That’s because the US Federal Reserve looks poised to embark on an interest rate tightening cycle as early as June this year - The Federal Open Market Committee of the US central bank meet tomorrow - but the Bank of England is unlikely to follow suit given the weaker inflationary backdrop in the UK. In fact, with UK core inflation set to drop into negative territory in the months ahead according to the central bank’s governor Mark Carney, money market futures point towards the first base rate rise being delayed until next year. In turn, this divergence in interest rate policy is benefiting the greenback and is boosting the sterling value of LMS’s US investments.
For instance, in the financial year to end December 2014, the company reported a £5.9m unrealised currency gain on its US portfolio of quoted, unquoted and fund investments, reflecting a 9 per cent devaluation of sterling against the greenback in the second half of last year. Moreover, since the company’s fiscal year-end, the US dollar has appreciated by a further 5 per cent from £1=US$1.557 to £1=US$1.474. To put this latest currency move into some perspective, around 64 per cent of the LMS investment portfolio is held in US assets, the equivalent of £85m of the £133m of assets held at the end of December 2014. This means that the weakness of sterling since the start of this year has resulted in an additional £4.8m unrealised gain on LMS’s US portfolio, or the equivalent of 3.3p per LMS share to lift its spot net asset value to 96.3p, up from 88p at the end of December 2013.
And having realised significant gains (£12.3m) in the past year on £45.9m worth of asset sales, the board are actively seeking to dispose of more investments as part of an orderly wind up process of the company, the proceeds of which are being returned to shareholders. Last year £40m was returned through a tender offer process pitched in-line with net asset value per share. With net cash of £9m on its balance sheet, and more asset sales in the pipeline, expect another tender offer this year too. The takeover of US graphic design company ChyronHego by Vector Capital will realise a further £5m of cash proceeds for LMS on that holding.
True, a steep fall in the share price of the company’s largest investment quoted holding, New York Stock Exchange quoted Weatherford International (WFT: NYQ - $11.40), a global diversified upstream oilfield service group with a market value of $9.1bn (£6.2bn), means the current market value of LMS’s holding is now only £14.7m, sharply down from £19.1m at the end of 2013 but up from £13.6m at the end of December 2014. That said, LMS still managed to boost its book value per share by 5p a share last year even after factoring in the reversal on the Weatherford shareholding. And a divestment of this stake would be relatively easy to execute too. Indeed, LMS sold 10 per cent of its holding at $21 a share last May to realise £2.6m of proceeds.
In my opinion, the share price slump in Weatherford largely explains why LMS’s shares have drifted from 87p six months ago to 75p at the end of last year. It’s therefore interesting to note the price low was retested earlier this month and there was clear positive divergence on the daily price chart with the 14-day relative strength indicator (RSI) significantly higher at the time of the retest, implying that the downtrend has been arrested as I believe is the case.
So with further US dollar gains against sterling a distinct possibility in my view, then LMS shares look set to bounce back as a foreign exchange tailwind benefits its US portfolio, and one where the currency risk remains unhedged. Add to that potential for positive news flow on asset disposals, and scope for another tender offer, and I still believe a fair value target price of 95p is sensible. Please note that I last updated the investment case when the price was 82p (‘Dollar strength boosts LMS’, 4 November 2014), having initiated coverage when the price was 54.5p ('Capital returns', 11 Feb 2011). The company has returned almost half its net asset value as cash to shareholders since starting the asset disposal programme at the end of 2011.
Offering in excess of 20 per cent share price upside to my target price, I continue to rate LMS shares a buy on a bid-offer spread of 76p to 77.5p.
Investors overly cautious on Trifast
Whereas sterling has slipped by more than 5 per cent against the US dollar since the start of the year, it has appreciated by around 9 per cent against the euro, a currency that is being devalued by the money printing programmes of the European Central Bank.
In my view, the currency headwind against the euro in part explains why shares in Trifast (TRI: 99p), a global manufacturer and distributor of industrial fastenings, have been weak since the company posted an upbeat trading update a month ago (‘Upgrades to drive re-ratings’, 17 February 2015). In the past month sterling has risen by almost 5 per cent against the single currency.
However, I feel that investors are overreacting to these exchange rate move as margin gains, particularly from Trifast’s acquisition of VIC, an Italian manufacturer and distributor of fastening systems predominantly to the white goods industry, and ongoing organic sales growth have been offsetting the negative headwind of sterling’s strength. Trifast has also been benefiting from higher margin new contracts, exposure to the robust UK automotive sector and faster selling car models in particular, and a strong order pipeline with its large global original equipment manufacturers (OEM) customers.
