Chief executive Richard Killingbeck revealed to the Investors Chronicle that his corporate finance team is currently working on two M&A deals which, if completed, will benefit the second half result. Having increased divisional pre-tax profit by over 20 per cent to £189,000 in the six month period, Mr Killingbeck says that “if the momentum in the business continues from the first half, then corporate broking is set for its best year for many a year”.
W.H. Ireland completed 15 corporate transactions in the first half including share placings for care home provider Caretech (CTH: 233p) and potash developer Sirius Minerals (SXX: 18.75p). This boosted transaction fees by 30 per cent to £2.7m. And with 98 corporate clients, up from 92 at the end of November 2014, W.H. Ireland’s retainer fees rose by 7 per cent to £1.7m for the six month period. Admittedly, market making was impacted by weaker private client activity which resulted in a 30 per cent drop in trading revenue to £700,000. Nonetheless it was a solid performance.
The other key take for me in the results was the £170m increase in assets under management and administration (AUMA) to £2.65bn after accounting for planned disposals of low margin and uneconomic mandates. Discretionary assets under management rose by 16 per cent to £834m to account for almost a third of the total. It’s worth noting that Mr Killingbeck says that the company has “continued to growth the asset base since the half-year end with between 60 to 65 per cent of all new business being discretionary.” Management fee income rose by over half to £3.4m to account for just under a third of revenues from the private wealth management arm. This also explains why pre-tax profit of £655,000 from the unit (before central costs) was greater than the whole of the prior fiscal year. Importantly, growth in corporate client retainers and discretionary funds under management means that recurring revenue now accounts for more than a third of W.H. Ireland’s total revenue and rising.
There is every reason to believe this profit momentum will build in the second half and beyond. Firstly, the focus on boosting margins means that 25 excess front office staff are being cut, a process that will finalise at the end of September and which will reduce costs permanently without negatively impacting the business. Both the Colwyn Bay and Birmingham offices will close at the end of next month with some clients transferred to other branches. Secondly, after a good June, July was quiet on the dealing front, but Mr Killingbeck still believes the company should be able to make pre-tax profits of between £1.5m and £2.5m for the full-year to end November 2015 and is “cautiously optimistic” on prospects.
Of course, delivering those two lucrative M&A transactions will have a bearing. But I am willing to back the management team, having first initiated coverage four years ago when W.H. Ireland’s share price was 68p ('Broking for success', 1 August 2011) and last reiterated that advice at the time of the fiscal 2014 results in March when the price was 92p (‘A non-standard investment’, 2 March 2015).
A fairer valuation
At the current price of 120p, the company has a market value of £29m, or less than the valuation of its discretionary assets under management (AUM) business according to analyst John Borgars at Equity Development. He values the unit at £33m after applying a valuation of 4 per cent of its AUM of £834m. That leaves the advisory asset management business (AUM of £784m), and execution only part of the business (AUMA of £1.1bn) in the price for free. Mr Borgars values these at £15m and £5m, respectively, after attributing a value of 2 per cent of AUM to the advisory business and 0.5 per cent to AUMA for the execution only business.
W.H. Ireland also has net funds of £4.5m and over £3.6m of equity in its head office building in Manchester which was valued at £4.75m at the end of last year and on which the company has a £1.1m mortgage. Equity in that property and cash on the balance sheet equates to a third of the company’s market capitalisation alone.
Trading on about less than half sum-of-the-parts valuations of around £61m, or 249p a share, the company remains significantly undervalued in my view. There is also value on an earnings basis as W.H. Ireland is being valued on about 14 times current year post tax earnings based on a pre-tax profit outcome of £2m after adjusting for net of cash on the balance sheet. It’s worth noting too that the board paid a dividend of 2p a share in April this year, so there is a modest income stream.
So if you followed my earlier advice, I would run your healthy 65 per cent paper profits and I maintain a conservative target price of 140p. Run profits.
Charlemagne downgrade
Emerging market asset manager Charlemagne Capital (CCAP: 11p), a constituent of my 2014 Bargain shares portfolio, has issued a disappointing trading update and one that has persuaded me to call time on the holding.
AUM fell by 8.6 per cent from US$2.28bn to US$2.08bn in the second quarter of this year, mainly reflecting the loss of a single mandate worth US$182m and spread across Charlemagne’s Magna funds and a segregated account. The company has not been helped by last month’s market downturn which has resulted in the MSCI Emerging markets index posting only a 0.7 per cent gain in the second quarter and a modest 2.7 per cent rise in the first half. There have been substantial investment outflows from the emerging market space of US$21.5bn in the first half alone, an acceleration on the outflows seen in both 2013 and 2014.
So although Charlemagne’s funds have performed generally well, the company’s AUM are now $400m shy of the level required to make sustainable profits on a recurring basis. Market performance, growth in assets and the generation of performance fees during the second half will be significant factors in determining the full year profit outcome. As a result analyst Andrew Watson at broking house N+1 Singer has cut his management fee income forecast by a fifth and now expects the company to only post pre-tax profits of $1.4m on revenues of $27.3m, rather than profits of $7.8m based on full-year revenues increasing by $4.4m to $33m as previously forecast when I last updated the investment case (‘Lights camera, action’, 21 May 2015). In turn, the company is now expected to post a loss per share of 0.5¢ (0.32p) rather than more than double EPS to 1.1¢ (0.7p).
