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OPINION

Below the radar

Below the radar
March 19, 2015
Below the radar

Bearing this in mind, I feel that investors are missing a trick with emerging market fund manager Charlemagne Capital (CCAP:10.75p). Admittedly, after enduring an 'annus horribilis' in 2014, many investors will be giving this particular segment of the equity market a wide berth. And it's only right to flag up that I included the shares in my 2014 Bargain share portfolio when the price was 16p, so the holding is still under water with them being offered in the market at 10.5p, valuing the company's equity at only £31m.

But having analysed the trading update from the company this week, and more importantly how the business has fared since the start of 2015, I feel that there is an increasing chance of a share price re-rating for a number of reasons that have come to light since I updated my Bargain share portfolio six weeks ago.

 

Sound reasons for profit recovery

Firstly, the company's long-short OCCO fund, accounting for $525m (£357m) of Charlemagne's assets under management (AUM) of $2.25bn, has already delivered a positive 4.2 per cent return in the first 11 weeks of the 2015 fiscal year. This follows a negative return of 2.6 per cent in 2014, albeit that was a robust showing against the 37 per cent decline in the MSCI Eastern European index. The fund had provided investors with a compound annual growth rate in excess of 10 per cent in the previous 12 years, so has a decent track record.

Critically, performance fees earned from the OCCO fund account for the vast majority ($15.6m in 2013, but only $20,000 in 2014) of Charlemagne's own performance fees. This explains why the company's total performance fee income fell from $16.2m in 2013 to $2.4m last year and resulted in pre-tax profit and EPS declining by two-thirds to £3.1m and 0.5¢, respectively, on revenues down around 30 per cent to $28.5m.

It's therefore worth noting that analyst Andrew Watson at broking house N+1 Singer has embedded an investment return of only 6 per cent in his 2015 estimates, predicting a strong recovery in pre-tax profits to $7.6m for 2015 based on full-year revenues rising by $4.5m to $33m. The 4.2 per cent positive return from OCCO in the year to date not only gives confidence that these forecasts are achievable, but offers scope for potential upgrades if the recovery continues.

It's also worth flagging up that Charlemagne's Magna fund range continues to prosper too, attracting net inflows of $166m last year and increasing total AUM by 17 per cent to $654m. The performance of Charlemagne's Magna Middle East and North American fund was ranked first in its peer group in 2014 and in the top quartile over a three-year period according to FactSet Morningstar. In addition, four of the eight Magna funds were in the first quartile for their performance over the same three year period too. That's a major selling point for the company as it has now entered a potentially transformational agreement with US marketing adviser North Bridge Capital to help Charlemagne build a presence in the US institutional investment market.

I would also point out that the latest funds data shows that by the end of February this year Charlemagne's AUM had increased by 3.7 per cent to $2.33bn since the start of 2015. This is worth bearing in mind as the company is due to release its first-quarter AUM trading update at the start of April. It could make for a good read. There is an operational gearing effect on profits from rising AUM as the company is able to absorb a significant increase in AUM, but with a negligible impact on its core costs. Again, this gives credence to N+1 Singer's estimates for 2015.

 

A solid dividend

The other major take for me in this week's full-year results was the board's decision to maintain the dividend at 1¢ (0.67p) a share even though it was uncovered by EPS of 0.5¢. The company has a policy of paying out all its net earnings as dividends to shareholders so that payout would be covered again by EPS of 1.1¢ assuming Charlemagne hits N+1 Singer's 2015 profit estimate. On that basis, the dividend yield is 6.5 per cent.

I would point out too that the company has a rock solid balance sheet with net cash of $17.4m equating to 4p a share. Charlemagne also has $9.9m invested in its own funds, or the equivalent of 2.2p a share. In other words, about 60 per cent of the current share price is covered by cash and liquid investments. To put that into some perspective, after taking into account these liquid resources, a business that is predicted to generate annual profits of $7.8m, or £5.3m at current exchange rates, is in effect being valued at £13m! That valuation is going to look very attractive if Charlemagne can maintain the recovery in its AUM as the year progresses, albeit this will be predicated on a more stable macro environment for Eastern European financial markets and also for the oil price, the twin factors which led to heightened investor risk aversion last year and the poor performance of emerging market funds in general.

