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OPINION

Lights, camera, action

Lights, camera, action
May 21, 2015
Lights, camera, action

Interestingly, Entertainment One’s share price is now pressurising the 330p glass ceiling that has arrested progress for the past six months, and it looks only a matter of time before the price breaks above this level and the resistance finally gives way. You could even make the case that a reverse head and shoulders pattern has now formed with the 330p resistance level being the neckline.

Moreover, a number of the technical indicators point to an imminent chart break-out. For instance, the 14-day relative strength indicator (RSI) has a reading around 60, so is miles off being in extreme overbought territory which improves the chances of the current rally continuing; the moving average convergence divergence (MACD) momentum oscillator has just given a buy signal; and the share price is not overextended above its 20-day and 50-day exponential moving averages, positioned at 319p and 313p, respectively.

Importantly, the fundamentals are just as supportive. The group’s adjusted EPS increased by 12 per cent in the year to March 2015, and analysts expect a similar operational performance this year, as Entertainment reaps the benefit of its increased scale and rising consumer demand for high quality content on a variety of digital media platforms. This market dynamic is playing to Entertainment One's strengths and supports the board’s strategy to double the size of the group within five years. And with the shares priced on 12.5 times earnings estimates, there is a strong argument to be made that this double-digit earnings growth is not yet fully in the price.

Exploiting a valuation anomaly

My interest in Entertainment One is more than just passing because a closed-end investment company listed on the Specialist Fund Market of the London Stock Exchange, Marwyn Value Investors (MVI: 228p), has a sizeable shareholding in the FTSE 250 film producer through its investment in an open-ended Master Fund domiciled in the Cayman Islands. I recommended buying shares in Marwyn a fortnight ago at 220p (‘Exploiting a value play’, 5 May 2015) on the basis it would be a low-risk way of playing the potential share price upside from Entertainment One’s results this week given that its shares were trading on an unwarranted deep discount to book value.

That remains the case as Marywn’s latest net asset value (NAV) was 290p a share on Friday, 8 May, up 11 per cent since the end of January. But after factoring in the rise in Entertainment One’s shares in the past 12 days, I reckon Marwyn’s spot NAV figure is now closer to 298p a share. Furthermore, if Entertainment One’s shares break-out above the 330p resistance level there is no technical resistance until they approach last September’s high at 360p. A share price rise of that magnitude would add around 25p a share to Marwyn’s own NAV and would see the share price discount to book value widening from 23 per cent to almost 30 per cent.

A far more likely scenario is that investors will recognise the valuation anomaly well before then and prompt an overdue re-rating of Marwyn’s equity. In fact, with Marywn’s shares trading just below their September high of 230p, it wouldn’t take too much buying to spark a break-out and send them into blue sky territory and beyond the March 2014 all-time high of 237p. The chances of the above scenario playing out look highly probable to me.

On a bid-offer spread of 225p to 228p, and offering 14 per cent share price upside to my initial target price of 260p, get ready for action in Marwyn’s shares. Buy.

Bloomsbury tales

I noted with interest news from two of the constituents of my 2014 Bargain share portfolio, emerging market asset manager Charlemagne Capital (CCAP: 13.5p) and publisher Bloomsbury Publishing (BMY: 178p). Clearly other investors have been paying close attention too because shares in the two companies have risen by 25 per cent and 16 per cent , respectively, since I last updated the investment case a couple of months ago (‘Below the radar’, 19 March 2015).

As a result of this stellar price move, shares in Bloomsbury Publishing have re-rated to a more realistic valuation. True, underlying pre-tax profits and revenues in the financial year to end February 2015 were pretty flat year-on-year at £12.1m and £111m, respectively, but this masks a strong recovery in the second half during which time the company increased profits by 7 per cent to £10.4m. Analysts had expected flat full-year EPS of 13.3p, but with the benefit of a lower tax charge of only 10 per cent the actual figure was 14.7p. The dividend was hiked 5 per cent to 6.1p a share as expected.

Importantly, the company’s academic and professional business division, accounting for a third of revenues and over 40 per cent of operating profits, posted a strong recovery after a weak first half. This performance was buoyed by a 35 per cent increase in digital sales, representing double the industry growth rate; a solid contribution from law publisher Hart, acquired in the autumn of 2013; and buoyant rights sales in the UK.

There was good news to report from the publisher’s children’s division too. Sales of Harry Potter titles grew by 29 per cent in the financial year following the reissue of the JK Rowling novels with striking new covers last summer, highlighting the benefit of a more targeted strategic marketing. Children’s picture books and activity books posted double digit sales growth and now account for 13 per cent of the division’s revenues. The 11 per cent hike in divisional revenue and a £1m rise in operating profits to £2.8m, accounting for a quarter of group profits of £12.1m, was way ahead of analysts’ forecasts.

A positive outlook

Importantly, the outlook statement from Bloomsbury is encouraging across all divisions with the UK and US businesses showing particular strength, buoyed by titles such as Celia Imrie's Not Quite Nice, Children of the Stone by Sandy Tolan, the Harry Potter box set and the re-jacketed Harry Potter and the Philosopher's Stone by J. K. Rowling.

