A pre-close trading statement from the company certainly impressed analyst Andrew Watson at brokerage N+1 Singer who upgraded his recommendation on the shares from hold to buy and upgraded his target price from 164p to 220p. He also raised his 2016 EPS estimates by around 3 per cent and adjusted his dividend payout ratio from 2.5 times cover to 2 times given the strong underlying cash generation of the business and progress made by H&T on paying down debt.
He has a point as a stable first half performance from the company’s core pawnbroking business, reflecting an improvement in redemption rates and yield on pledges, has driven an increase in interest income. Net debt at the end of June 2015 was only £8.9m, down from £9.7m at the start of this year and £13.7m at the end of June 2014. The pledge book did decline slightly to £37.4m, but this is positive as it reflects strengthening redemptions (a sign of credit quality) and in any case the book looks to have stabilised at around the £38m level.
Moreover, with ample funding lines in place, and net debt well below analysts’ cash profit estimates of £11.2m for the 2015 fiscal year, the company has ample scope to grow the pledge book by taking advantage of bolt-on purchases from distressed rivals. The balance sheet is rock solid: net borrowings equate to less than 10 per cent of shareholders' funds of £91m, or 248p a share, and the company has an enviable working capital position with net current assets of £78.8m.
Importantly, both the company’s retail operations – accounting for more than a fifth of H&T's gross profits – and newly launched products (personal loans and foreign currency) are showing encouraging growth too. In fact, the personal loan book has increased by 30 per cent to £3.4m in the past 12 months.
So with the company now on a stronger footing to trade profitably in a lower and more stable gold price environment, and a more diversified revenue stream offering H&T a decent platform to underpin a return to earnings growth, I feel very comfortable with the double digit earnings growth forecasts of analysts for the next three years. N+1 Singer predict that revenues will hold firm at £87.7m this year, but with costs under control, yields improving, and new products generating additional income, then cash profits will rise from £9.8m to £11m to drive up pre-tax profits from £5.5m to £7.1m. On this basis, expect EPS to grow by more than a quarter to 15p and with the balance sheet so lowly geared then a higher proportion of these net profits can be returned to shareholders by way of dividends. Indeed, Mr Watson predicts the payout per share will increase from 4.8p in 2014 to 7.5p this year, rising to 8.6p in fiscal 2016. On this basis, the shares offer a prospective yield of 3.75 per cent, rising to 4.3 per cent in 2016, a very attractive income stream for investors who can realistically expect capital upside from the shares too as H&T’s earnings recovery gathers pace.
It’s an appealing combination in my view and one I still feel is yet to be fully reflected in the company’s valuation with H&T’s shares trading on 13 times current year earnings estimates, falling to 11.5 times EPS forecasts of 17.2p for fiscal 2016,. For good measure, they are rated 20 per cent below book value too. On a bid-offer spread of 195p to 200p, I rate the shares a decent income and recovery buy.
Exploiting a valuation anomaly
H&T was not the only share on my active buy list that has benefited from a target price upgrade. So too has STM (STM: 47p), the Aim-traded financial services company specialising in the administration of assets for international clients in relation to retirement, estate and succession planning and wealth structuring.
Having recommended buying the shares at 35p ('Tapping into a pensions payday', 27 April 2015), STM’s share price hit my initial target price of 47.5p, coinciding with a six-year high dating back to January 2009. I subsequently advised running your healthy profits but placed a conditional buy recommendation on a close above 48p to reflect the technical set up with a new target price of 60p, representing the pre-Lehman Brothers lows in the summer of 2008 (‘Smashing target prices’, 14 May 2015). That conditional buy advice was triggered and within a week of that article the shares had peaked out at 56p. This prompted some profit taking.
However, I note that analyst Duncan Hall at broking house finnCap has just raised his target price on the shares from 45p to 55p on the back of market developments and positive company specific newsflow. He has a point as the successful flotation of Aim-traded Bristol-based rival Curtis Banks (CBP: 229p) highlights the chronic undervaluation of STM. Indeed, Curtis Bank’s market value of £100m is 30 times its annual operating profit last financial year.
There is no reason at all to justify such a valuation anomaly with STM whose Qualifying Recognised Overseas Pension Schemes (QROPS) business, an offshore pension scheme approved by HMRC and used by expatriates and internationally mobile employees whose tax domicile can change as a consequence of employment, is highly profitable and a reliable source of income as I noted when I initiated coverage. Indeed, a 26 per cent operating profit margin from this business segment alone is highly supportive of an earnings multiple higher than 9 for fiscal 2016 given the double digit earnings growth STM is generating.
Migration boosting pension plan profits
Mr Hall also rightly points out that the market for such pension schemes keeps growing and for good reason too given that “migration and issues of domicile are becoming more topical throughout the EU as foreign-born population percentages rise.” For instance, the NHS reports that 26 per cent of doctors in the service have been trained overseas and that the General Medical Council sees around 4,000 applications a year for Certificates of Good Standing to allow UK registered doctors to seek work overseas. The UK government estimates 5.5m British born nationals now live overseas. So with a more mobile and affluent workforce to cater for, this can only illustrate the need for versatile savings products. Operating from centres in both Gibraltar and Malta, STM has been expanding the number of introducers with whom it works to sustain the robust sales momentum the business has been enjoying and to exploit further a captive market for long-term savings products.
I would also point out that STM has been acquitted in a court case that was pursued by The Attorney General for the States of Jersey against a former employee of the company, and STM Fiduciare as defendant. I flagged up this court case in my April article, and had expected such an outcome, but it is positive nonetheless.
