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OPINION

Hitting target prices

Hitting target prices
April 28, 2015
Hitting target prices
IC TIP: Buy

That thought is in my mind right now because shares in two companies I advised buying in the last couple of months have both issued earnings beats in the past few days and, in the process, their share prices have now hit my target prices. It's time to decide whether or not the investment case is strong enough to underpin further potential gains. I am also revisiting two of the constituents of my annual Bargain Share portfolios, both of which are worthy of an update following important news flow.

 

Redde's transformation on track

Redde (REDD: 124p), a provider of replacement vehicles for drivers involved in accidents that are not their fault and of legal services designed to assist claimant parties in partnership with leading insurance companies, has reported operating profits in its third quarter to end March 2015 ahead of the board's expectations.

Volume growth has remained strong, building on the performance in the first half of the financial year, and working capital efficiency continues to improve with debtor days falling to 104 days, a record low, compared to 116 days a year earlier. In turn, the company produced an operating cash inflow of £10.8m in the three month period to end March 2015 which almost covered all of the £11.3m cost of the interim dividend of 4p a share paid out in the same period. The net result is that net funds of £36m, or 13p a share, is only slightly down on the level at the end of 2014, and well up on 12 months earlier.

Importantly, the fall in the oil price - and with it a sharp decline in the petrol price on the forecourt – is driving higher vehicle mileage and should provide a further tailwind for the business. In addition, Redde is clearly benefiting from a better working relationship with insurers as highlighted by the decent new business being won.

So, although Redde's share price hit my 125p target price yesterday, having initiated coverage only five weeks ago when the price was 108p ('In the fast lane', 23 Mar 2015), I feel that there is scope for the bull-run to continue given the increasingly likely prospect of analyst earnings upgrades in the coming months if the business momentum is maintained through the fourth-quarter trading period. That should be good news for the dividend too. That's because consensus is for adjusted EPS to rise from 6.5p to 7.5p in the financial year to end June 2015 - analyst Andrew Watson at broker N+1 Singer predicts top of the range EPS of 7.9p - but with the board's policy to distribute as much of the profits as it reasonably can, then any earnings upgrade will lift the payout too. N+1 Singer expects the full-year dividend per share to be raised by a third to 7.5p a share, but the payout could be nearer 8p if Redde beats Mr Watson's top of the range EPS estimate.

But even in the absence of an upgrade to both EPS and dividends, Redde's share price is well underpinned by a 6 per cent plus prospective dividend yield. True, a forward PE ratio of 15 may seem full, but with net cash accounting for 13p a share, and the company on the look-out for earnings-enhancing acquisitions, then that rating could easily fall a couple of points in the event of Redde deploying its cash pile wisely. In the circumstances, I have raised my fair value target price to 140p, and continue to rate the shares a buy on a bid-offer spread of 123.5p to 124p.

 

Trakm8 on the right track

Shares in Aim-traded telematics and data provider Trakm8 (TRAK: 117p) surged after the company's board reported a bumper pre-close trading update for the fiscal year to end March 2015 and upgraded their profit guidance for the current fiscal year to March 2016.

In the latest 12 month trading period, revenues increased by 95 per cent to £18m, and by a hefty 73 per cent on an underlying basis once acquisitions are stripped out. Annualised recurring revenue shot up by 60 per cent to £7.3m, or the equivalent of a third of finnCap's revenue estimate of £22.5m for the financial year to March 2016. The company also announced robust growth in its order intake which increased by 38 per cent year-on-year.

At the time of the half year results in December, the board reported a strong pipeline of opportunities under trial. A number of these have since been secured including a £1m initial order with Marmalade, the specialist provider of cars and insurance for young drivers. Trakm8 is supplying Marmalade with a self-installed telematics device to support the insurer's New Driver Insurance product, a telematics-based insurance scheme for young drivers aged between 17 and 25. I also understand there is "a strong stream of new opportunities some of which we would expect to convert over the coming months".

