This is the second major land deal in less than a month as the company previously announced the sale of 230 residential plots with planning permission across three brownfield sites at Queensgate in Farnborough, Gerrards Cross in Buckinghamshire and Woolwich in East London for total sale proceeds amounting to £20m. These deals can only highlight the significant value in the company’s land bank of 4,500 plots.
Indeed, excluding Inland’s investment in the former MoD site at Wilton Park, Beaconsfield and other joint ventures, the open market value of the company’s 1,656 plots of owned land could easily be in excess of £80,000 a plot, or more than double the carrying value in the company’s last set of accounts. The difference between book value and open market value on these land holdings alone is around £70m, a sum worth 35p per Inland share. In turn, it’s really not that difficult to make a case that once you mark all the company’s land holdings to market value, including the value tied up in land under option, then Inland’s underlying net asset value per share could be three times the 33.3p figure in its last set of accounts.
Moreover, as land is sold, and the hidden value of these land assets in the accounts is crystallised, then expect the company to make substantial profits. For instance, following the Drayton Garden Village disposal, analyst Nick Spoliar at brokerage WH Ireland upgraded his pre-tax profit estimate from £12m to £15m to produce EPS of 4.9p for the 12 months to June 2015. In fiscal 2014, Inland reported profits of £8.6m and EPS of 2.87p, so expect profit and earnings growth of north of 70 per cent when the company reports its final results in a few months time. We can also expect some decent upgrades to fiscal 2016 earnings estimates in due course too.
So with the shares making headway towards my 80p conservative year-end target price, and trading 30 per cent below analysts’ sum-of-the-parts valuations, I would continue to run your huge profits. Please note that I included Inland’s shares as one of my 2013 Bargain shares at 23.5p (‘How the 2013 Bargain shares fared, 7 February 2014), and have remained positive ever since. I last advised running profits when the share price was 64p (‘Decision time’, 16 April 2015).
CareTech on the acquisition trail
Aim-traded shares in care home operator CareTech (CTH: 237p) have yet to make much headway on my recommended buy in price of 230p (‘Time to take care’, 16 March 2015), but with the company reporting a solid set of interim results at the end of last week, and with finances in place to make earnings enhancing bolt-on acquisitions, I still believe this is more a case of ‘when’ the re-rating will occur, rather than ‘if’.
Firstly, the specialist social care market continues to benefit from strong demographic trends and higher acuity levels across the UK, growing at an estimated 5 per cent per annum and with an estimated shortfall of 20,000 specialist beds at present. Local Authorities and the NHS are also turning to the private sector to make cost savings just as smaller independent operators are struggling under the increasing regulatory burden. In this environment, CareTech offers an attractive investment proposition.
The business is split into two main segments: adult services, encompassing learning difficulties and mental health; and children's services, incorporating young person's residential and foster care. The adult learning difficulties business is the largest profit centre, generating in excess of 60 per cent of profits. It’s growing at the rate of 5.5 per cent a year too, according to analysts, which underpins demand for the 1,482 adult places at its care centres.
CareTech's young person's residential care business caters for children with learning and emotional behavioural disorders, a market that is growing at 5.7 per cent a year. It's also under-represented by the public sector, which only caters for one-third of the residential homes in this niche market. So by focusing on children with the most complex needs CareTech can maximise profits for this business unit. Growth from this segment, and from adult learning services, were the key drivers in the company delivering a 11 per cent rise in pre-tax profits in the first half. Analysts expect almost 10 per cent profit growth for the full-year to deliver EPS of 31.7p and a well covered dividend of 8.3p a share. On this basis the shares are rated on 8 times earnings estimates and offer a decent 3.5 per cent dividend yield.
Clearly, this solid performance is supportive of the share price, but the key driver of a near-term re-rating to attract investor interest is likely to be the announcement of earnings accretive acquisitions. Having tapped shareholders for £21m last year, I understand the board is making good progress on a number of potential bolt-on deals, several of which it is in exclusive negotiations. And with cash generation strong, and the loan-to-value ratio on its properties around half their open market value of £275m, expect most of the proceeds from the placing to be deployed in the second half of this year.
Moreover, with the industry backdrop solid, and earnings upgrades likely in the event of sensibly priced acquisitions being made, then I feel that now is still a good time to buy into the CareTech growth story. Offering 25 per cent share price upside to my 300p target price, and priced 13 per cent below book value per share after marking to market value the property portfolio, I continue to rate the shares a solid income buy with potential for capital upside.
KBC repeat buying opportunity
A key feature of many of the companies I follow is the scope for repeat buying opportunities. For instance, shares in Aim-traded KBC Advanced Technologies (KBC:110p), a consultancy and software provider to the global hydrocarbon processing industry, rallied hard from 109p to 126p after I highlighted the price was on the cusp of taking out last autumn's highs at 110p (‘Three value plays’, 19 May 2015). I originally advised buying a couple of years ago at 69p ('Fuelled for growth', 5 May 2013) and still believe a return to the 142p highs dating back to June 2014 is a realistic target. Furthermore, with a decent operational performance, then a fair value target price of 165p is a sensible medium-term valuation.
It was therefore comforting to read the trading update at the annual meeting yesterday when chairman Ian Godden disclosed that his company has won £9m of new contracts in the Middle East and North Africa in the first five months of the fiscal year, including major contracts with national oil and gas companies in Saudi Arabia, Kuwait, United Arab Emirates and Jordan. KBC’s strategy has been to concentrate on key regions where the company believes growth will emerge while at the same time proactively keeping costs in check in light of the difficult conditions in the energy market. It’s hardly surprising that demand is holding up as KBC’s software enables companies to reduce capital and operational spend, so offers attractive efficiencies for customers no matter the operating environment. I also understand that the two acquisitions the company made last year have both been performing well.
Of course, KBC’s board has acted sensibly and cut costs in the current environment, taking £3.4m out of the cost base at a one-off cost of £800,000. So although revenues are expected to fall by 4 per cent to £73m this year, operating margins are predicted by analysts at research firm Equity Development to rise by 150 basis points to 14.7 per cent. This explains why underlying pre-tax profits are forecast to rise by 10 per cent to £10.5m in fiscal 2015.
It’s also worth flagging up that KBC's latest net cash figure of £15m is forecast by analysts to grow to around £19.2m by the year-end, a sum equivalent to 23p a share. That’s significant in relation to the company's market capitalisation of £90m. Or put it another way, if you strip out net funds of £15m for the current market capitalisation of £90m, then the company is currently being rated on only 7 times current year cash adjusted operating profit estimates of £10.7m. To put that rating into perspective, the sector average multiple on this basis is 12 times operating profit.
So with KBC’s shares pulling back to their chart break-out point (110p), and tracing back to the 50-day exponential moving average (110p, then from my lens at least this looks like yet another repeat buying opportunity with the 14-day relative strength indicator now showing an oversold reading of 40. Priced on a bid-offer spread of 109p to 110p, and offering 50 per cent share price upside to my year-end target of 165p, I continue to rate KBC’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 53 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)
■ Trakm8: Run profits at 159p, new target 180p; Anite: Sit tight at 126.75p; Trifast: Run profits at 129p, target 140p; Record: Buy at 37p (‘Small cap wonders’, 17 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'
