The news prompted analyst Eric Burns at house broker W.H. Ireland to increase his profit and EPS estimates by over 20 per cent to £1.6m and 3.7p, respectively, based on revenues of £5.6m. Previously, Mr Burns had anticipated a relatively flat profit performance, not because the business isn’t growing strongly – revenues will have risen by over a third in the fiscal year just ended - but because of the additional costs incurred due to investment in sales, marketing and underwriting staff, and new IT systems. 1pm is aiming to grow its loan book to £40m by 2016, almost double the level in May 2014, which explains the additional costs to support this anticipated and very profitable growth.
But clearly analysts were too conservative in their assumptions as a better than expected bad debt performance, combined with a 23 per cent hike in the combined asset finance and loan portfolio from £24.3m to £30m in the second half to end May 2015, resulted in a robust margin improvement which led to the earnings upgrade. Both parts of the portfolios have continued to grow with new business written in the second half increasing from £5.7m to £9.2m year-on-year, including a record £5.5m in the final quarter alone. Over the 12 month trading period, the loan and asset finance portfolios increased from £20.4m to £30m.
Moreover, with the company well funded – it has raised £5.7m of debt finance and £3.8m from a share placing since its May 2015 financial year-end – the business looks well on course to increase its lending loan portfolio to £40m next year. If achieved, W.H. Ireland predicts the company’s revenue will increase by around 58 per cent to £8.9m in the current financial year to deliver a 25 per cent pre-tax profit increase to £2m. On this basis expect a 19 per cent rise in EPS to 4.4p.
This means 1pm’s shares are rated on 16 times forward earnings, hardly a punchy valuation for a company that has just delivered 20 per cent plus earnings growth and is on course to deliver almost the same next year to. The PEG ratio is well below one which is attractive in my view. For good measure, analysts expect the company to announce a maiden dividend of 0.3p at the forthcoming full-year results in early July, and are pencilling in a payout of 0.4p in the current financial year too. On this basis, the prospective dividend yield is around 0.6 per cent.
A sweet spot to warm to
Importantly, 1pm continues to operate in a sweet spot as not only is the business benefiting from the general economic recovery – the Bank of England forecasts GDP growth of 2.6 per cent this year and 2.5 per cent in 2016 – but it is also operating in a niche area of the finance sector where there is a supply-demand imbalance due to the unwillingness of the banking sector to provide adequate funding to SMEs.
The majority of the credit provided by 1pm is asset finance based lending to SMEs and the average loan agreement is around £8,500 for a term of 40 months. 1pm also entered the business loan market in September 2013 and advances loans of £1,000 to £26,000 over a term of three to 36 months. Bad debts account for less than 0.5 per cent of the total portfolio and no single customer accounts for more than 0.4 per cent of the asset finance portfolio, in particular, so there is a broad customer base to mitigate credit risk. This is highly supportive of the business case and one I expect investors to start to continue to warm to.
Trading on a bid offer spread of 69p to 70p, and with a decisive price move yesterday well worth following, I rate 1pm’s shares a buy and have an initial price target of 80p. Buy.
Hitting target prices
1pm is not the only high growth company on my watchlist that has seen a marked share price movement. Shares in Vislink (VLK: 55.5p), a global technology business specialising in the collection and delivery of high-quality video and data from the field to the point of usage, hit my 60p target price at the end of last week. This represents a 30 per cent rise in the share since I updated the investment case post the fiscal 2014 results (‘Suitable investments for growth’, 26 March 2015).
To recap, I initiated coverage last summer at 43p ('Time to make the link', 26 August 2014), and also highlighted another good buying opportunity at 41p at the start of this year (‘Punching above its weight’, 27 January 2015).
Clearly, the Capital Markets day hosted by executive chairman John Hawkins together with other members of the Vislink senior management team was well received by institutional investors at the end of April. I didn’t attend that event as no new information was being released by the company, but in any case having reappraised the investment case I am not ready to bank profits yet for a number of reasons.
Positive earnings momentum
Firstly, although Vislink’s shares are far more sensibly priced now than at the start of the year, there is still scope for the re-rating to continue. That’s because analyst Tintin Stormont at brokerage N+1 Singer predicts earnings growth of around 9 per cent this year to lift EPS to 4.5p based on pre-tax profits rising from £7.1m to £7.7m on revenues of £63.7m. On this basis, Vislink’s shares are priced on little over 12 times earnings forecasts and offer a dividend yield of 2.7 per cent assuming a held dividend per share of 1.5p. That rating is not out of sync with a company generating a post tax return on equity of 10 per cent.
Furthermore, N+1 Singer are at the bottom of the range as the consensus EPS forecast is around 4.8p with analysts at research firms Edison Investment Research looking for top of the range fully diluted normalised EPS of 5.3p and Equity Development predicting middle of the range EPS of 4.8p. At the mid-point of these three forecasts, the shares are trading on a reasonable 11.5 times forward earnings estimates for 2015.
