The company had agreed a full cash settlement with its insurers following a major fire at its Swansea facility (‘Engineering growth’, 5 February 2015), and having now settled all liabilities with employees, and disposed of the 99-year lease on the site, the board anticipates returning between 140p to 145p of cash per share back to shareholders. This is far more than the 125p a share cash return the board had previously guided shareholders towards. The unexpected news also sent the company’s share price surging by 23 per cent to an all-time high of 160p and means that my fair value target price range of between 140p to 150p has been taken out too.
I updated the investment case when the share price was 123p a few months ago (‘Hitting target prices’, 2 June 2015), having initiated coverage at 72.5p in the autumn of 2013 ('Time to chip in', 10 October 2013). Admittedly, it has been a volatile share to hold, but with the buy recommendation showing a 120 per cent return it has been worth it nonetheless.
Pure Wafer’s board also points out that the company’s facility in Prescott, Arizona continues to operate successfully and trading there has been unaffected by the closure of the Swansea facility. The U.S. facility is currently running at "record levels of productivity and high utilisation, providing confidence in the strength and profitability of this business going forward." Analyst Eric Burns at brokerage W.H. Ireland believes the U.S. business is worth a minimum of 38p per share, or £11m, based on a conservative multiple of 4 times historic cash profits whilst acknowledging that, to a strategic buyer, the valuation could be "substantially higher than our base case."
So with the forthcoming cash return accounting for at least 140p, and possibly 145p of Pure Wafer’s current share price, I feel that it’s not time yet to bank profits with the shares priced on a bid-offer spread of 160p to 162p. Offering scope for a further 10 per cent upside and perhaps far more if a strategic buyer emerges for the U.S. business, I would run profits ahead of the full-year results on 5 October.
Property slide hits Macau
The good news from Pure Wafer was offset to some extent by a valuation slide at London-listed property developer and closed-end investment fund Macau Property Opportunities (MPO: 186.5p). The shares have fallen 12 per cent since my last investment column on the company (‘Overseas property plays’, 11 May 2015), albeit they are still 18 per cent ahead of my recommended buy-in price of 177p when I initiated coverage ('Far Eastern delight', 6 September 2013) after taking into account the cash return of 21p a share in April last year.
News that the company’s net asset value per share fell by almost 10 per cent to 397 cents in the three-month period to end-June 2015, and by almost 15 per cent to 253p after factoring in the 5.6 per cent appreciation of the greenback against sterling in the same period, sent the share price down another 4 per cent yesterday. It’s now blatantly clear to me that the downturn in the Macau gaming industry and the consolidation in the property market is continuing to impact the company's property portfolio far more than I had anticipated when I kept the shares on a buy recommendation at 214p in May (‘Overseas property plays’, 11 May 2015).
The catalysts for the slowdown in gaming revenues include China's anti-corruption efforts and a smoking ban on mass-market casino floors. This is impacting rental levels and occupancy rates at Macau Properties’ residential investment properties which in turn is accentuating the downward slide in their valuations. Macau Properties’ management has taken steps to address the reduced demand, but also indicates that occupancy levels are unlikely to rebound in the near term.
In my view the negative sentiment is likely to continue to weigh on the shares in the short term and there is potential for further valuation falls too. So although Macau Properties’ shares now trade on a 25 per cent discount to book value, and the company’s balance sheet remains in a strong position with an estimated available cash balance of US$40m, or 33p a share, at the end of June 2015 according to analyts at Liberum Capital, I am not prepared to let my paper profits be eroded any further. Sell.
Inland on a roll
Shares in Inland Homes (INL: 71p), the specialist housebuilder and brownfield land developer, are tantalisingly poised to take out the May high of 73.5p and make progress to my initial target price of 80p, and potentially my break-up value of 100p a share.
If you followed my advice to buy the shares at 23.5p in my 2013 Bargain share portfolio (‘How the 2013 Bargain shares fared, 7 February 2014), I would resist the temptation to bank the 200 per cent paper gain just yet as some positive newsflow is likely to emerge in the next six weeks which should underpin the rally further.
