Based in Bodmin, DCS has six staff and three core brands: Dogcam (sports and recreation use); LawMate (police and military surveillance); and RoadHawk (the UK’s leading insurance-approved black box recording systems for vehicles, capturing video, audio, GPS and g-force information). The acquisition is in line with Trakm8's strategy of augmenting its organic growth with selective bolt-on purchases that expand its telematics offering to both insurance and fleet customers. It certainly looks a sound deal and one that taps into the increasing use for cameras in a wide range of applications, including demand for forward facing vehicle cameras to record driving incidents and to mitigate the risk from 'crash for cash' accidents. Trakm8 already has an existing relationship with DCS, supplying some Trakm8 customers with its RoadHawk cameras, so its management team knows the business well.
Moreover, the acquisition will be immediately earnings enhancing. DCS made pre-tax profits of £600,000 on sales of £2.8m in the fiscal year to end April 2015, and the £3.2m cash consideration will be funded from existing cash and low cost debt facilities. This means that shareholders will benefit from a positive net contribution to profits after factoring in the additional interest costs on the debt raised. Post the acquisition, Trakm8’s net borrowings will be £3.7m, so the company still has untapped facilities of around £2m for further bolt-on deals.
The acquisition has also led to sharp earnings upgrades: analyst Lorne Daniel at brokerage finnCap upgraded his fiscal 2016 (March year-end) revenue forecast by £2m to £24.5m, raised his pre-tax profit estimate from £2.8m to £3.2m and EPS estimates from 9.1p to 10.3p. So although the company’s pre-tax profits and revenues are forecast to almost double to £1.7m and £18m, respectively, in the financial year to end March 2015, Trakm8 is also on course to repeat this impressive performance in the current financial year too. EPS are predicted to rise by 81 per cent to 10.3p, but earnings growth could easily be greater as the company boasts a very strong order book - order intake had soared by 38 per cent year-on-year at the time of the last trading update - and a robust pipeline of opportunities under trial with potential clients. In the circumstances, it’s worth reassessing my fair value target prices.
To recap, I last advised running profits at 135p (‘Smashing target prices’, 14 May 2015), having first recommended buying the shares at 92p ('Zoning in on a profitable price move', 16 February 2015). However, I now feel a fair value target price around 180p is far more realistic after factoring in the potential for more upgrades and earnings enhancing acquisitions. Trading on 15 times forward earnings for fiscal 2016, and with a swing buy chart signal in the offing on a confirmed price move above the 163p level, I would continue to run your 72 per cent paper profits. Run profits.
Record’s bumper profit growth
Trakm8 was not the only share on my watchlist of companies to make an important price move yesterday. Investors also reacted positively to the full-year numbers from currency manager Record (REC: 37p). Interestingly, a move above last September’s high of 37.5p would pave the way to a return to the 47p level which halted progress in early 2012. The fundamentals certainly support a re-rating.
In the fiscal year to end March 2015, the company reported a 20 per cent rise in assets under management to £37.3bn, or a 7 per cent increase in US dollar terms. In turn, pre-tax profits shot up by 18 per cent to £7.7m on revenues ahead by 6 per cent to £21.1m, helped in part by a 354 basis point improvement in operating margins to 35.8 per cent. The growth was underpinned by the addition of seven new clients, to take the customer base to 55, and the addition of two new multi-strategy currency mandate wins.
Chairman Neil Record points out that foreign exchange markets have been characterised by two central themes in the past year: continued expectation of monetary policy divergence between the major central banks (US Federal Reserve, Bank of Japan, European Central Bank and Bank of England); and the re-emergence of volatility. These factors have raised awareness amongst the institutional investment community of currency-related issues, and led to a more supportive environment for Record's products and services.
