The price move is fully justified too as results this week highlighted that the growth seen in assets under management (AUM) in the six months to end June has continued during July and August. At the end of last month the company had AUM of £2.364bn, up from £2.05bn at the start of the year and £2.22bn at the end of June, despite the fall in equity markets. This growth is important because with operating costs held in check, a greater proportion of the fee income generated from these new mandates will fall straight to the bottom line, highlighting the operational gearing of the business.
As I anticipated when I initiated coverage, Miton's newer funds are attracting the greatest inflows which indicate an appetite for the group's products. The successful CF Miton UK Value Opportunities Fund managed by George Godber and Georgina Hamilton had increased AUM to almost £500m by the end of August, up from £378m at 30 June, and £211m at the start of the year. Miton’s UK MicroCap Trust launched in April and raised £50m and since then the trust has raised a further £5m. Importantly, the strong performance of the Miton multi asset funds – both Miton's Cautious and Defensive multi asset funds have continued to generate first quartile performance under their new investment teams - means that the company can develop its offering. This includes a proposed change of the PFS Darwin multi asset fund to an income mandate next month.
The turnaround in the performance of Miton's funds aside, the group is in a strong position to continue to recruit talented fund managers to diversify its revenue stream. For instance, following the appointment of Carlos Moreno in August as European equities fund manager, Miton will launch a new European equities fund in the final quarter this year. Mr Moreno was previously a fund manager at JO Hambro Capital Management Group where he managed JO Hambro All Europe Dynamic and has 21 years experience across european equities.
This growing momentum in the business is supportive of forecasts from analyst Stuart Duncan at house broker Peel Hunt that imply Miton will be able to deliver pre-tax profit of £1.8m in the second half of this year, up from £800,000 in the first half, to produce EPS of 1.2p and deliver a 16 per cent hike in the payout to 0.7p a share. On this basis, the shares are priced on 15 times cash adjusted earnings – net funds of £13.6m equates to 8p a share – and offer a prospective dividend yield of 2.7 per cent.
But with the business now having passed an inflexion point then profits could accelerate if Miton continues to attract new mandates as is proving to be the case right now. This explains why Mr Duncan predicts that revenues will rise from £14.9m this year to £17.3m in fiscal 2016 to deliver a 50 per cent plus hike in pre-tax profits to £4.1m and EPS of 1.9p. Of course there is execution risk, but the signs are promising, and on less than 10 times cash adjusted earnings for next year, the risk:reward ratio is favourable in my view.
Offering 33 per cent upside to my maintained target price of 35p, I continue to rate Miton’s shares a buy on a bid-offer spread of 25.5p to 26.5p.
Game on for 32Red
Shares in Aim-traded online gaming company 32Red (TTR: 73.75p) look well placed to take out their summer high of 79p and progress to my upgraded target price range of 90p. I originally recommended buying the shares at 51.75p ('Game on', 7 Jul 2013), and last updated the investment case at 67.5p (‘Acquisitions drive earnings upgrades’, 15 July 2015).
The latest half year results can only add to the attraction. The internet casino operator reported a 20 per cent increase in net gaming revenue to a record £18.6m which drove up underlying cash profits by more than half to £4.2m. These figures are stated before accounting for the £2m hit from the UK point of consumption (POC) tax which came into force in December and £1m of investment in 32Red’s Italian fledgling business.
Importantly, chief executive Ed Ware confirmed that trading since the June period end has been buoyant, so much so that underlying net gaming revenue has soared by more than half, implying an acceleration on the 35 per cent growth reported in the first three weeks of the second half at the time of the pre-close trading update. 32Red looks one of the sector’s winners in the post POC-market place.
It’s quite a remarkable performance and one that prompted house broker Numis Securities to pencil in a 42 per cent increase in second half revenues to underpin a 9 per cent EPS upgrade for the full year to 6.5p. Analyst Ivor Jones at Numis also raised his 2016 EPS estimate by a fifth to 10.5p and has a new target price of 160p, up from 120p previously.
Greater customer retention and reactivation of players, more focused digital marketing investment, and a fall off in competition in the new tax environment are all contributing factors in driving up customer numbers and supporting their spend. Interestingly, 32Red is now focused on maximising return on investment rather than trying to control the cost of acquisition, the upshot of this approach being that the payback period for capital invested in recruiting new players (around two months) is much shorter than for rivals. And with the benefit of a cash-rich balance sheet the company is well funded to pursue this successful approach as well as making further earnings accretive acquisitions. 32Red still has net funds of £5.7m, or 6.5p a share, on its balance sheet after factoring in the post period end acquisition of remote online gaming operator Roxy Palace for £8.4m in mid-July.
