And this is precisely what we are seeing right now with a spate of deals being announced on a daily basis. It’s certainly keeping me busy as no fewer than five companies on my watchlist announced major acquisitions last week and there have been another two so far this week, the latest being small-cap UK defence company Cohort (CHRT: 357p).
Cohort is a company I know all too well having first advised buying the shares at 215p ('Blue-sky buy', 6 October 2014), I reiterated that advice at 280p ('Flying high', 14 April 2015), and again at 312p when my previous price target was smashed following an earnings beat (‘Riding earnings upgrade cycles’, 7 July 2015). In fact, my upgraded target price of 365p is also starting to look too conservative. Following upgrades analyst Chris Dyett at broking house Investec Securities now believes fair value is around 400p a share, rather than his previous target of 360p.
A smart bolt-on acquisition
He has a point because I feel that investors are likely to warm to this week’s acquisition of EID, a Portugal based supplier of advanced electronic products and systems for the global defence and security market. The bolt-on deal makes sound strategic sense as EID is a hi-tech company with more than 30 years' experience in the design, manufacture and support of advanced, high performance command, control and communications equipment. Its products equip over 120 warships worldwide including naval communications systems for the Royal Navy and other NATO navies. Moreover, EID provides Cohort with a portfolio of complementary products and systems which have a strong global market presence, relationships in a number of important export markets in Europe, Middle East, Africa, Asia and Latin America, and access to EID's international customers for Cohort’s products and services.
Importantly, the numbers stack up too as Cohort is acquiring EID for €16m (£11.2m) on a cash-free, debt free basis, or the equivalent of 11.5 times its operating profit of almost £1m in the 12 months to end March 2015. EID generated revenues of €14.5m (£10m) last fiscal year and had a closing year-end order book of €35.2m on which revenue of €12.4m for the 2015 fiscal year was already on order, so prospects look well underpinned for some time to come.
And Cohort can easily afford to acquire EID as the company’s net funds increased by a fifth to £19.7m in the 12 months to end April 2015, despite paying out £17m on prior acquisitions. That cash pile easily covers the £11.2m net purchase price, but Cohort is also in advanced talks to arrange a new debt facility worth £25m with a syndicate of banks including RBS, Barclays and Lloyds. But even if the company doesn’t tap that facility, analysts at Investec still believe that Cohort will have net funds of £4.8m by the end of April, or a sum equivalent to 12p a share, so it still retains a strong balance sheet.
Earnings upgrades
Factoring in the contribution from EID, Investec have assumed the acquisition will generate revenues of £5m and a £500,000 operating profit in Cohort’s 2016 fiscal year, rising to revenues of £12.7m and operating profits of £1.3m in fiscal 2017.
On this basis, the broking house now predicts that Cohort will lift pre-tax profit from £10.2m to £12.1m on revenues of £114m in the current financial year to produce EPS of 21.8p, rising to profits of £13.6m on revenues of £125m the following year to produce EPS of 24.6p. This means the shares are currently being priced on 14 times earnings estimates and are underpinned by a 2 per cent prospective dividend yield for the fiscal year ending April 2017. That valuation still seems reasonable to me especially as the new debt facility will give the company scope to make further earnings enhancing bolt-on acquisitions. Cohort’s record order book of around £158m post completion of the deal is highly supportive of analysts' revenue too.
In the circumstances, I feel a multiple of 15 times fiscal 2017 earnings estimates’ is a fairer valuation for the equity, implying a target price of 375p. So if you followed my previous advice I would run your 60 per cent bumper profits with Cohort’s shares trading on bid-offer spread of 350p to 357p.
Cineworld’s price surge
Shares in one of Europe’s leading cinema chains Cineworld (CINE: 530p) have not just gone through my target price, but completely obliterated it. I recommended buying at 336p ('Lights, camera, action', 28 October 2014) and with the shares priced on a bid-offer spread of 520p to 520.2p, the recommendation is showing a gain of 57 per cent in the past nine months.