Analysts have taken note and Lorne Daniel at broker finnCap has upgraded his fiscal 2016 revenue estimates by 6 per cent to £22.5m and lifted his pre-tax profit forecast by 17 per cent to £2.8m, a 65 per cent increase on the £1.7m profit estimate for the fiscal year just ended and more than treble the £900,000 of profits reported in the financial year to March 2014. On this basis, expect EPS to surge from 5.7p to 9.1p in the current fiscal year to March 2016.

So although Trakm8's share price hit my target price of 120p at the end of last week, representing a 30 per cent rise on my recommended buy in price of 92p ('Zoning in on a profitable price move', 16 Feb 2015), I feel that a forward PE ratio of 13 is still not too punchy for a business in a strong earnings upgrade and growth cycle. In fact, I am willing to bet that the company will report yet another very positive trading update at the time of the full-year results in early July. I also feel that with the benefit of further contract wins yet another earnings upgrade is feasible too.

In the circumstances, I have raised my target price from 120p to 135p, the all-time high dating back to May 2006, and a price level I feel would be warranted if Tramkm8 manages to post EPS of around 10p in the current financial year, or 10 per cent above finnCap's estimates. I would not bet against that possibility given the strong order momentum, high recurring revenue stream and scope for the pipeline to be converted into further contracted orders. My advice is to use the minor pull-back from last week's intra-day high of 125p to the current bid-offer spread of 115p to 117p as a buying opportunity.

 

Smart deal making at Conyger

Aim-traded property vulture fund Conygar (CIC: 185p) has pulled off not one, but two disposals which have significantly reduced the voids on its investment portfolio, not to mention generated bumper profits above the carrying value of the assets in the company's accounts.

The sale of Norfolk House, a 115,000 sq ft freehold office building in Birmingham, for a consideration of £12.3m represents a bumper £1m premium over the September 2014 valuation. The current rental income from the property is £915,000 per annum, but over 19,000 sq ft of space in the building is vacant and this is set to rise to 51,000 sq ft within six months. In addition, Conygar has sold the 30,000 sq ft vacant office building at Geoffrey House, Maidenhead for £4.76m. The net effect is that the overall portfolio vacancy rate has fallen to 11.8 per cent from 18.2 per cent at the end of September.

Moreover, pro-forma gross cash balances of around £85m on Conygar's balance sheet now cover gross borrowings of £84m, so the company has ample firepower available to recycle its cash into opportunistic purchases. This is exactly what the board, led by chief executive Robert Ware, has been doing as I highlighted when I last updated the investment case ('Taking stock', 29 Dec 2014). And of course there is the potential for significant gains on the company's development portfolio which is very conservatively valued at cost of £37m in Conygar's accounts.

As analysts at Oriel Securities rightly point out, the company has made "significant progress on planning (at the Holyhead Waterfront and Fishguard developments, for instance) which would normally result in valuation uplifts and which is likely to be crystallised on sale". There is also the live prospect of some bumper gains on land sales at the Haverfordwest site which has planning for 726 residential homes. I would expect news on this front to emerge in the coming months.

Add to that further yield compression on an investment portfolio worth around £140m post last week's disposals - every 50 basis points contraction in yield equates to a valuation uplift of almost 7 per cent - and net asset value per share accretive share buy backs, and Conygar's share price looks well underpinned on a 12 per cent discount to Oriel Securities' net asset value per share estimate of 210p for the financial year to end September 2015, up from 197p last fiscal year. My conservative fair value target price of 200p is more than justified.

So having initiated coverage when the price was 131p ('Shrewd insider buying at property play', 30 Sep 2013), I continue to rate Conygar's shares a buy on a bid-offer spread of 183p to 185p.

 

Record's strong funds inflows

Specialist currency manager Record (REC:34p) has announced a $2.7bn (£1.8bn) rise in assets under management equivalent (AUME) in its fourth quarter following significant mandate wins. AUME ended the financial year to end March 2015 at $55.4bn (£37bn), up from $51.9bn a year earlier.