Firstly, investors are only just cottoning on to the 25 per cent profit upgrade following a pre-close trading update ahead of the release of full-year results next month. Ahead of that release, analyst Duncan Hall at broking house finnCap now expects the company to have increased revenues by 146 per cent to £98m in the 12 month period to end June 2015 and deliver a 74 per cent rise in pre-tax profits to £15m. Based on a lower tax charge of 20 per cent, compared to 34 per cent in fiscal 2014, this means that EPS is set to rocket from 2.7p to 6.1p and supports a 50 per cent hike in the dividend to 0.9p a share. On this basis, Inland’s shares trade on less than 12 times historic earnings and offer a dividend yield on 1.3 per cent.
But if you run through the numbers, it’s clear to me that the robust south east of England property market is set to underpin a strong outcome for the current financial year to end-June 2016 too. That’s because land sales in the year just ended brought in proceeds of £39m and achieved £90,000 per plot for the 433 plots disposed of with planning permission.
However, Inland has continued to grow its land bank since the financial year-end. So even after accounting for the sale of consented plots and residential units, it now stands at over 5,000 plots together with a significant amount of commercial space, including sites held within joint ventures and managed on behalf of the Drayton Gardens joint venture in west London. Marking consented land to market value and factoring in the value of investment and commercial properties held at their open market value, which are now bringing in £2m of rental income, I reckon that Inland has a break-up value of at least £200m, or 100p a share.
Land undervalued in balance sheet
For instance, the company has recently received a resolution to grant planning consent for 351 residential plots at the former Meridian TV Studios in Southampton. Planning applications for 329 residential plots across eight development sites are currently being considered by various local authorities with further applications for 1,196 residential plots to be made in the near future. However, land inventories were only in the books at £68m at the end of December, so as land is sold off to major housebuilders the company is set to reap some huge profits on its conservatively valued land bank.
Moreover, analysts are warming to the potential upside as Mr Hall at finnCap notes that "as disposals come through in 2016 (along with progress at Wilton Park), confirmation of Inland’s worth may well suggest scope for a target price nearer 100p than our upgraded target of 80p at present." I agree and ahead of the full-year results next month I would run profits with the shares now priced on a bid-offer spread of 70.5p to 71p. My initial target price is 80p.
Please note that I will be updating my 2015 Bargain share portfolio on Monday and will assess yesterday's acquisiiton by online gaming company Netplay TV (NPT: 9.5p) in that article.
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 15 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 Jun 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 Jul 2015) target 90p; Marwyn Value Investors: Buy at 244p, target 275p ('Acquisitions drive earnings upgrades', 15 Jul 2015)
■ Vislink: Buy at 53p, target 70p ('Awarding success', 16 Jul 2015)
■ SPARK Ventures: Buy at 4.5p ('Exploiting a valuation anomaly', 20 Jul 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 Jul 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 Jul 2015)
■ SPARK Ventures: Buy at 4.5p; Entu: Buy at 115p, target 165p ('Cashed-up for gains', 23 Jul 2015)
■ Capital & Regional: Buy at 60.25p, target 70p ('Hot property', 27 Jul 2015)
■ LMS Capital: Vote against proposals at EGM; Marwyn Value Investors: Buy at 238p, target 275p to 280p ('Game changers, 28 Jul 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 Jul 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 Jul 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 Aug 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 Aug 2015)
■ Globo: Buy at 42.75p, target 69p; Cambria Automobiles: Run profits ('Short sellers in for shock treatment', 5 Aug 2015)
■ Cohort: Run profits at 357p, target 375p; Cineworld: Run profits at 530p; Paragon: Buy at 412p ('Acquisitive growth drives re-ratings', 6 Aug 2015)
■ PROACTIS: Buy at 93p, target 117p ('Procuring growth', 10 Aug 2015)
■ Town Centre Securities: Buy at 310p, target 350p ('Equity market watch', 11 August 2015)
■ Equity market strategy ('Equity market watch', 11 August 2015)
■ KBC Advanced Technologies: Buy at 122p, target 165p; Getech: Buy at 59p, target 80p (‘Fuelled for strong growth’, 12 August 2015)
■ Pure Wafer: Run profits at 162p, target 178p; Inland: Run profits at 71.5p, next target 80p; Macau Property Opportunities: Take profits at 189p (‘Bumper cash returns’, 13 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'