It’s worth noting that the acquisition fits in well with 32Red’s regulated markets growth strategy and enables the business to leverage the expertise that the Roxy team has built up over many years in overseas markets. It’s a profitable operation too as Roxy generated cash profits of £1.6m on net gaming revenue of £10m in 2014. Since the acquisition a couple of months ago, Roxy has reported net gaming revenue of £2.5m.
In the circumstances, the board can easily afford to increase the interim dividend by 10 per cent and expect the same again for the final to take the forecast payout to 2.64p a share. On this basis, the shares offer a decent 3.5 per cent dividend yield and are rated on a modest 11 times fiscal 2015 cash-adjusted earnings, falling to seven times 2016's likely cash adjusted earnings.
That represents value in my book and on a bid-offer spread of 72.75p to 73.75p, I rate 32Red's shares a decent buy offering 20 per cent upside to my target price of 90p. Buy.
Taking a reality check
Ordinarily, when a company’s share price slumps by almost a quarter post results it’s generally due to a profit warning or at the very least a substantial deterioration in trading conditions. Therefore, it may come as surprise to many that Vislink (VLK: 40p), a global technology business specialising in the collection and delivery of high-quality video and data from the field to the point of usage, has not warned on profits even though its share price has taken a battering since the release of its half year results a fortnight ago. In fact, the price is back to where I initiated coverage last summer ('Time to make the link', 26 August 2014). So what has spooked investors?
It’s certainly not the performance of Weybridge-based Pebble Beach Systems, a developer and supplier of automation, 'channel in a box' and content management services for TV broadcasters, cable and satellite operators. Last year’s acquisition now looks a bargain buy for Vislink as the business blazes a trail across the broadcast sector. In fact, it’s trading ahead of some analyst expectations.
For instance, in March this year, Pebble Beach was awarded a landmark deal with Al Jazeera Media to supply a system to unify the broadcaster’s playout infrastructure; a few months later German national broadcaster ZDF transferred all of its playout across its five channels to Pebble Beach’s automated solution; and in July, Nasdaq listed Harmonic Inc (HLIT), Vislink’s strategic partner in North America who white labels Pebble Beach’s applications under the Polaris brand, said that the partnership had already secured several contracts from a standing start in its first nine months. The bottom line is that Pebble Beach’s operating profit surged by 60 per cent to £1.8m on revenues of £5.4m in the first half. It’s higher margin too which means that any revenue shortfall from other parts of the business is easier to cover.
The performance of Pebble Beach also explains why Vislink’s adjusted pre-tax profit rose by a quarter to £2.2m on revenues of £26.6m in the six month trading period and why the board’s guidance, and for that matter analysts profit forecasts, remain unchanged for the full year. At the bottom of the range, analysts at Equity Development expect Vislink to report a 3 per cent rise in pre-tax profits to £7.3m on flat revenues of £62m. On this basis, expect adjusted EPS of 4.8p and a dividend per share of 1.55p, implying the company’s shares are rated on a forward PE ratio of 8.5, or less than half the sector average of 20, and offer a prospective dividend yield of 3.8 per cent.
Analysts at broking house N+1 Singer are even more bullish and believe the company is on course to turn in profits £400,000 higher than Equity Development’s aforementioned forecast. And it’s not as if the company has stretched finances to warrant such a low rating either as net debt of £1.2m equates to less than three per cent of shareholders funds, and well within credit facilities of £10m.
Reasons for the slump
In my opinion, there are three likely factors behind the share price slump, but none can justify the scale of the decline.
Firstly, challenging market conditions impacted Vislink’s Communications Systems business and led to a £1.7m one-off charge for a (largely completed) restructuring of this hardware division. However, this has to be put into some context as first half order intake of £22.1m for this side of the business was way ahead of first half revenue of £16.9m, the lower cost base has improved operating leverage through site consolidation and outsourcing older products to third parties, and investment in new products is underpinning the pipeline of future work. Indeed, the board is actually guiding shareholders to improved trading in the second half.
Secondly, Vislink’s surveillance business had tough comparables as this unit benefited from a large Home Office contract in the first half of 2014. But even after factoring in an anticipated decline in surveillance revenues from £15.9m to £9.5m for the full year, the combination of a repeat revenue performance from Pebble Beach in the second half, underpinned by a robust order book, combined with margin improvement through a better sales mix and lower cost base, more than compensates for softness on the surveillance side. Furthermore, the increasing proportion of revenues being generated from the higher margin software business, inline with the company’s strategy, improves the predictability of future revenues and earnings, and reduces the reliance on lumpy hardware contracts. That’s a positive, not a negative in my view.
Of course, investors may just be taking a very cautious view as they are entitled to do. For instance, the economic slowdown in Asia, with potential knock-on effects on Vislink’s customer base is worth flagging up given the cyclical nature of advertising spend that underpins broadcasters’ income. Broadcast revenues from Asia fell by almost a third in the first half, but this has to be put into perspective too as this segment represents only a small part of the business, about 7 per cent of Vislink’s first half revenue.
