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OPINION

Break-outs looming

Break-outs looming
August 4, 2015
Break-outs looming

Founded in 1984, the firm now has over 200 employees, of which two thirds are fee earners, based in three offices located in Manchester, Kingston and Acton. The bolt-on acquisition complements the range of services already offered by Fairpoint's legal services operation, Simpson Millar LLP, and represents a further step in the development of this part of the business as well as offering potential to establish market-leading positions in certain sectors such as travel law.

Last summer, Fairpoint acquired both Simpson Millar LLP Solicitors, and Fosters & Partners, a Bristol-based law practice specialising in all aspects of family law, as part of a strategy to diversify its revenue streams away from IVA services. Legal services contributed half of the company's revenues in the second half of last year, and analyst Gary Greenwood at broking house Shore Capital predicts that on completion of the deal Fairpoint's legal services division will generate fiscal 2015 pro-forma revenues of £42.2m and operating profit of £5.9m, representing 62 per cent and 45 per cent of their respective group totals.

 

Earnings enhancing acquisition

The acquisition will boost Fairpoint's earnings per share too. That's because in the fiscal year to end April 2015 Coleman's made pre-tax profits of £2.3m on revenues of £19m and Fairpoint is paying an initial cash consideration of £8m and issuing shares worth £1m to the vendors at 132p each.

There is also an earn-out agreement according to which the purchase price could increase by a further £7m to reflect deferred consideration of £3.5m payable if Colemans hits profit targets for the 11 months to end June 2016, and a further payment of £3.5m dependent on the profit outcome for the following financial year. If all earn-outs are met in full, split equally in cash and shares, then the full purchase price of £17m equates to a reasonable seven times pre-tax profits. So reflecting only a modest increase in its share capital, and low-cost debt funding the balance of the consideration, Mr Greenwood at Shore Capital has upgraded his fiscal 2015, 2016 and 2017 adjusted EPS estimates by 3 per cent to 18.3p, 8 per cent to 20p and 9 per cent to 21p, respectively. Analysts at Equity Developement have very similar estimates.

In order to fund the cash consideration, Fairpoint has extended its five-year banking facility with AIB from £20m to £25m. On completion, the company will have net debt of £13.2m, up from £5.2m at the end of June 2015, but comfortably within those credit facilities. Moreover, net borrowings still only equates to one times cash profit forecasts for fiscal 2015 and net debt is expected to drop to 0.7 times next year's cash profits, and only 0.3 times in 2017, reflecting the company's strong cash generation.

Shore Capital has left its dividend per share forecasts unchanged at 6.8p, 7p and 7.2p respectively for fiscal 2015, 2016 and 2017. On this basis, the shares trade on only 7 times earnings estimates and offer a 5 per cent prospective dividend yield for fiscal 2015. A price-to-book value ratio of 1.3 times is hardly exacting, either.

 

Reverse head and shoulder pattern

Interestingly, Fairpoint's share price is close to generating both a swing and point-and-figure buy signal on a confirmed close above 140p. This price point has acted as a glass ceiling as previous rallies hit major resistance in both May this year, and in September 2014.

Keen watchers of chart patterns will note that a close above 140p would complete a 14-month long reverse head and shoulders pattern and open the door to a rally towards the April 2014 high of 164p and ultimately to my long-term target price of 190p. That target is not unreasonable, implying a rating of little over 10 times this year's expected earnings.

So with the technical set-up favourable, interim results on Thursday, 3 September 2015 likely to further underpin the investment case, and a chart break-out looking increasingly imminent, I rate Fairpoint's shares a strong buy on a bid-offer spread of 135p-138p.

Please note that I first advised buying shares in Fairpoint at 98.25p in my 2013 Bargain Shares Portfolio since when the company has paid out total dividends of 15.95p a share to give a total return of 53 per cent. I last updated the investment case post the fiscal 2014 results at 127p ('Repeat buy signals', 11 May 2015) and if you followed that recommendation you will now have received the final dividend of 4.1p a share for fiscal 2014.

