The key of course is to identify such businesses in the first place and assess whether investors are likely to warm to the investment case. To make this judgement call I take into consideration both the fundamental case for investing and also the technical set-up on the share price chart. Fortunately, a number of my selections have been attracting investor interest, so much so that in today’s column I am updating another three recommendations that have hit my target prices in double quick time. It’s time to assess whether these bull runs have further to go.
Trakm8 hits the right track
Shares in Aim-traded telematics and data provider Trakm8 (TRAK: 135p) have surged after the company's board released a bumper trading update for the fiscal year to end March 2015 and upgraded its profit guidance for the fiscal year to March 2016.
Investors were clearly impressed as the shares hit my target price of 120p in mid-April, representing a 30 per cent rise on my recommended buy in price of 92p ('Zoning in on a profitable price move', 16 February 2015). I subsequently reassessed the investment case at the end of last month and raised my target to 135p (‘Hitting target prices’, 28 April 2015). The shares were being offered in the market at 117p at the time, and given the price action, this represented a repeat buying opportunity. That judgement call proved correct as my upgraded target price was hit yesterday when Trakm8’s shares printed an intra-day high of 138p, the all-time high dating back to May 2006. The question now is whether it’s time to bank profits?
Assessing a sensible valuation
Following last month’s analyst upgrades, Lorne Daniel at brokerage finnCap 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. To put this into some perspective, the pre-tax profit estimate is two thirds higher than the £1.7m of profit forecast for the fiscal year to March 2015 and three times the level of profits Trakm8 reported in the financial year to March 2014. On this basis, expect EPS to surge from 5.7p in the financial year just ended to 9.1p in the fiscal year to March 2016. So with Trakm8’s shares currently trading on a bid-offer spread of 133p to 135p, the prospective PE ratio is 15.
That’s clearly a more realistic valuation for a company producing such a robust earnings growth profile and reflects the 44 per cent share price gain in the three months since I initiated coverage in February. The key for further share price upside will be earnings upgrades. That’s not an unrealistic possibility given that Trakm8’s revenues surged by 73 per cent on an underlying basis in the last financial year and recurring revenue now equates to a third of finnCap's revenue estimate of £22.5m for the financial year to March 2016. Order intake has soared by 38 per cent year-on-year, and I understand the company boasts a strong pipeline of opportunities under trial with potential clients.
In fact, I believe the odds are firmly skewed to the company reporting yet another positive trading update alongside full-year results in early July, and analysts being forced to upgrade their numbers yet again. For instance, a modest 3 per cent revenue upgrade to Mr Daniel’s current year sales forecast would lead to a profit upgrade three times greater due to the operational gearing of Trakm8’s business to deliver EPS around 10p. In the circumstances I would run your bumper 44 per cent paper profits and await further news of contracts wins and possible earnings upgrades. Run profits.
Redde’s repeat buy signal imminent
Aim-traded shares in Redde (REDD: 120.75p), 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, look on the verge of giving yet another buy signal.
The share price has moved sideways from a peak of 125p at the end of last month, the highest level since the end of 2010 and my target price when I initiated coverage at 108p ('In the fast lane', 23 March 2015). As a result the 14-day relative strength indicator (RSI) has unwound from an extreme overbought position. In fact, with the 14-day RSI pulling back from a reading of close to 80 to only 40, and the moving average convergence divergence (MACD) momentum oscillator on the verge of giving a buy signal, then the technical indicators are fully supportive of a share price break-out.
Interestingly, during the recent pull back the share price found support yet again at its 50-day exponential moving average (EMA) at the 117p level. This is significant because since the run up in Redde’s shares started last September, a test of the 50-day EMA has marked the end of each pull back every time and a repeat buying opportunity.
I strongly feel this is the case right now and that Redde’s shares are set to move through the 125p resistance level and give a swing buy signal too. My upgraded target price is 140p, so there is potentially a further 16 per cent share price gain on offer. If my new target price is achieved Redde’s shares would be rated on 16 times analyst's top of the range cash adjusted EPS of 7.9p for the financial year to end June 2015, after taking into consideration a cash pile of 13p a share, and would offer a dividend yield of 5.4 per cent based on the full-year dividend per share being raised by a third to 7.5p a share. That would represent fair value in my view.
I am also willing to wager a small bet on analyst earnings upgrades emerging in the coming months if as seems highly likely the strong momentum in the business is maintained through the current fourth-quarter trading period. This prediction is not being made without foundation as volume growth remains strong, the fall in the oil price is driving higher vehicle mileage and with it potential for more accidents on the roads, and Redde is benefiting from a better working relationship with insurers. The company is also looking to make earnings-enhancing acquisitions which could easily knock a couple of points off that aforementioned earnings multiple if the board use its cash pile wisely.
So trading on bid-offer spread of 120.25p to 120.75p, I rate Redde’s shares a buy ahead of a pre-close trading update in early July.
Profiting from a pension pay day
It hasn’t taken long for investors to warm to the merits of STM (STM: 45p), the Aim-traded financial services company specialising in the administration of assets for international clients in relation to retirement, estate and succession planning and wealth structuring. Having recommended buying the shares at 35p only 17 days ago ('Tapping into a pensions payday', 27 April 2015), the price has surged by 28 per cent and is closing in on my initial target price of 47.5p.
Investors’ enthusiasm for the shares has been fully justified too as the company released an upbeat trading update at the annual meeting yesterday. Chairman Michael Riddell noted that the business continues to make inroads in increasing its distribution network. In fact, it has signed on more intermediaries in the year to date than in the whole of the previous financial year. STM is also in the final stages of setting up a sales office in the Middle East, and recruitment for a further office in Asia is well under way too. This gives further reassurance that the company will be able to deliver on profit estimates.
Analyst David Buxton at brokerage finnCap predicts that STM is on course to grow pre-tax profits this year by £1m to £2.7m based on a £1.8m increase in revenue to £17.7m. On that basis, expect EPS to almost double from 2p to 3.8p. But with pro-forma net cash of £4.7m on its balance sheet equivalent of 8p a share, the shares are still only priced on 10 times cash adjusted net earnings even after the sharp price rise. That’s hardly a punchy rating for a company that is forecast to increase EPS by 95 per cent this year. A price-to-book value of 1.15 times is hardly punchy either.
Moreover, the increase in recurring revenue from STM’s pension business means that a modest £900,000 forecast rise in revenue to £18.6m in 2016 is expected to boost pre-tax profit by a further £1m to £3.7m, albeit this performance is also being enhanced by the reduction in finance charges following the redemption of the convertible loan notes I discussed in my article last month. Nevertheless, on this basis EPS estimates surge from 3.7p in 2015 to 5p in 2016, implying that STM’s shares are trading on only 9 times next year’s likely earnings, or 7.5 times on a cash-adjusted basis. That's a modest rating for a company set to deliver robust EPS growth over the next few financial years.
True, the 14-day RSI is overbought at a reading of 80, but this can unwind itself without the shares selling off heavily as the price can move in a sideways fashion as has been the case with Redde. Furthermore, if STM’s share price can take out the 47.5p level, coinciding with a six-year high dating back to January 2009, then a run-up to the next price target of 60p, representing the pre-Lehman Brothers lows in the summer of 2008, would be on the cards.
So if you followed my previous advice I would run your healthy profits for now and I am placing a conditional buy recommendation on the shares on a close above 48p for new investors. In this event my new target price becomes 60p.
Please note that I published an article with all the share recommendations I have made this year at the end of last month. I have published three other investment columns this week all of which are available on my IC homepage...
■ 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'
