The uptick in corporate activity follows a theme this year as four other companies on my active buy list have all been taken over: IT security firm Accumuli (ACM); vehicle repair group Nationwide Accident Repair Services (NARS); energy group Fortune Oil (FTO); and environmental engineer Tinci (TNCI).
I don't expect the bid frenzy to end at this point either as a stock market exit is the most likely end game for a number of the companies I follow including: Bioquell (BQE:150p), a provider of specialist microbiological control technologies to the international healthcare, life science and defence markets; housebuilder and land developer Inland (INL:71p); and wafer reclaim services provider Pure Wafer (PUR:125p), to name but a few.
Cashing in on a bid target
For good measure, I have found another sitting duck which is likely to reward shareholders with a tasty bid premium, Ensor (ESR:97p), a Manchester-based products and services company focused on the manufacturing and supply of physical security products and packaging. Ensor has a market capitalisation of £29m, having listed its shares on the London Stock Exchange in 1989, and was founded in 1880. But its days as a listed entity now look numbered after the board in effect put the company up for sale at the end of May.
It's an opportune time for shareholders to sell because Ensor has just reported a surge in revenues and profits in its latest financial year to end March 2015. In fact, operating profit soared by 84 per cent to £3.4m on revenues up 18 per cent to £36.1m to drive up EPS by more than 110 per cent to 9.2p. On this basis, the shares are rated on 10 times historic earnings, hardly a punchy valuation for a company in play.
Moreover, the board of Ensor have been clearing the decks for a clean sale of the company, having sold off property in Normanton in September, and freehold land and buildings in Woodville, Derbyshire and Stockport post the financial year-end. Those latest two disposals, one of which was made to a residential property developer, generated cash proceeds of £3.13m, a hefty £843,000 premium to book value. As a result I reckon that the company now has pro-forma net funds of almost £1.6m, so is in a very strong financial position to extract the best possible price for its businesses. BDO LLP have been appointed advisors to conduct the sale process.
Moreover, there is scope for further chunky cash receipts from property disposals as Ensor has a residential planning application for its site at Brackley, Northamptonshire in the planning stage with South Northampton Council. The company has applied for permission to demolish the buildings on the site and build seven dwellings with landscaping and parking. The land is in a great location close to the Great River Ouse at the former Hawkins Salmon site, Mill Lane, Brackley.
It's prime property as a six bedroom house with a floor space of around 3,000 sq ft on the same street has recently gone on the market for £575,000. Ensor intends to market the land to residential property developers as soon as it gets planning consent. Bearing this in mind, the land is in Ensor's accounts at only £550,000, but clearly is worth significantly more with residential planning consent. Indeed, a figure well north of £1m would be well in order and I don't see the company having any problems offloading the site.
It's worth pointing out too that Ensor's board are in talks with the management of its building products business to sell that unit to them. This operation distributes specialist roofing and drainage products, supplying the merchant trade and contractors, and has seen growth in its market as the construction industry improves. Operating profit more than doubled last year, so it's a rather good time to sell to maximise returns for shareholders.
Bearing this mind, the Harrison family have four members on the board, led by 85-year old chairman Kenneth Harrison, and 60-year old chief executive Roger Harrison, and control 54 per cent of Ensor's issued share capital. They have a combined age of 283 years, so it's not difficult to understand why they have decided to cash in their chips at this stage in their lives. Importantly, with such substantial shareholders, they have a vested interest in achieving the best prices possible for the assets of the company they control.
Sound business prospects
The other major positive for me is that irrespective of whether the board can sell the company as a stand-alone entity, it's still worth significantly more than its current market value.
That's because Ensor's building & security products division not only enjoyed a strong year operationally, posting turnover almost 20 per cent higher at £32.6m and a near doubling of operating profit to £2.78m in the 12 months to end March 2015, but prospects are robust for the year ahead across the board.