 

Improving technical set-up

Having seen Charlemagne's shares halve in value from a high of 19.5p in June to a low of 9.5p at the start of this year, it would appear that a base formation is being formed on the chart. In fact, there have been three attempts in the past couple of months to drive the weekly closing price below 10p and each one has failed with a long tail emerging on the weekly candlestick chart. There is also positive divergence with the 14-day relative strength indicator (RSI) rising and not confirming the share price action.

In addition, the 20-day exponential moving average (EMA) appears to have bottomed and is positioned at 10.5p. The 50-day moving average is flattening and close at hand too at around 11p. It wouldn't take too much to produce a positive cross over between these two trend lines, the most obvious catalyst being some upbeat news flow in the first quarter trading update in a few weeks time.

In the circumstances, I continue to feel that the shares are being seriously undervalued on 5.5 cash adjusted earnings estimates for 2015 and underpinned by a solid 6.5 per cent dividend yield. Recovery buy.

 

Bloomsbury on track

A pre-close trading update from Bloomsbury Publishing (BMY: 155p), another one of the constituents from my 2014 Bargain share portfolio, may have been brief to say the least, but the book publisher has importantly confirmed that earnings for the financial year to end February 2015 will be inline with market expectations, having made good a first half profit shortfall of £600,000.

There is a strong second half bias to the numbers for three reasons: October is the peak for academic book sales; Christmas is the peak season for the sales of general books; and profits are subject to a number of new contracts from which Bloomsbury receives rights and services income in the second half of the financial year. Drilling through the numbers, I estimate that Bloomsbury has increased its second half pre-tax profits by 7 per cent to around £10.4m to edge up full-year profits to £12.1m. On this basis, analysts expect flat full-year EPS of 13.3p and a 6 per cent higher dividend of 6.1p a share.

For the year ahead, the key positives for me are that the children's segment is maintaining its strong momentum following a bumper first half; the professional business division seems to have recovered from a weak first half; and prospects for the Harry Potter iconic brand look well underpinned. Indeed, a new illustrated series launches in the autumn, a new Harry Potter stage play will be hitting the London's west end later this year, and the new digital Pottermore.com content and new Bloomsbury book jackets appear to be weaving their magic on extending the longevity of the brand. There is also the prospect of a sales uplift for the books next year on the back of the upcoming trilogy of Warner Bros films, based on Fantastic Beasts and Where to Find Them, one of the companion books to J.K. Rowling's best selling Harry Potter series of books.

True, analyst Steve Liechti at broking house Investec is only pencilling in a modest 4 per cent rise in profits to £12.6m in the 12 months to end February 2016. But I still feel that investors may start to warm to the shares once again. That's because the company is up against soft comparatives from the first half of last year and with the benefit of acquisitions made, the first half numbers this year should be much stronger. Expect another trading update at the time of the fiscal 2015 results on 19 May.

Ahead of that announcement, I would continue to hold the shares if you followed my advice to buy last year as priced on little over 11 times earnings estimates, yielding over 4 per cent and rated 10 per cent below value, there is undoubted value here. Hold.

MORE FROM SIMON THOMPSON...

Please note that since the start of March I have written articles on a total of 33 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 Mar 2015)

WH Ireland: Buy at 92p, target 140p ('A non-standard investment', 2 Mar 2015)

Software Radio Technology: Buy at 31.25p, target range 40p to 43p ('On the radar', 3 Mar 2015)

Vislink: Buy at 48.5p, target 60p ('Tapping into e-commerce profits', 4 Mar 2015)

Sanderson: Buy at 68p, target 80p to 85p ('Tapping into e-commerce profits', 4 Mar 2015)

Town Centre Securities: Run profits at 292p ('To bank profits or not?', 5 Mar 2015)

Sutton Harbour: Buy at 36.5p ('To bank profits or not?', 5 Mar 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 Mar 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 Mar 2015)

Stadium: Run profits at 123p; Pure Wafer: Hold at 42p ('Electrifying shares', 11 Mar 2015)

CareTech: Buy at 230p, target 300p ('Time to take care', 16 Mar 2015)

LMS Capital: Buy at 77.5p; Globo: Run profits at 55.5p; Trifast: Buy at 99p, target 140p ('Exploiting currency moves', 17 March 2015)

KBC Advanced Technologies: Buy at 87p, target 165p; K3 Business Technology : Buy at 227p, target 275p; Fairpoint: Buy at 123p, target 190p ('Blow out results', 18 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'