Wealth and investment management boosts Walker Crips’ profits
Having run through the full-year results from Walker Crips Group (WCW: 47p), the financial services group with activities covering stockbroking, investment and wealth management, I feel investors are definitely missing a trick. The company’s operating profit increased by almost 15 per cent to £540,000 in the 12 months to end March 2015, driven by an 11 per cent rise in revenue to £23m and buoyed by a rise in assets under management and administration (AUMA) from £3bn to £3.8bn, up from £2.66bn at the end of September 2014 and only £1.4bn three years ago. Discretionary and advisory assets under management rose by half to £2bn which is important as this segment is higher margin.
Once you strip out one-off costs for acquisitions at the end of the period (see below), and factor in investment income and finance costs, adjusted pre-tax profits increased by around 9 per cent to £769,000 in the 12-month period. To put this performance into some perspective, underlying profits were £100,000 more than I had anticipated when I recommend buying Walker Crips’ shares at 45p earlier this year (‘Delivering on a plan’, 12 February 2015).
Importantly, trading in the new financial year has started strongly, so much so that the company’s board were confident enough to raise the final dividend per share by in excess of 10 per cent to 1.17p to take the full-year payout to 1.7p. The shares go ex-dividend on 15 July. On this basis the dividend yield is around 3.6 per cent. The payout is likely to grow further because just before the financial year-end Walker Crips used £1.8m of its cash pile to acquire London-based Barker Poland Asset Management (BPAM), a private client wealth management business. The company also issued £200,000 of new shares on completion of the deal and there is a £2m maximum earn-out, subject to BPAM's annual revenues averaging £1.6m or more over the next three years.
BPAM currently has around £227m of assets under management (AUM), mostly discretionary-managed funds, and generated recurring revenue of £1.5m and profits of £564,000 in its last financial year. This means that the acquisition will be immediately earnings enhancing in the first full-year after factoring in cost savings from reducing office costs and by moving BPAM's client base over to Walker Crips' in-house platform. After taking into account the contribution from BPAM, I reckon the company should easily be able to make pre-tax profit in the region of £1m for the March 2016 fiscal year.
I would not discount further bolt-on acquisitions either as Walker Crips' board scales up its investment and wealth management operations. They can easily afford to do so because even after factoring in the cash consideration for the BPAM acquisition, net funds of £6.6m at the end of March 2015 equated to a third of the company’s net asset value of £20.9m, or 37.5 per cent of its current market value of £17.6m. In fact, net funds are about 17.6p a share, or 2.5p more than I had anticipated when I last updated the investment case at 47p (‘A six shooter of small cap buys’, 10 March 2015).
Scaled up for growth
But even without more acquisitions, the addition of further investment managers and their discretionary fee based recurring revenue stream – the company took on a further 14 personnel in the year to bring the number of fee earning staff to 120 – is creating the additional scale needed to reach the company's stated AUMA medium-term target of £5bn. Investment management fees now accounted for £10.4m of Walker Crips’ total revenue of £23m, up from £8.4m in the prior financial year, and importantly is a far more stable source of income than from private client stockbroking where commission fees can be volatile. That said, broking income did edge up by 3 per cent to £10.2m. It’s also fair to say that Walker Crips is benefiting from the advent of the RDR and pension freedoms. For instance, funds under administration in its SIPPs York-based pension business,
So, with both parts of the business generating growth, and the outlook statement positive, I feel that there is no way that on a cash adjusted basis Walker Crips should be valued on just 11 times my estimate of current year pre-tax profits. I am not the only one thinking this way as earlier this year managing director Sean Kin Wai Lam spent £95,000 purchasing 221,000 shares at 43p each to almost double his stake in the company to 1.1 per cent of the share capital, and non-executive director Lim Hua Min acquired the same number of shares through members of his family to take their total stake to 9.08m shares, or 24.2 per cent of the share capital.