Firstly, Technocover, the company's subsidiary which manufactures physical high security products for the utilities sector started the new fiscal year with a good forward order book. Although Ofwat's AMP5 asset management programme has concluded, a carry-over of orders has resulted in an unusually strong order backlog to support results into the current year as the new AMP6 programme gets underway.
Secondly, Ellard, a supplier of electric motors, automation and accessories for doors and gates, has significantly improved its position within this niche sector and boosted share of an expanding market too. Investment into a graduate recruitment programme, new products and planned expansion of the premises, have been initiated "in anticipation of continuing buoyant markets", according to chairman Kenneth Harrison.
Thirdly, Ensor's subsidiary OSA has had a similarly progressive year. This unit supplies ready-to-install industrial sectional overhead doors, residential garage doors, steel hinged doors and repair materials to the same market as Ellard. Prospects look good, underpinned by continued growth in market share and a key supply agreement securing exclusive rights to supply certain products within the UK.
Finally, the company's packaging subsidiary, Wood's Packaging, is enjoying buoyant demand from the retail sector and is also benefiting from competitive sourcing of products though Ensor's offices in China. The unit continues to complement Ensor's security orientated businesses. In the last financial year, both revenues and operating profit from this business increased by around a fifth to £3.3m and £530,000, respectively.
Robust cash position
Although there is no analyst coverage on the company, and Ensor's management are bound by Takeover rules from issuing guidance, I think it's only realistic to expect further revenue and profit growth this year. Indeed, irrespective of progress on the trading front, the company will make a saving on interest costs given that it's now in a robust cash position and one that is large enough to wipe out a £2.1m pension deficit too.
Ensor's working capital position is worth quantifying too. That's because after a strong end to the financial year, trade receivables ended the 12-month period up almost £2.9m to £8.4m; there was a heavy investment in stocks to service higher sales levels which skewed the working capital flows; as did accelerated payment for foreign supplies to secure better prices. As a result current assets rose by £6m to £16.2m in the 12 month period to end March 2015, or twice the £3m increase in current liabilities which ended the financial year at £9.4m.
Most of these working capital changes will unwind in the first half to end September 2015 with the net result that the cash inflow should exceed operating profit in the six-month period. To put this into perspective, in the first half of fiscal 2015, Ensor generated operating profit of £1.5m on revenues of £17m, and a positive operating cashflow of £1.7m. In other words, I would not be surprised at all to see Ensor ending the first half with net funds close to £4m, and that's after factoring in the cash payment of £390,000 for the final dividend of 1.3p a share, up 30 per cent year-on-year to take the total payout to 1.9p a share.
Add to that a potential windfall of £1m from the Brackley site, and Ensor could potentially have £5m of cash on its balance sheet within the next six months. That's a chunky sum for a company with a market capitalisation of £29m. The net funds position could even be higher if a disposal of Ensor's building products division to its management takes place.
Fair valuation
The bottom line is that, based on 29.9m shares in issue, excluding 922,000 shares held in Treasury, I can easily see a value of at least 125p a share for Ensor's equity, valuing the company at £37.5m. This is based on the company having a net cash position of £5m, including proceeds from a sale of the Brackley site using a £1m valuation, or £140,000 per plot, and valuing all its businesses on a multiple of eight times their cash profits of £3.93m. Note that Ensor has a £530,000 non-cash depreciation charge which explains the difference between its reported operating profit of £3.36m and cash profits.
Needless to say, with Ensor's Aim-traded shares trading on a bid-offer spread of 93p to 97p, offering almost 30 per cent share price upside to my target price, I rate them a decent buy with very limited downside risk in the unlikely event that a sale of the company fails to materialise. In that scenario, and given that the company is now in a strong cash position, I would not be surprised at all for the board to sanction a special dividend to return excess capital to shareholders. 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 54 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, target 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)
■ Inland: Run profits at 71p, target 80p; KBC Advanced Technologies: Buy at 110p, target 165p; Caretech: Buy at 237p, target 300p ('Riding an earnings upgrade cycle', 18 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'