The strong appreciation of the US dollar against the euro since December, reflecting the divergence of monetary policy being pursued by the US Federal Reserve and The European Central Bank, and increased volatility in currency markets caused by the Swiss National Bank dumping the Swiss franc's currency ceiling against the euro, has raised awareness among investors to seek foreign exchange hedging strategies in order to protect performance against adverse currency moves. Indeed, chief executive James Wood-Collins says his company "continues to engage with potential clients across a broad range of currency issues and geographies and is hopeful that further progress can be made in the new financial year."

True, procurement processes are highly competitive and lengthy, but it's my view that if Record continues to win new mandates then this offers scope for earnings upgrades to Edison Investment Research's EPS estimate of 2.47p for fiscal 2016, up from 2.32p in the year just ended. It should also offer upside to Record's share price which net of 12.7p per share of cash is rated on nine times likely earnings for the year just ended. Add to that a solid 4.4 per cent dividend yield, and I continue to rate the shares a buy on a bid-offer spread of 33p to 34p. Please note that I included Record's shares in both my 2014 and 2015 Bargain Shares portfolios.

  

Camkids share price kicked

Another constituent of my 2014 Bargain Shares Portfolio is Camkids (CAMK: 20.5p), a share selection that has proved an unmitigated disaster, and the worst performer in last year's portfolio. I last advised holding the shares when the price was 20p when I updated my 2014 Bargain Shares Portfolio in early February. The price did recover, doubling to a high of 40p at the start of last week before the board dropped a bombshell to shareholders in its full-year results and which caused the price to slump to 20.5p.

Despite sitting on 55p a share of net cash at the end of 2014, and taking a more conservative approach to its expansions plans given the tougher trading environment, the board have axed the final dividend of 2p share to preserve cash. True, the directors are also taking a pay cut, but I find the rationale for the shareholders' dividend cut impossible to comprehend because the cost of the payout is only £1.55m, or less than 4 per cent of Camkids' year-end cash pile of £42.6m. If prospects are so bad - the order book is down 38 per cent year on year - that the board are unable to maintain the dividend even though the business remains profitable, then there is really no point holding the shares. Sell.

MORE FROM SIMON THOMPSON...

Please note that I have published articles on the following 21 companies in the past fortnight:

Nationwide Accident Repair Services: Accept bid; SeaEnergy: Buy at 21.5p; Netplay TV: Buy at 9.5p; Stanley Gibbons: Buy at 253p ('Profiting from M&A', 13 Apr 2015)

Getech: Buy at 61p, target 80p; Cohort: Buy at 280p, target 300p; Faroe Petroleum: Buy at 86.5p, target 100p; Gama Aviation: Hold at 272.5p ('Flying high', 14 Apr 2014)

Entu: Buy at 145p, target 165p; Flowtech Fluidpower: Buy at 121p, target 150p ('Riding the new listings gravy train', 15 Apr 2015)

Inland Homes: Buy at 64.5p, target 80p; Walker Crips: Buy at 45p, target 54p; Software Radio Technology: Buy at 32p, target range 40p to 43p ('Decision time', 16 Apr 2015)

Bioquell: Buy at 124p, target range 155p to 159p ('Bug busting profit potential', 20 Apr 2015)

Stadium: Run profits at 123p, target 140p; Trifast: Buy at 108p, target 140p; First Property: Run profits at 39p ('Running bumper profits', 20 Apr 2015)

Somero Enterprises: Buy at 140p, target 185p ('On solid foundations', 22 Apr 2015)

Creston: Buy at 124p, target 150p; K3 Business Technology: Buy at 226p, target 275p ('On the acquisition trail', 23 Apr 2015)

STM: Buy at 35p, target 47.5p ('Tapping into a pensions payday', 27 Apr 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'