a share. On this basis, the shares are rated on a miserly eight times EPS estimates, offer a 2015 prospective dividend yield of almost 4 per cent and are priced in line with new book value of 56p a share after factoring in the aforementioned asset impairment charge. I remain a buyer at the current level and would be using the share price weakness late last week as another buying opportunity.
Cashed up for deals
Following the disposals of its Llanos portfolio at the end of last year (‘Cash rich and undervalued oil plays’, 17 December 2014), Aim-traded South American oil explorer and producer Global Energy Development (GED: 44p) ended 2014 with net cash of $41.2m (£27.1m), or 75p a share at current exchange rates.
As I flagged up last month (‘Engineering growth’, 5 February 2015), non-cash impairment charges in those financial results resulted in a hefty loss because the heavy oil reserves within its Bocachico contract area in the Middle Magdalena valley, Colombia, are now uneconomic due to the low oil price. But with the company pausing discretionary spend on exploration and development, and operational and overhead costs being reined back in light of the depressed oil price environment, then Global Energy is in a favourable position to exploit the financial distress of others in the sector by redeploying its cash pile to good effect.
If no deal transpires then the realistic alternatives would be a cash return to shareholders, a buyback of the company's own shares, which are trading well below cash, or potentially the concert party that controls 61.92 per cent of Global Energy's share capital could take the company private by using the cash on its balance sheet to buy out minority shareholders. Either way, there should be upside for shareholders. That's because if Global Energy does cherry-pick a financially distressed oil producer with profitable operations then its concert party would have to sanction any deal, so it would have to offer more upside to them than buying out minority interests. Of course a share buyback programme now would not go amiss, but even so, with Global Energy's shares trading 40 per cent below net cash on its balance sheet, I continue to rate them a speculative buy.
MORE FROM SIMON THOMPSON...
Please note that since the start of March I have written articles on a total of 17 companies all of which are available on my IC homepage... and are detailed in chronological below with the relevant web links for ease of reference.
■ Non-Standard Finance: Buy at 103p ('A non-standard investment, 2 March 2015)
■ WH Ireland: Buy at 92p, target 140p ('A non-standard investment, 2 March 2015)
■ Software Radio Technology: Buy at 31.25p, target range 40p to 43p ('On the radar', 3 March 2015)
■ Vislink: Buy at 48.5p, target 60p ('Tapping into e-commerce profits', 4 March 2015)
■ Sanderson: Buy at 68p, target 80p to 85p ('Tapping into e-commerce profits', 4 March 2015)
■ Town Centre Securities: Run profits at 292p ('To bank profits or not?', 5 March 2015)
■ Sutton Harbour: Buy at 36.5p ('To bank profits or not?', 5 March 2015)
■ Housebuilders: Run profits on Persimmon, Bellway, Barratt Developments, Taylor Wimpey, Berkeley Group. Bank profits on Crest Nicholson, Bovis Homes, Galliford Try and Redrow. Buy Inland at 64p) (‘Housebuilders: trading gains’, 9 March 2015)
■ 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'