On a bid-offer spread of 45.5p to 47p, I continue to rate the shares a buy. A move through the April 2014 high of 52.5p, coinciding with the July 2011 high too, would be a very positive signal. My fair value target price is 60p.
600 Group profits set to surge
The key take for me in the full-year results from 600 Group (SIXH: 18p) was news that the Aim-traded machine tools and laser marking company has been seeing “substantial improvements” in the operational performance of its laser marking business since the acquisition of US-based laser marking company TYKMA, purchased for an initial consideration of £3m in February this year.
That’s important because a recovery in the contribution from the higher margin laser marking business is critical if 600 Group is going to deliver the 50 per cent rise in adjusted pre-tax profits to £3m as analyst David Buxton at brokerage finnCap predicts. The unit is being run by David Grimes, who built up the TYKMA business, and integration with 600 Group’s Electrox business is now complete. In the financial year to end March 2015, 600 Group’s underlying pre-tax profits edged up only 2 per cent to £2m as a 7 per cent rise in operating profits to £2.9m from its machine tools and precision engineered components division was completely wiped out by a shortfall in the laser marking business which only reported profits of £304,000 on revenues of £9.2m.
I also feel that the recent appointment of Paul Dupree as executive chairman is likely to put fresh impetus into the company. He is a senior member of private equity firm Haddeo Partners, a 25.4 per cent shareholder, and his appointment follows the resignation of Nigel Rogers as chief executive. The plan is to accelerate revenue growth by taking a more hands-on approach to running the business and, in so doing, boost the investment returns for Haddeo and other shareholders too.
Analyst Ian Berry at brokerage WH Ireland believes that 600 Group’s laser marking business should be able to deliver revenues of £15m and operating profit of £1.7m in the 12 months to end March 2016 after factoring in the contribution from TYKMA, cost savings and 6 per cent growth in the market overall. That’s based on a margin of 11.3 per cent, marginally ahead of the margin TYKMA made on revenues of £5.44m in fiscal 2014 before it was acquired by 600 Group. Mr Berry also believes that there is scope for the group’s machine tools and precision engineered products division to grow revenues by just under 10 per cent to £38m and operating profit from £2.9m to £3.3m, driven by anticipated 20 per cent revenue growth in the US and the UK (600 Group’s largest markets), based on forecasts from Gardner Research. If achieved then pre-tax profits rise by about half to £3m after accounting for central overheads of around £1.3m and a finance charge of £0.8m.
Reaping the financial rewards
Clearly, there is execution risk to reap the upside from the TYKMA acquisition and Mr Dupree has to prove himself too. But this is more than factored into a historic PE ratio of 9, falling to 6.5 if 600 Group achieves EPS of between 2.6p and 2.7p this year as analysts predict. That’s less than half the rating enjoyed by rivals in the engineering sector. Admittedly, part of the earnings discount is due to the fact that 600 Group raised £7.7m through a five-year loan note at a coupon rate of 8 per cent to fund the costs of the acquisition (£4m), pay off a shareholder loan (£950,000), repay other borrowings (£1.5m) and the balance was for working capital needs. There is further deferred consideration estimated at £4.2m in 600 Group’s latest balance sheet and which is not due to be paid before the March 2017 year-end.
The loan note holders were given call warrants to subscribe for 39.9m shares in 600 Group at a price of 20p with an expiry date of 18 February 2020. This means that if all warrant holders exercise, then 600 Group’s issued share capital would increase from 92.3m at present to 132m shares. The flip side is that the proceeds from an exercise on this scale would wipe out the loan note borrowings which account for most of 600 Group’s net debt of £10.8m and lift pre-tax profits by over £600,000. It seems a fair deal to me given the potential for a step change in the company’s earnings profile in the next couple of years.
I would also point out that 600 Group’s financial salary pension scheme has an accounting surplus of £34.3m, or double 600 Group’s own market value of £16.6m. As soon as UK interest rates start to rise, this surplus will increase further. Moreover, there is potential to release some of this value by selling off the pension liabilities and assets at a future date, subject to trustee and regulatory approval. That’s worth considering given the shares are trading on less than half net asset value.