Cineworld will announce its interim results on Thursday, 13 August 2015 and the figures are likely to make for a good read. That’s because the company flagged up in a pre-close trading update last month that pro-forma revenue increased by over 11 per cent in the six month period with growth being reported in all territories apart from Slovakia. Cineworld currently operates 1,927 screens across 208 sites in the UK and Ireland, Poland, the Czech Republic, Slovakia, Hungary, Bulgaria, Romania and Israel. It has the number one or number two position by number of screens in each of its regions, so is well placed to benefit from a promising film release programme slated for the second half of the year including potential blockbusters "Star Wars: Episode VII"; the final Hunger Games film "Hunger Games; Mockingjay Part 2" and the next James Bond film "Spectre".
The company also offers investors a growth angle through expansion of the cinema estate, having opened three new Cineworld cinemas in the UK with 31 screens in total in the first half, one Picturehouse (in East Dulwich with three screens), redesigned its Milton Keynes cinema and relaunched the former site in the Trocadero in London’s West End as a seven screen Picturehouse cinema. In the second half, a further six cinemas in the UK (with a total 47 screens, of which five will be Picturehouse screens), and a further seven cinemas overseas with 77 screens, are expected to open.
Admittedly, most of the good news is already priced into the shares which are rated on 19 times fiscal 2015 EPS estimates of 27.9p, falling to 17.4 times fiscal 2016 estimates of 30.5p. A prospective dividend per share of 15.3p this year and 16.8p in 2016 implies a forward dividend yield of 2.9 per cent, rising to 3.2 per cent. Analysts at broking house N+1 Singer have a target price of 550p, or 4 per cent above the current share price.
So having considered the valuation, second half trading prospects and a bullish chart set-up with the shares just giving a swing and point & figure buy signal after the price took out the May record high of 523p, I am inclined to run these paper profits.
Buy-to-let gains
Shares in the UK’s largest buy-to-let mortgage lender Paragon (PAG: 412p) are up 18 per cent in the nine months since I recommended buying at 347p (‘Riding the buy-to-let boom’, 27 October 2014), but are adrift of the 440p price level at the time of my last update (‘Repeat buy signals’, 11 May 2015). They are currently priced on a modest 11.5 times earnings estimates of 35.7p a share for the financial year to end September 2015, underpinned by a prospective dividend yield of 2.4 per cent based on a hike in the payout from 9p to 10p a share, and are rated on a price-to-book value of 1.3 times.
The pull back in the share price since it hit a high of 461p is largely down to the change in government policy towards buy-to-let property landlords with restrictions being placed on the amount of mortgage interest they can offset against rental income on the homes they rent out. That said, I feel that professional investors are taking a sensible approach to the change in government policy as they will still be able to deduct all finance costs from their rental income until the 2017-18 tax year, and tax relief won’t be fully restricted to the basic rate of 20 per cent until the 2020-21 tax year. Someone looking at a buy-to-let investment today will be fully aware of the changes in the tax regime and will be factoring this into their decision.
It’s also fair to say that residential property as an asset class still offers attractive net yields if you buy in the right areas even after taking into full consideration the impact of the aforementioned tax changes. With government bond yields at record lows, there are few alternatives which offer solid asset backing and a reliable income stream for yield hungry investors. And the potential group of investors looking at buy-to-let investments is not getting any smaller as this April’s tax changes to pensions has enabled millions of over 55s to access their pension pots. I still contend that some of these funds will make their way into the buy-to-let market as deposits on debt funded property purchases, a point I made when I initiated coverage last autumn.
Furthermore, business is clearly good for Paragon as the company highlighted in its trading statement at the end of last week: the pipeline of buy-to-let mortgage business was at £865m at the end of June 2015, up 167 per cent on 12 months earlier; Paragon Bank's savings proposition has developed strongly, with the balance of deposits outstanding rising to £389m by the end of June; and the company is currently tapping the London Stock Exchange retail bond market by issuing its third bond issue. There is no shortage of investment appetite for either borrowing from or lending to the company.
So ahead of Paragon’s full-year results for the year to 30 September 2015, I rate the shares a buy on a bid-offer spread of 411.5p to 412p.
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 14 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)
■ Globo: Buy at 42.75p, target 69p; Cambria Automobiles: Run profits ('Short sellers in for shock treatment', 5 August 2015)
■ Cohort: Run profits at 357p, target 375p; Cineworld: Run profits; Paragon: Buy at 412p ('Acquisitive growth drives re-ratings', 6 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'