In fact, in the last week alone, analysts at N+1 Singer and finnCap have both upgraded their earnings estimates modestly for the current fiscal year to end March 2015, and for next year too. Analyst David Buxton at finnCap predicts Trifast will deliver current year pre-tax profits of £13.5m and EPS of 8.1p, up from £9.2m and 6p, respectively in fiscal 2014, based on a 18 per cent rise in revenues to £153m. Jo Reedman at N+1 Singer and Nigel Harrison at Edison Investment Research have almost identical forecasts. On this basis, expect the payout per share to be raised from 1.4p to at least 1.7p (finnCap and Arden Partners estimates), and possibly as high as 1.9p (N+1 Singer), implying a prospective dividend yield of between 1.8 per cent to 2 per cent.
So even if earnings were to grind to a halt the shares are hardly expensively rated on a PE ratio of 12 for the fiscal year to end March 2015. But that’s not what analysts predict as they can see scope for another year of earnings growth based on revenues ticking up to around £160m to deliver pre-tax profits of at least £14m (finnCap), and perhaps as high as £14.3m (Arden). N+1 Singer is looking for top of the range profits of £14.5m. On this basis, expect EPS of around 8.5p to 8.8p and with balance sheet gearing of just 25 per cent, a dividend of 1.9p to 2.1p a share is predicted too.
Of course, Trifast still has to deliver on those estimates for the 2016 fiscal year, but even so with the shares now so modestly rated then there is a margin of error priced in for the impact of ongoing euro weakness. In fact, N+1 Singer have just upgraded the shares to a buy and have a 124p target price, and finnCap has lifted its target to 137.5p. Both Arden and Edison remain very positive too and I would agree, favouring a fair value estimate at the top end of those target prices.
Trading on a bid offer spread of 97p to 99p, albeit this is down from the 111p level when I updated the investment case a month ago, I remain a buyer of Trifast’s shares ahead of a pre-close trading update in mid-April. Please note that I initiated coverage on the shares when the price was 53p ('Bargain shares for 2013, 7 February 2013). Buy.
Globo going global
Aim-traded shares in Greek mobile software provider Globo (GBO: 55.5p) have rallied sharply after bursting through the 47p major technical resistance level and activating my conditional buy recommendation (‘Going global’, 2 February 2015). I subsequently flagged up this significant chart break-out when the price was 49p (‘Catalysts for re-ratings’, 24 February 2015). On Friday, 6 March the share price hit an intra-day high of 59.25p withing a whisker of my 60p target price.
The latest run up comes on the back of some positive news flow from the company including the release of a market-leading version of its mobile application development platform, GO!AppZone, with industry-first enhanced security features. It was a high profile announcement too as Globo revealed at the Mobile World Congress in Barcelona that its GO!AppZone platform now offers FIPS 140-2 certified encryption for the secure development, deployment, management and end-to-end usage across company networks. Globo is the only company that offers such security.
Organisations, particularly in regulated and public sector markets such as finance and healthcare, will be able to use the GO!AppZone platform to develop highly secure, bespoke apps for a range of mobile operating systems. Technology analysts at leading research company IDC predict that 3.3m apps will be available by the end of this year and that annual installs will reach 150bn (equating to nearly 50 apps per device per year). In turn, this will necessitate tighter security and greater control of enterprise usage that the improved GO!AppZone platform offers.
This news can only underpin prospects for this year and expectations that Globo will deliver on analysts’ pre-tax profit estimates of €50.7m on revenues of €122m, up from €34.3m and €99.8m forecast for calendar 2014. On this basis, EPS are predicted to increase by 11 per cent to 8.2 cents (5.8p) in 2014, rising to 11.9 cents (8.5p) this year. This means that even after factoring in the near 10 per cent appreciation of sterling against the euro since the start of 2015, Globo’s shares are still only priced on 10 times likely fiscal 2014 earnings, falling to 7 times 2015 estimates assuming of course it delivers the robust growth anticipated by sector analysts.
So although my initial target price was almost hit, I feel the re-rating has scope to continue especially as the company will be releasing its full-year results in the next month or so. From a technical perspective, a share price close above the intra-day high of 61.75p (from last June) would be significant and could open the door for a run up to a historic price band between 70p and 75p, dating back to the first quarter last year. It's worth noting that the shares are unwinding an overbought position in a sideways price pattern. The 14-day relative strength indicator (RSI) is now closer to 60, down from 80 earlier this month. This is a healthy development and is enabling the rising 20-day exponential moving average to play catch up with the share price. That short-term trend line is now positioned at around 52.5p, or just below Globo's current share price of 55.5p. If you followed my previous advice I would run your bumper profits as a return to the March highs, and beyond, looks the call here in my view.
MORE FROM SIMON THOMPSON...
Please note that since the start of March I have written articles on a total of 27 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)
■ Stadium: Run profits at 123p; Pure Wafer: Hold at 42p ('Electrifying shares', 11 March 2015)
■ CareTech: Buy at 230p, target 300p ('Time to take care', 16 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'