This means that if the board maintains the dividend of 1¢ (0.65p) a share, it will have to dip into the company’s cash reserves to do so as was the case in 2014. At the start of this year, the company had net funds of $17.4m on its balance sheet equating to 3.8p a share and $9.9m invested in its own funds, a sum equivalent to 2.2p a share. True, that’s solid asset backing, but with no respite in sight for emerging markets I am really struggling to see where the catalysts will emerge for the share price to recover.
So having upgraded the shares to a trading buy at 10.75p (‘Below the radar’, 19 March 2015), and changed that recommendation to hold at 13.5p a couple of months ago (‘Lights camera, action’, 21 May 2015), I think it’s best to sell. I included the shares at 15.8p in my 2014 Bargain share portfolio, so even after factoring in total dividends of 1.24p a share paid in the interim period, the net loss on this holding is 25 per cent.
Safestyle’s earnings upgrades
Aim-traded shares in Safestyle (SFE: 235p) have passed through my fair value target price of 230p after the uPVC window company posted a better than expected second quarter trading update.
Despite facing tough comparatives from the first quarter, the company reported sales growth of 6.8 per cent in the first half, implying order intake of around 13-14 per cent in May/June according to analyst Matthew McEachran at brokerage N+1 Singer. As a result the company boosted its market share by over one percentage point to 9.5 per cent and is bang on course to post its 11th consecutive year of growth, based on data from trade organisation FENSA. Expect further market share gains too in light of the sensible strategic decision to focus on the affluent market in southern England (sales in the region increased by 17 per cent in 2014), which has resulted in more installations and at higher margins.
Furthermore, with a new customer credit offer in place since the start of June, a key driver in Safestyle's recent order intake, and a positive macroeconomic and housing market backdrop underpinning consumer confidence, then analysts are upgrading their earnings estimates. N+1 singer now predicts fiscal pre-tax profits will rise from £16.8m in 2014 to £17.8m, or about £300,000 higher than previous estimates, to deliver fully diluted EPS of 17.4p, up from 16.3p in 2014. This is based on revenues increasing by 6.5 per cent to £145m in the 12-month trading period. On this basis, expect the board to lift the payout by 6 per cent to 9.9p a share.
Interestingly, Mr McEachran notes that his “revised assumptions are still conservative and there is further scope for upgrades later in the year given more soft comparables in the fourth quarter”. N+1 Singer have upgraded their target price by 17 per cent to 253p to reflect the stronger growth outlook.
Catalyst for a re-rating
In my opinion, the next leg up in the share price is likely to be driven by the half year results on Thursday, 17 September and not only because of the ongoing strong operational performance. I would not be surprised at all to see the company return more of its growing cash pile back to shareholders too. That’s because Safestyle had net funds of £14.9m at the end of June, up from £8.4m at the start of 2015, and analysts believe this figure could easily swell to £17.2m, or 22p a share, by the end of December. The board could easily sanction an earnings accretive share buy-back programme, tender offer or even a special dividend to shareholders.
Moreover, even without further earnings upgrades the shares are still not too highly rated on 11.5 times fiscal 2016 EPS consensus estimates of 18.8p after accounting for net cash on the balance sheet. A dividend yield of 4.2 per cent is attractive too. In the circumstances, and having initiated coverage on the shares at 138p ('Window of opportunity', 23 December 2013), and last advised running profits at 220p (‘Soaring small caps’, 24 June 2015), I feel it’s not yet time to bank the 70 per cent paper gain.
My firm advice is to run profits on the shares ahead of the half-year results in September with a view to benefitting from further upgrades and potentially a special dividend too, catalysts which could take the share price up to N+1 Singer’s revised target. Run profits.
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 Jun 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 Jun 2015)
■ Elegant Hotels: Buy at 105p, target 135p to 140p ('Checking into an elegant investment', 15 Jun 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 Jun 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 Jun 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 Jun 2015)
■ Ensor: Buy at 97p, minimum target 125p ('Building up for a takeover', 22 Jun 2015)
■ GLI Finance: Buy at 54p, target 80p; Pittards: Buy at 128p; Netplay TV: Buy at 9.5p ('A triple play of small cap picks', 23 Jun 2015)
■ Bilby: Run profits at 97p; Safestyle: Run profits at 220p; Epwin: Run profits at 134p ('Soaring small caps', 24 Jun 2015)
■ Faroe Petroleum: Buy at 86p, target 100p; Greenko: Hold at 65p; Communisis: Buy at 48p ('A slick investment', 25 Jun 2015)
■ Mountview Estates: Buy at 12,250p; Inland: Run profits at 71p, conservative price target ('Running bumper profits', 29 Jun 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 Jul 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 Jul 2015)
■ H&T: Buy at 200p; STM: Buy at 47p, target 60p; Stadium: Buy at 113p, target 140p ('Exploiting upgrades', 9 Jul 2015)
■ Cambria Automobiles: Buy at 57.5p, target 75p ('Driving a re-rating', 13 Jul 2015)
■ Walker Crips: Buy at 47p, target 60p; 600 Group: Buy at 18p, target 24p; Henry Boot: Buy at 235p, target 260p ('A trio of small cap value plays', 14 Jul 2015)
■ Bilby: Buy at 90p, target 120p; 32Red: Buy at 67.5p, target 90p; Marwyn Value Investors: Buy at 244p, target 275p (‘Acquisitions drive earnings upgrades’, 15 July 2015)
■ Vislink: Buy at 53p, target 70p ('Awarding success', 16 July 2015)
■ SPARK Ventures: Buy at 4.5p ('Exploiting a valuation anomaly', 20 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'