Or put it another way, if 600 Group hits analysts estimates this fiscal year and next, and the £4.2m earn-out from TYKMA is paid in March 2017, then I reckon net debt would halve to around £5.5m and its proforma fully diluted net asset value would be around 33p a share assuming all the loan note holders exercise their warrants in 2020.
So although the shares are slightly below the level at which I initiated coverage at 19p ('Tooled up for a strong recovery', 14 April 2014), albeit they have risen from 16.5p at the time of my last update (‘Repeat buy signals’, 11 May 2015), I feel comfortable with the investment case. Offering 33 per cent share price upside to my target price of 24p – finnCap’s maintained target price is 27p and WH Ireland have fair value at 25p – I rate 600 Group’s shares a medium-term buy on a bid-offer spread of 17.25p to 18p.
Asset backed and undervalued
Investors are warming to Henry Boot (BHY: 235p), the 129-year-old Sheffield-based construction and property company. In fact, the shares are tantalisingly close to breaking out above the March high of 237p, confirmation of which would signal the next leg up in the share price has started and a move to my target price of 249p and beyond is on the cards. It’s likely to prove conservative as analyst Alison Watson at Investec has a 277p target price, and Nick Spoliar at WH Ireland has a 317p sum-of-the-parts target price.
To recap, I originally advised buying the shares at 202p (‘A bootiful investment’, 19 February 2015). There has been no company specific newsflow from Henry Boot since my last update (‘A six shooter of small cap buys’, 10 March 2015), but if press reports of an imminent relaxation of residential planning regulations prove founded then Henry Boot is clearly well placed.
That’s because Mr Spoliar at WH Ireland points out that new legislation could enable “ministers to impose housing plans on local authorities, who have not produced an adequate plan, as well as speeding up the whole process. Attempting to grasp the nettle of low housing production in the UK is likely to be a further positive for the sector and indeed for Henry Boot, which is a past master in this field”.
He has a point as a trading update at the annual meeting confirmed that the business is in great shape across all three segments: land, commercial development and construction. In particular, the company has 47 sites with over 12,000 units holding either planning permission or "minded to grant" consent subject to agreeing a S106 with the local authority in question, and a further 25 sites for over 10,000 units which are within the planning process but are, as yet, undetermined or are within the appeals system. In the first quarter alone, the company completed two land sales for over 500 units and is in discussions for the sale of a further 13 sites for over 1,800 consented units, some of which will complete in 2015, others will conclude in 2016.
This stellar progress adds further weight to profit estimates from Hallam Land, Henry Boot’s land development arm which has 140 sites across 10,000 acres, and expectations that Henry Boot will lift its gross trading profit from £41m in 2014 to £44m in 2015. On this basis, expect current year IFRS pre-tax profit of between £29m to £30.7m, and EPS of 17.5p. But clearly if there are important changes in the planning process then Henry Boot’s profits could get quite a lift in coming years.
Trading on 13 times forward earnings, and offering a prospective dividend yield of 2.5 per cent, I continue to rate the shares a buy on a bid-offer spread of 230p to 235p. In fact, I have raised my target price to 260p to reflect the more stable housing market conditions resulting from the election of a Conservative administration.
I would also point out that Henry Boot’s share price has lagged somewhat behind the rise in the general housebuilding sector since May’s general election, an anomalous situation considering the company sells its oven baked land to the major homebuilders, all of which are benefiting from the benign market conditions and are in a financially strong position to replenish their land banks. Buy.
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)
■ H&T: Buy at 200p; STM: Buy at 47p, target 60p; Stadium: Buy at 113p, target 140p ('Exploiting upgrades', 9 July 2015)
■ Cambria Automobiles: Buy at 57.5p, target 75p ('Driving a re-rating', 13 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'