In the circumstances, I feel that now is an opportune time to buy STM’s shares in advance of what is likely to be a bumper set of first half results in a few months time. Mr Hall at brokerage finnCap predicts that the company should grow current year pre-tax profits from £1.7m to £2.7m underpinned by a £1.8m increase in revenue to £17.7m. On this basis, expect EPS to almost double from 2p to 3.8p. But with pro-forma net cash of £4.7m on its balance sheet equivalent of 8p a share, the shares are only being priced on 10.5 times cash adjusted earnings, a bargain rating in my view. A price-to-book value of 1.3 times is hardly exacting either. To put this into some perspective, Curtis Banks is rated on closer to 8 times book value.
Moreover, the increase in recurring revenue from STM’s pension business means that a modest £900,000 forecast rise in revenue to £18.6m in 2016 is expected to boost pre-tax profit by a further £1m to £3.7m, albeit profits are being enhanced by the reduction in finance charges following the redemption of the convertible loan notes. I discussed this issue in detail when I initiated coverage in April. On this basis EPS estimates surge from 3.7p in 2015 to 5p in 2016, implying that STM’s shares are trading on only 9 times next year’s likely earnings, or 7.5 times on a cash-adjusted basis.
So no matter what way I look at it STM’s shares are far too lowly rated on a bid-offer spread of 44p to 47p. Strong buy.
On track for bumper growth
Aim-traded Stadium Group (SDM: 113p), a specialist provider of niche electronic technologies, has released a reassuring trading update ahead of its interim results on 8 September 2015.
Analyst Jon Lienard at broking house N+1 Singer is maintaining his forecasts and expects Stadium to report a 29 per cent rise in fiscal 2015 revenues to £53.7m to drive up adjusted pre-tax profits by almost half to £4m and deliver EPS of 9.5p, up from 7p in fiscal 2014. On this basis, expect the dividend per share to be raised from 2.1p to 2.7p, covered 3.5 times by net profits, implying a prospective dividend yield of 2.4 per cent.
This performance is being enhanced by some well timed acquisitions. But it’s also worth flagging up that the company’s technology products division is set to generate half of Stadium's sales, up from only 20 per cent in 2013, so the quality of earnings is improving which is why investors are more willing to ascribe a higher earnings multiple to the company. Indeed, last summer’s acquisition of United Wireless has given Stadium exposure to the design and manufacture of electronics for the machine-to-machine (M2M) wireless sector to support wireless connectivity between devices, primarily mobile networks, and target businesses in the following key sectors: automotive, telematics and asset tracking. Industry experts predict that demand for M2M devices will grow at a compound annual rate of 24 per cent over the next five years. A new facility in China, which will significantly enhance the company’s technical capability, is progressing well and is on plan to be completed this month.
Admittedly, Stadium’s shares have hit a glass ceiling of 125p this year, having risen sharply after I initiated coverage at 75.5p ('Switch onto the Stadium of light', 30 July 2014). I subsequently advised running these huge profits four months ago (‘Electrifying shares’, 11 March 2015) and last updated my view in April when the price was 123p (‘Running bumper profits’, 21 April 2015). I am not going to change my positive stance either as I feel that investors are likely to warm to the forthcoming results especially as a large uplift in profits is in the bag due to the seasonal skew in profits between the first and second halves. This year is following the same pattern, so expect first half profits of £913,000 to rise by around half to £1.35m this time round, or a third of the full-year profit estimate. The results statement should make for a good read with the dividend being hiked too.
So, trading on less than 12 times fiscal 2015 earnings estimates, representing a 20 per cent discount to the electronics sector, falling to only 9.2 times 2016 EPS estimates of 12.3p, based on a further 30 per cent rise in pre-tax profits to £5.2m based on revenues of £59m, I feel that a PEG ratio of well below one is attractive.
In the circumstances, I am upgrading my recommendation on the shares back to buy with the shares priced on a bid-offer spread of 110p to 113p and offering 24 per cent upside to my fair value of 140p a share, in-line with the price target of analyst William Game at Charles Stanley Stockbrokers. Buy.
Please note that I am working my way through a number of results statements and announcements from companies on my active watchlist. I will endeavour to update my view on engineering group 600 Group (SIXH: 18.5p), asset manager and stockbroker Walker Crips (WCW: 47p), and avation group Gama Aviation (GMAA: 305p) in the near future. Following a pre-close trading update, WH Ireland (WHI: 115p) is scheduled to report half year results on Monday, 20 July and I will cover these on the day.
MORE FROM SIMON THOMPSON...
At the end of April, I published an article with all of the share recommendations I have made this year. Since then I have published articles on the following 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)
■ Ensor: Buy at 97p, minimum target 125p ('Building up for a takeover', 22 June 2015)
■ GLI Finance: Buy at 54p, target 80p; Pittards: Buy at 128p; Netplay TV: Buy at 9.5p ('A tripple play of small cap picks', 23 June 2015)
■ Bilby: Run profits at 97p; Safestyle: Run profits at 220p; Epwin: Run profits at 134p ('Soaring small caps', 24 June 2015)
■ Faroe Petroleum: Buy at 86p, target 100p; Greenko: Hold at 65p; Communisis: Buy at 48p ('A slick investment', 25 June 2015)
■ Mountview Estates: Buy at 12,250p; Inland: Run profits at 71p, conservative price target ('Running bumper profits', 29 June 2015)
■ Redde: Run profits at 138p, target range 150p to 155p; Trakm8: Buy at 175p, target 200p; Cohort: Buy at 312p, target 365p; Burford Capital: Buy at 175p, target 190p; Flowtech Fluidpower: Buy at 135p, target 155p ('Riding earnings upgrade cycles', 7 July 2015)
■ Crystal Amber: Buy at 161p; Stanley Gibbons: Buy at 258p; Somero Enterprises: Buy at 150p, target 185p; Globo: Buy at 49p, target 69.5p (‘A quartet of small-cap buys’, 8 July 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'