Mr Record adds that with divergence in monetary policies and forex market volatility set to continue, he would expect the increased focus on currency-related issues to be maintained. This view is “reinforced by the current high level of engagement with potential clients and investment consultants across a broad range of currency issues”. I would agree and it’s no coincidence that the board of Record feel bullish enough to have increased the dividend by 10 per cent to 1.65p a share. The payout is covered 1.6 times by EPS of 2.66p. It’s worth noting too that the company has a cash pile worth £30.1m, or almost 14p a share, so the cash adjusted PE ratio is less than 9 and the historic dividend yield is around 4.5 per cent. That’s hardly an exacting valuation for a company winning new mandates, growing profits and set to continue to profit from the currency volatility resulting from the marked divergence of monetary policy of the aforementioned central banks.
I included Record’s shares in my 2015 Bargain shares portfolio at 34.3p, and on a bid-offer spread of 36p to 37p, I continue to rate them a decent income buy with capital upside too. Buy.
Anite cash offer
FTSE Small Cap constituent Anite (AIE: 126.75p), a leading supplier of test and measurement systems to the global wireless market, has received a recommended cash offer of 126p a share from Nasdaq-listed Keysight Technologies (KEYS:NYQ), valuing the company at £388m.
Keysight has received undertakings from shareholders controlling more than 15 per cent of the share capital to accept the offer. It looks sensibly priced too as the take-out price equates to 20 times EPS estimates of 6.3p based on finnCap’s forecasts for the 2016 fiscal year (April year-end). Moreover, having initiated coverage on Anite’s shares only three weeks ago when the price was 91p, the offer represents a 38 per cent premium to your buy in price if you followed my advice (‘Testing a break-out’, 26 May 2015).
There is sound logic for the deal as Ron Nersesian, chief executive of Keysight, notes that: "The combination of Keysight and Anite - two global leaders with complementary strengths - enables us to offer a broad portfolio of leading-edge solutions throughout the wireless research and development cycle. This will help us to expand our portfolio into the software layer for design and validation, and expand Keysight's position as a supplier for wireless design and validation tools." Anite’s products are used to test whether mobile phones are working correctly before launch and that an operator's mobile networks are running efficiently. In effect, the company is a pure play global wireless test and measurement business. That’s important because Keysight does not have a strong position in 4G, so acquiring Anite makes strategic sense with a view to enhancing its position in 5G before it takes off in 2020.
It’s worth noting that the wireless testing industry has been consolidating, a point I made in my analysis last month. This trend is partially being driven by greater concentration in the underlying customer base (including among mobile network operators and major manufacturers of chipsets and mobile devices), but also by the economies of scale required to support major research and development investment programmes. Consolidation among Anite’s customers has led to volatility in the company’s order flow, which has been exacerbated by the traditionally short order cycles and seasonality in the business.
The logic for combining the two businesses is quite compelling in my view, especially as Keysight believe that it can extract £13m of annualised costs savings within two years of completion at a one-off cost of £26m. That’s almost half of Anite’s forecast pre-tax profits for the current financial year. The only question is whether there will be a counter offer from a competitor?
That’s because Anite offers an attractive proposition, serving a large, international and growing market that has considerable barriers to entry, and its management team have diversified into adjacent markets through a number of bolt-on acquisitions too. Other rivals could easily be running their slide rule over the business in light of the cost savings Keysight believes are achievable within a couple of years. Indeed, other investors clearly believe there is potential for a counter offer which is why Anite’s shares are trading at a small premium to the cash offer price. Rodie & Schwarz, a German manufacturer of test and measurement equipment for mobile radios and radio communications, is the most likely candidate to launch a rival offer. Trading on a bid-offer spread of 126.5p to 126.75p, I would sit tight for now as you have nothing to lose.
Trifast for more share price gains
Shares in Trifast (TRI: 130p), a global manufacturer and distributor of industrial fastenings, have surged by 20 per cent since I last advised buying them at 108p (‘Running bumper profits’, 21 April 2015) and are well on their way towards hitting my 140p target price. I initiated coverage on the shares when the price was 53p a couple of years ago ('Bargain shares for 2013, 7 February 2013), so the holding has proved a decent investment and one that has also given numerous repeat buying opportunities. For instance, I rated the shares a strong buy at 99p only three months ago (‘Exploiting currency tailwinds’, 11 March 2015).