Bloomsbury's publishing programme includes Sweet Caress by William Boyd, Big Magic by Elizabeth Gibert, The Heart Goes Last by Margaret Atwood, and new cookery titles from Tom Kerridge, Paul Hollywood, Frances Quinn, and Hugh Fearnley-Whittingstall. Books with television tie-ins include Jonathan Strange & Mr Norrell by Susanna Clarke and the second Grantchester Mysteries novel, Sidney Chambers and the Perils of the Night by James Runcie.

This augurs well for the year ahead. Indeed, analyst Gareth Davies at broking house Numis Securities believes that Bloomsbury should be able to lift pre-tax profits from £12.1m to £12.9m in the 12 months to end February 2016 and deliver adjusted EPS of 13.8p based on a normal tax charge. On this basis, the forward PE ratio is 13. However, after adjusting for net cash of 10p a share on Bloomsbury’s balance sheet, the forward earnings multiple is nearer to 12. Mr Davies has a hold recommendation and a target price of 185p, whereas analyst Steve Liechti at brokerage Investec Securities has a buy recommendation and a sum-of-the-parts valuation of 197p a share, noting that “as Bloomsbury delivers, the valuation looks increasingly cheap.”

That rating still offers value for a company set to resume profits growth and one successfully implementing a strategy of growing academic, professional, special interest and educational revenues to reduce exposure of the business to the traditional book market. So underpinned by a 3.3 per cent dividend yield, I would continue to hold Bloomsbury’s shares on a bid-offer spread of 175.5p to 178p.

Charlemagne’s profit recovery

The key take for me in Charlemagne’s first quarter trading update was the performance of the company's long-short OCCO Eastern European fund, accounting for $515m (£332m) of the company’s assets under management (AUM) of $2.28bn. The fund has so far delivered a positive 4 per cent return in the first 14 weeks of the fiscal year which is important because performance fees earned from the OCCO fund account for the vast majority of Charlemagne's own performance fees.

So with analyst Andrew Watson at broking house N+1 Singer factoring in an investment return of 6 per cent in his 2015 estimates, then progress to date augurs well for a strong bounce back in profits following last year’s annus horabilis in emerging markets which devastated performance fee income. Mr Watson is maintaining his forecast that Charlemagne’s pre-tax profits will rise from $3.1m in 2014 to $7.8m this year based on full-year revenues increasing by $4.4m to $33m. On this basis, the company would more than double EPS to 1.1¢ (0.73p) which in turn covers a maintained dividend of 1¢ (0.65p), based on a 100 per cent payout policy, and means that the shares are now trading on 19 times earnings estimates and offer a dividend yield of 5 per cent.

On the face of it, the prospective earnings multiple may seem full, but it’s worth pointing out that the company has a rock solid balance sheet: net cash of $17.4m equates to 3.8p a share and Charlemagne also has $9.9m invested in its own funds, or the equivalent of 2.2p a share. On a cash-adjusted basis, the forward PE ratio is actually only 10.5 which is still attractive for a company in recovery mode.

In the circumstances, I continue to see potential upside in the shares, albeit this is predicated on price stability in emerging markets and no reccurrence of the factors which led to the heightened risk aversion in these markets last year. So if you followed my earlier advice, I would continue to hold onto your positions with Charlemagne’s shares trading on a bid-offer spread of 13p to 13.5p.

MORE FROM SIMON THOMPSON...

Please note that I published an article with all the share recommendations I have made this year at the end of April. So far this month I have published articles on the following 22 companies:

Marwyn Value Investors: Buy at 220p, target price 260p (‘Exploiting a value play’, 5 May 2015)

Pure Wafer: Buy at 113p, target 140p to 150p; Paragon: Run profits at 440p, but buy on a confirmed breakout above the 445p and new target of 500p; 600 Group: Buy at 16.5p, target 24p; Fairpoint: Buy at 127p, target 190p; AB Dynamics: Buy at 207p, target 230p (‘Repeat buy signals’, 11 May 2015)

Globo: Buy at 56p, target 69.5p; Greenko: Hold at 70p; Pittards: Buy at 128p (‘Break-out looms for mobile wonder’, 12 May 2015)

Macau Property Opportunities: Buy at 214p; Dragon-Ukranian Properties & Development: Hold at 28p; Raven Russia: Hold at 53p (‘Overseas property plays’, 13 May 2015)

Trakm8: Run profits at 135p; Redde: Buy at 120.75p, target 140p; STM: Run profits at 45p, but conditional buy on close of 48p and new target of 60p (‘Smashing target prices’, 14 May 2015)

Bilby: Buy at 75p, target 100p (‘Buy to build’ growth play, 18 May 2015)

Bioquell: Buy at 148p, target 170p to 185p; Somero Enterprises: Buy at 140p, target 185p; KBC Advanced Technologies: Buy at 109.5p, target 165p; Inspired Capital: Hold at 14.25p ('Three value plays', 19 May 2015)

Renew Holdings: Buy at 315p, target range 350p to 375p; Manx Telecom: Buy at 198p, target 210p (‘Renewing old acquaintances’, 20 May 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'