 

Engineering growth

Shares in Renew Holdings (RNWH:340p), an Aim-traded engineering services group specialising in the UK infrastructure market, got within pennies last week of touching the lower end of my fair value price range between 350p to 375p.

To recap, I issued a strong buy recommendation on the shares last summer when the price was 258p, targeting fair value of 330p ('A small cap break-out', 14 August 2014), and subsequently upgraded my target price post the half year results in May when the price was 315p ('Renewing old acquaintances', 20 May 2015). I still feel a run up to the upper end of that price range is underpinned by what should be a very positive pre-close trading statement next month.

Buoyed by a robust order book for the company's engineering services division, and the contribution from acquisitions, WH Ireland's revenue forecast of £475m for the 12 months to end September 2015 looks in the bag as is the broking house's estimate of 20 per cent rise in pre-tax profits and EPS to £19.6m and 24.9p, respectively. On this basis, the shares are rated on 13.7 times fiscal 2015 likely earnings and offer a prospective dividend yield of 2 per cent based on a full-year dividend of 6.75p a share, up from 5p a share in fiscal 2014.

Prospects for fiscal 2016 are equally promising too. Underpinned by a number of new contracts including an award from Northumbrian Water, for sewage repairs and maintenance work, and activity in rail where it's the national leader in engineering skills for works on tunnels and bridges, and specifically civil, analysts conservatively forecast the company will grow revenues to just shy of £500m and pre-tax profits and EPS by mid-single digits to £20.7m and 26.7p, respectively. On this basis, the shares are trading on 12.7 times forecast earnings and offer a forward dividend yield of 2.2 per cent based on a further increase in the payout to 7.5p a share. I still feel there is potential for upgrades on those estimates.

Offering another 10 per cent upside to the top of my target price range, I continue to rate Renew's shares a buy on a bid-offer spread of 335p to 340p and feel that a repeat swing buy signal is in the offing. Buy.

 

Sanderson insider buying

Shares in Sanderson (SND:71p), the software and IT services business specialising in multi-channel retail and manufacturing markets in the UK and Ireland, have been trading in an incredibly tight range for 21 months now, repeatedly hitting resistance at 75p and receiving strong support at the 60p level. At some point a break-out will happen and I still side with a move to the upside. So does David Gutteridge, a non-executive director, who acquired 45,000 shares at a price of 66p each in mid-July to give himself a beneficial interest in 545,000 shares, or 1 per cent of the issued ordinary share capital.

It's a company I know well, having initiated coverage when the price was 33.5p ('A valuable stock check', 18 July 2011), and last updated the investment case post the half-year results around the current share price ('Blue sky potential', 10 June 2015). Those figures confirmed that the company is on course to grow pre-tax profits by almost 15 per cent to £3.1m in the 12 months to end September 2015 as analyst Michael Donnelly at Charles Stanley Stockbrokers forecasts. On this basis, expect adjusted EPS of 4.7p, up from 4.4p in fiscal 2014, and a dividend of at least 1.9p a share.

Sanderson has a cash-rich balance sheet too as net funds equate to 7p a share. This means the cash adjusted forward PE ratio is only 13, a deep discount to the ratings attributed to peers in the small cap software and IT services business space. A prospective dividend yield of close to 3 per cent is attractive for the technology sector too.

True, with a market capitalisation of £37m, the company is well below the radar of most investors, but nonetheless the rating is out of sync with the progress the company has been making both organically and through some smart acquisitions. So with the shares anomalously valued for the sector, and offering decent upside to my 80p to 85p fair value target price, I would be following the lead of the insiders ahead of a pre-close trading update in October. On a bid-offer spread of 68p to 71p, I continue to rate Sanderson's shares a buy.