Thirdly, sentiment has not been helped by a controversial share scheme the directors awarded themselves in the summer (‘Awarding success’, 16 July 2015). That said, Vislink’s share price would have to rise by almost three quarters to 70p for the company to have a market value in excess of £85m before the directors financially benefit from the scheme.
The bottom line is that I feel that the sell-off in Vislink’s share price has gone way too far and with the 14-day relative strength indicator(RSI) massively oversold – the reading is in now in the low 20s – and the company still forecast to generate earnings growth, a single digit PE ratio shouts value.
In the circumstances, I rate Vislink’s shares a buy on a bid-offer spread of 39p to 40p and have a medium-term target price of 70p.
Stamped on value play
I also feel that the precipitous share price fall in stamp and coin dealer Stanley Gibbons (SGI: 138p), the laggard in this year's Bargain shares portfolio is massively overdone. In fact, having updated my view in the summer when the price was 240p ('A quartet of small-cap buys', 9 Jul 2015), I requested the company issue a trading update following the 40 per cent decline in the share price since mid-August. This was duly issued last week.
The key take for me in the trading update is that the board still believes it will achieve market forecasts for the full-year to end March 2016, based on trading initiatives in place, the realisation of integration benefits from recent acquisitions (see below) and through anticipated sales of rare high quality collectibles. True, weakness in the company’s Asian operations during the first half means that it is uncertain whether high value sales completed by the end of September will be at the level required to achieve internal budgets for the first half of the year.
But the company is working on a number of high value sales with potential new clients, the completion of which would have a material impact on trading. Also, the auction calendar for this year is more heavily weighted towards the second half than last year and is budgeted to deliver materially higher revenues and profits in the remainder of the financial year.
Admittedly, Stanley Gibbons’ board noted that its new online marketplace has yet to make any material contribution to growth since it went live on 21 May. Analyst Charles Hall at house broker Peel Hunt had previously factored in internet losses of £3m in the current fiscal year to reflect increased marketing spend, so it is only sensible for the company to hold off investing in any material marketing spend to drive sales until it sees improved traffic and conversion rates. I would also flag up that Stanley Gibbons is expected to reap annualised savings of around £1.4m from rationalisation costs and savings resulting from the acquisitions of coin dealer Noble Investments and antique dealer Mallett, both of which have been made in the past couple of years.
Overly cautious approach
Clearly, investors are taking a very conservative approach as the shares are trading on only 11 times last year’s EPS of 12.9p which was produced from pre-tax profits of £7.5m and revenues of £56.9m. They also offer a historic dividend yield of 3.6 per cent based on a payout per share of 5p. The current valuation also implies a great deal of scepticism towards Peel Hunt’s maintained fiscal 2016 pre-tax profit and EPS estimates of £10m and 17p (after accounting for £3m of internet losses) based on revenue of £71.6m.
In fact, the valuation implies the business will generate nil growth in the current financial year otherwise the company’s market value of £65m would not be a fifth less than book value of £82m. Moreover, included in that net asset value figure are stocks with a book value of £53.8m, but which according to analysts have an open market value of £150m. Of course, that open market value can only be realised if a buyer is forthcoming, something that is easier said than done given the impact of timing issues and the fall-out from the Asian economic slowdown on sales in China and Hong Kong.
Nonetheless it is clear to me that there is solid value in the company’s heavily oversold shares. Indeed, you could sell all the stock in a fire sale for 50 per cent of its open market value and the cash raised would still be worth 15 per cent more than the company’s market value. Furthermore, the 14-day relative strength indicator (RSI) has a reading lower than at any time in the past decade including at the bear market lows in 2009. At the very least this points to a strong bounce in the share price, and one that would be more than warranted by the asset backing alone.
So underpinned by a lowly geared balance sheet – net debt is only 14 per cent of shareholders funds – I continue to rate Stanley Gibbons’ shares a buy on a bid-offer spread of 136p to 138p. Buy.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies last week:
■ Trakm8: Run profits at 195p, target 220p; Character Group: Run profits at 518p, target 575p; Marwyn Value Investors: Buy at 220p; Global Energy Development: Speculative buy at 30p; Software Radio Technology: Buy at 27p, target range 40p to 43p; Globo: Buy at 33p, target 69p; Pittards: Hold at 105p (‘Cashed up for cash returns, 22 September 2015)
■ KBC Advanced Technologies: Buy at 112p, initial target 142p; K3 Business Technology: Run profits at 298p; Cenkos Securities: Buy at 177p; Netplay TV: Buy at 10p ('Small cap value plays', 23 September 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'
