The combination of the contribution from acquisitions, a leaner cost base, and positive industry drivers all underpinned this stellar performance and one that vindicates my decision to initiate coverage when the share price was 75.5p ('Switch onto the Stadium of light', 30 July 2014). I last advised running profits when they were around the current level a few months ago ('Small cap tech wonders', 19 January 2015).
A key take for me has been the acquisition last summer in a £8m deal (including earn-outs) of United Wireless, a specialist in the design and manufacture of electronics for the machine-to-machine (M2M) wireless sector. United's technology supports wireless connectivity between devices, primarily cellular networks, and acts as a specialised wireless integrator for Original Equipment Manufacturers (OEMs). United has a strong customer presence in the automotive and telematics sectors, and also works with OEMs in the areas of 'infotainment' and vending, industrial equipment and asset tracking.
It's a hot market to be operating in as Stadium's chief executive Charlie Peppiatt points out that demand for M2M devises is forecast by experts to grow at a compound annual rate of 24 per cent over the next five years. United Wireless has also strengthened Stadium's integrated technology product offering as the company can now provide clients with turnkey design capabilities covering power supplies, electronic manufacturing services, interface and displays and wireless connectivity.
Complementary acquisitions targeted
Mr Peppiatt also notes that Stadium is considering other acquisitions to increase the company's exposure to high growth markets, enhance its geographic reach and complement existing technologies. Year-end net borrowings of £4.9m was less than half shareholders funds and with the company generating annual free cash flow of £1.3m then the board have ample scope to consider bolt-on deals, maintain investment in the business and reward shareholders with higher payouts. Indeed, analyst Jon Lienard at broking house N+1 Singer expects the dividend per share to be lifted to 2.7p this year at a cost of £837,000, implying a prospective dividend yield of 2.2 per cent.
This forecasts is underpinned by a 29 per cent expected rise in revenues to £53.7m to lift adjusted pre-tax profits by almost half to £4m and deliver EPS of 9.5p in fiscal 2015. True, those profit estimates are £200,000 less than previous ones, but that's only because Stadium is increasing its investment in regional design centres, a sensible move to attract new business and the highest quality staff as the company moves to become a fully fledged technology business. Moreover, with the technology products division set to generate half of Stadium's sales, up from a fifth in 2013, the quality of earnings has improved, too, as the board focuses more on design-led integrated technology solutions. The same is true of Stadium's integrated electronic manufacturing services division (iEMS), which has been exiting low-margin business and targeting higher margin contracts. In turn, the earnings multiple investors are now willing to attribute to the shares has been increasing, too.
An attractive mix
The combination of sharply rising EPS driven by margin expansion and top-line growth, combined with earnings multiple expansion, is the reason why Stadium's shares have re-rated so strongly. It's also the reason why I think they could realistically run up towards Charles Stanley's target price of 140p. That's because after factoring in a 25 per cent hike in pre-tax profits to £5.2m in fiscal 2016 based on a 11 per cent hike in revenues to £59m, EPS are set to grow again by almost 30 per cent to 12p so would still only be rated on 12 times next year's forecast earnings if the 140p target price is achieved. That's one point less than the current forward rating for the 2015 fiscal year.
Of course there is execution risk in hitting those earnings targets, but given the high EPS growth rates anticipated, there is a decent margin of error already factored into the current rating. And that is why I would continue to advise running profits on this particular holding, targeting a fair valuation at around the 140p mark. Run profits.
Value in Pure Wafer
There is no doubt in my mind that there is value on offer in the shares of Aim-traded Pure Wafer (PUR: 42p), a leading global provider of high quality silicon wafer reclaim services to some of the world's largest semiconductor makers and foundries.
Based on 28.3m shares in issue, the company has a market capitalisation of £11.9m, or 20 per cent less than its shareholder funds of £14.8m, which includes net cash of £1.1m. Pure Wafer reports in US dollars and I have used a conversion rate of £1:$1.50. However, this latest balance sheet figure is taken after the company was forced under accounting rules to take a $15.5m (£10.3) non-cash exceptional charge in yesterday's interim results in relation to the carrying value of its wafer reclaim facility in Swansea following a fire there just before Christmas.
In addition, inventory worth £1m was destroyed. It's therefore worth pointing out that the insurance policy covering the plant includes extensive three-year business interruption cover, so this impairment charge will reverse once the insurer pays out. The insurer has already accepted liability for the claim. In other words, at the current price the shares are rated on less than half underlying book value, a huge discount for a profitable business.
It goes without saying that the fire has led to massive disruption and it will take 12 months for full-scale production to recommence at the Swansea plant. In the meantime, some production will be transferred from May onwards to the company's other facility in Prescott, Arizona, to minimise disruption to the company's clients who have been impacted by this incident. Still, there is no getting away from the fact that on the basis the Arizona facility accounts for three-fifths of Pure Wafer's annual cash profits of £4m, and the company has a cash rich balance sheet, too, then in effect the Arizona business is now only being valued on four times its cash profits. That's not just a miserly valuation, but it completely ignores all the value embedded in the Swansea facility, which we know is at the very least has to be £10m, according to the aforemenetioned write-down.
Of course, we need a catalyst for Pure Wafer's shares to re-rate, a factor that is clearly lacking right now. But once the insurer agrees the size of the payout, and repair work to the Swansea facility commences, then at least investors will have greater clarity on the full financial implications for the company. It's my view that they are being overly cautious and I would continue to hold the bombed out shares for their recovery potential if you followed my earlier advice.
Please note that I last updated the investment case when the price was around the current level ('Engineering growth', 5 February 2015), having initiated coverage at 72.5p ('Time to chip in', 10 October 2013). The shares hit a high around 100p last spring. Hold.
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)
■ Walker Crips: Buy at 47p; Henry Boot: Buy at 232p; H&T: Buy at 179.5p; Nationwide Accident Repair Services: Buy at 85p; Communisis: Buy at 56p; Global Energy Development: Speculative buy at 44p ('Six-shooter of small cap buys', 10 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'