 

Run with the Creston run

Shares in small-cap marketing communications company Creston (CRE:155p) have rallied through my 150p target price and have now risen by 30 per cent since I initiated coverage at 118p in the late autumn ('Buy the break out', 4 November 2014). I last updated the investment case post the full-year results in June when the price was 133p ('Blue-sky potential', 10 June 2015), having upgraded my target price ahead of those results ('On the acquisition trail', 23 April 2015).

Investors have been clearly warming to the board's decision to deploy its bumper cash pile to make some smart looking acquisitions. For instance, earlier this year the company acquired a 51 per cent stake in How Splendid, a London-based digital design and development consultancy, a deal I commented on at the time ('On the acquisition trail', 23 April 2015), and subsequently acquired a 27 per cent stake in 18 Feet & Rising, a London based advertising agency('Blue-sky potential', 10 June 2015).

Although Creston has invested all its cash pile post its March financial year-end, with annual operating cashflow of £8.6m and credit lines of £35m in place, the business is still very well funded. It's worth flagging up too that the shares are still not that expensively priced on 11 times conservative looking EPS estimates of 14p for the fiscal year to end March 2016 based on forecasts from brokerage N+1 Singer.

Last financial year, the company delivered 11 per cent EPS growth and diluted EPS of 13p beat analyst expectations by 4 per cent, so there is positive earnings momentum now coming through. There is also a progressive dividend policy to appeal to investors: the board declared an 8 per cent increase in the dividend to 4.2p a share. I would flag up that the final dividend of 2.85p a share is payable next month and goes ex-dividend tomorrow. Analysts predict a further rise in the payout to 4.7p a share in the current financial year to give a prospective dividend yield of 3 per cent.

So although we are sitting on healthy gains, I believe that Creston's shares still offer scope to run up to the upgraded target price of 171p of analyst Johnathan Barrett at N+1 Singer. That target is based on a valuation of £100m for the company's equity representing 7 times likely cash profits of £14.4m in the fiscal year to end March 2016. On an earnings basis, the PE ratio would be 12.2 if Mr Barrett's target price is hit. That's still not an unreasonable valuation and I would therefore run your profits with Creston's shares trading on a bid-offer spread of 153p to 155p.

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 in the past 13 weeks:

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 break-out', 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, ('Exploiting a valuation anomaly', 20 July 2015) 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)

W.H. Ireland: Run profits at 120p, target 140p; Safestyle: Run profits at 235p; Charlemagne Capital: Sell at 11p ('Cash rich small-caps', 21 July 2015)

Amino Technologies: Buy at 150p, target 180p; Arbuthnot Banking: Buy at 1,530p; Globo|: Buy at 49p, target 69.5p ('Primed for major re-ratings', 22 July 2015)

SPARK Ventures: Buy at 4.5p; Entu: Buy at 115p, target 165p ('Cashed-up for gains', 23 July 2015)

Capital & Regional: Buy at 60.25p, target 70p ('Hot property', 27 July 2015)

LMS Capital: Vote against proposals at EGM; Marwyn Value Investors: Buy at 238p, target 275p to 280p ('Game changers, 28 July 2015)

Stadium Group: Buy at 130p and take up open offer, new target range 155p to 160p; 1pm: Buy at 68p and take up open offer at 60p, new target 90p ('Powered up for gains', 29 July 2015)

CareTech: Buy at 245p, target 300p; Burford Capital: Buy at 170p, target 190p; K3 Business Technology: Run profits at 275p; Trakm8: Buy at 178p, target 200p ('Hitting the right numbers', 30 July 2015)

Non-Standard Finance: Buy at 107.5p; Software Radio Technology: Buy at 27.5p, target 40p; Character Group: Run profits at 500p; Communisis: Hold at 50p ('Value judgements', 3 August 2015)

Fairpoint: Buy at 138p, target 190p; Creston: Run profits at 155p; Sanderson: Buy at 71p, target 80p to 85p; Renew Holdings: Buy at 340p, target 375p ('Break-outs looming', 4 August 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'