Importantly, the fundamental case remains well supported after the company posted yet another earnings beat yesterday. Pre-tax profits increased by over half from £9.2m to £14.3m in the 12 months to end March 2015, an outcome that was £800,000 ahead of some analysts’ forecasts, to drive EPS up by 46 per cent to 8.7p and which enabled the board to raise the payout by 50 per cent to 2.1p a share.
True, the earnings enhancing acquisition of VIC, an Italian manufacturer and distributor of fastening systems predominantly to the white goods industry, boosted the bottom line to the tune of £4.4m, but organic growth was robust too. Underlying sales rose by 7.6 per cent and lifted like-for-like operating profit by almost 12 per cent after stripping out the contribution from VIC. This reflects the drive to leaner manufacturing, higher margin new contracts and the natural operational leverage in the business with overheads falling as a percentage of sales. It’s worth noting too that a negative currency headwind clipped £500,000 off profits, so in constant currency terms the performance was actually even better.
In the UK, Trifast continues to benefit from single digit profit and sales growth, a segment accounting for just under a third of the company’s profits, driven by improving confidence across its customer base. For instance, the automotive sector has decent exposure in the North East and the Midlands to some of the faster growing car models made in the UK. The improvement has been particularly notable for Lancaster’s and the general distribution business. These activities can be viewed as a barometer of the UK economy and achieved good growth with improving demand and associated re-stocking, according to analyst Ben Thefaut at the company’s corporate broker, Arden Partners. Forecasts that the UK economy will grow by around 2.5 per cent this year and next are clearly a positive.
The upside from VIC aside, there were some encouraging returns in Europe (accounting for around 40 per cent of group profit) from operations in Holland and Hungary where the company has built on major OEM contracts secured in the past 18 months. Indeed, organic revenue grew by 5.5 per cent in the region and with margins on the rise too, this translated into a 18 per cent hike in operating profit after stripping out the VIC contribution.
Upgrades drive re-rerating
The company is clearly delivering which is why analysts raised their earnings forecasts for this year and next by around 10 per cent plus. Arden now predicts fiscal 2016 EPS of 9.2p, rising to 9.7p in fiscal 2017. And with net debt reduced to less than 20 per cent of shareholders funds, then expect a 10 per cent hike in the current year dividend to 2.31p a share, rising to 2.54p the year after. On this basis, the shares are rated on a forward PE of 14 and offer a prospective dividend yield of 2 per cent, still an attractive valuation for a company on an upwards earnings curve.
It’s one in good hands too as finance director Mark Belton, who has been with the company for 16 years, will be stepping into the shoes of outgoing boss Jim Barker, a stalwart with 40 years experience in the industry. Group financial controller Clare Foster is an able replacement for Mark Belton.
Not surprisingly, analysts have also been upgrading their target prices: Henry Carver of brokerage Peel Hunt lifted his from 140p to 150p, shy of the 185p target of Robert Sanders at Westhouse Securities, but in line with that of David Buxton at finnCap. Arden Partners, the company’s corporate broker, has the shares on a buy rating as does N+1 Singer. Edison Investment Research are positive too and analyst Nigel Harrison points out that the shares are priced on a discount to peers such as Electrocomponents (ECM - 17 times fiscal 2015 earnings estimates) and US-based fastener distributer Anixter (US: AXE and 15.4 times).
Moreover, there is ample scope for this undervaluation to correct itself so I would run profits on this solid holding if you followed my earlier advice. Run profits.
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 48 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)
■ 1pm: Buy at 67p, target 80p; Vislink: Buy at 58p, target 70p ('Small-cap growth stocks', 11 June 2015)
■ Elegant Hotels: Buy at 105p, targte 135p to 140p ('Checking into an elegant investment', 15 June 2015)
■ First Property: Run profits at 45p; AB Dynamics: Run profits at 225p and target 250p; Inspired Capital: Sit tight at 20p (Bargain shares updates', 16 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'