Secondly, I even scope for earnings upgrades to those EPS forecasts as the year progresses. That’s because in the fiscal 2014 results, Vislink revealed that its second half operating profits trebled to £5.5m, an eye-catching performance and one driven by a robust showing from the company’s surveillance division and the acquisition of Weybridge-based Pebble Beach Systems, a developer and supplier of automation, 'channel in a box' and content management services for TV broadcasters, cable and satellite operators.
Pebble Beach reported operating profit of £3.3m on revenues of £8.3m for the nine month period under Vislink’s ownership in 2014. It has been growing quickly and I expect this business to be the primary driver of Vislink’s profits in the year ahead as benefits materialise from a strategic five-year partnership with Nasdaq-quoted Harmonic Inc (US: HLIT), a worldwide leader in video delivery infrastructure for emerging television and video services. I commented on the significance of that alliance in detail when I initiated coverage last summer ('Time to make the link', 26 August 2014).
Thirdly, the company's surveillance and public safety division is clearly benefiting from the heightened extremist terrorist threats in the western world. That’s not going to change anytime soon. It’s a major part of the company too, accounting for 25 per cent of turnover, having grown revenues by over a third in 2014.
Fourthly, a third of Vislink’s revenues are generated in North America. The average exchange rate between sterling and the greenback was £1:US$1.647 last year, ending the period at £1:US$1.558. However, the average cross rate has fallen to £1:US$1.519 in the year to date, so the ongoing weakness of sterling, reflecting expectations of the US Federal Reserve increasing the Fed Funds rate later this year, is likely to lead to a currency gain to boost Vislink’s profits. True, around a fifth of revenues originate from Europe, so the slide in the €uro from £1:€1.29 to £1:€1.36 since the start of this year will offset some of the US dollar derived currency gains, but I can still see a net currency led profit improvement in the first half of this year.
Finally, Vislink is up against some easy comparatives for the first half of 2014 when it turned in adjusted pre-tax profits of £1.7m on revenues of £33.3m, but only benefited from a three month contribution from Pebble Beach. Factor in a full six month contribution from Pebble Beach and we can realistically expect a significant increase on the first half performance when the company reports interim results in September. That can only be positive for investor sentiment.
Target price
So taking all of the above factors into consideration, I have decided to lift my target price from 60p to 70p, a level that is still below the targets of Edison Investment Research (75p) and Equity Development (80p). Interestingly, Vislink’s share price has pulled back to its 20-day exponential moving average around 56p, a short-term trend line that has acted as a major support all this year with each test proving successful and offering a repeat buying opportunity. I don’t expect this time to be any different as the 14-day relative strength indicator has now unwound from a reading of 80 at last week’s eight-year share price high of 61p to a reading well below 60, so is no longer in extreme overbought territory.
Trading on a bid-offer spread of 55p to 55.5p, and offering 26 per cent share price upside to my upgraded target price of 70p, I rate Vislink’s shares a buy.
MORE FROM SIMON THOMPSON...
At the end of April, I published an article with all of my share recommendations this year. Since then I have published articles on a further 42 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 ('Breakout looms for mobile wonder', 12 May 2015)
■ Macau Property Opportunities: Buy at 214p; Dragon-Ukrainian 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)
■ Marwyn Value Investors: Buy at 228p, target 260p; Charlemagne Capital: Hold at 13.5p; Bloomsbury Publishing: Hold at 178p ('Lights, camera, action', 21 May 2015)
■ Anite: Buy at 91.5p, target 110p ('Testing a breakout', 26 May 2015)
■ Character Group: Buy at 415p, target 525p ('Playtime', 1 Jun 2015)
■ Tristel: Run profits at 96p; Pure Wafer: Buy at 123p, target range 140p to 150p; Crystal Amber: Buy at 153p ('Hitting target prices', 2 Jun 2015)
■ B.P. Marsh &Partners: Buy at 150p, target range 170p to 180p; Moss Bros: Buy at 110p, target range 120p to 130p; SeaEnergy: Sell at 15p ('Exploiting a valuation anomaly', 3 Jun 2015)
■ Globo: Buy at 59p, target 69.5p; London & Associated Properties: Buy at 38.5p; Greenko: Hold at 44p ('Catalysts for share price moves', 4 Jun 2015)
■ Burford Capital: Buy at 148p, target 190p ('Legal eagles', 8 Jun 2015)
■ Market strategy ('Financial Market Watch', 9 June 2015)
■ Software Radio Technology: Buy at 29.5p, target 40p to 43p; Tristel: Run profits at 92p; Creston: Buy at 136p, target 150p; Sanderson: Buy at 69p, target range 80p to 85p (‘Blue sky potential’, 10 June 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'
