Firstly, the company has confirmed that trading in the first five months of the current fiscal year is inline with analyst estimates ahead of the release of interim results on Tuesday 10 November 2015. In fact, the business has delivered its strongest trading performance since being formed over 40 years ago with encouraging progress being reported across all regions and underpinned by a strong pipeline of work. True, the Chinese economic slowdown could have an impact on global markets, but Trifast’s sales within and into China only amount to 5 per cent of its total revenue which means the business is not overly exposed to the region. So although I am certainly not complacent, I am not that concerned either with the impact on Trifast’s business from the slowdown in China.
More important is the growth opportunity for the company elsewhere as the board scales up Trifast’s presence in what remains a fragmented market sector by adding niche, well run businesses to its portfolio. Strategically it makes sense to do so as market research indicates that global demand for mechanical fasteners will continue to rise over the next five years, so the market backdrop remains positive. Bearing this in mind, even though Trifast operates from 26 locations in 17 countries across Europe, Asia and North America, the company still only has less than one per cent of the global industrial fastener market.
This explains why Trifast has just announced the £6.16m acquisition of German industrial distributor Kuhlmann, a company based close to Biefield. The country is the fourth largest industrial fastener market in the world and the largest in Europe. Exports into Germany accounted for 6 per cent of Trifast’s sales last year, so there is a strategic opportunity to establish a strong domestic distribution and logistics facility there in order to drive the company’s multi-national OEM base and tap into Kuhlmann’s well-established longstanding customer base in the machinery and plant engineering, sheet metal processing and industrial sectors. Importantly, Kuhlmann's management team and previous owners, Frank Niggebrügge, Eric Hütter and Peter Henning will continue to run the business with the support of their operational management team and staff.
Sensibly priced
The transaction has been sensibly priced too as Kuhlmann reported pre-tax profit of £1.26m on revenue of £4.9m in 2014. So after factoring in the re-introduction of director salaries – about £200,000 in total each year – and assuming a 28 per cent tax charge, the total cash consideration of £6.16m equates to just under six times net earnings. It’s also earnings accretive with analysts upgrading their estimates for the 2016 fiscal year (March year-end) by a couple of per cent and by around 4 per cent for the 2017 fiscal year. Analysts at brokerage Arden Partners now expect Trifast to increase revenues from £155m to £163m in the current financial year and to £172m the year after. On this basis, expect pre-tax profits to increase from £14.3m in fiscal 2015 to £15.5m and £16.6m, respectively, to drive up EPS from 8.7p to 9.4p and 10p, and underpin a near 10 per cent rise in the dividend per share to 2.3p and 2.5p. This means that Trifast shares are being rated on 12 times’ current year earnings estimates and offer a prospective dividend yield of 2 per cent.
That’s hardly an exacting valuation for a company that has been executing its bolt-on acquisition strategy flawlessly and has been reporting decent organic growth in its existing businesses too. In fact, Trifast’s last major acquisition in May 2014, that of VIC, an Italian maker and distributor of fastenings systems predominantly to the white goods industry, outperformed forecasts for the last financial year.
Scope for decent gains to target price
So with the shares trading well below my 140p target price, I have no hesitation maintaining my positive stance, having first initiated coverage on the shares when the price was 53p ('Bargain shares for 2013, 7 February 2013). True, the share price got within pennies of my 140p target in June, but I feel a revisit to those highs and beyond is more than justified. I am not the only one thinking this way as analyst Jo Reedman at broking house N+1 Singer has a target price of 129p; David Buxton at finnCap has fair value at 152p; and Henry Carver at house broker Peel Hunt has a 150p target.
Interestingly, Trifast’s share price is exhibiting positive divergence on the chart with the 14-day relative strength indicator (RSI) markedly higher at last week’s retest of the summer low of 107p. From my lens at least the bottom looks in place and, on a bid-offer spread of 110p to 114p, I am upgrading my recommendation from run profits to buy.
Engineering growth
Buoyed by a robust order book for the company's engineering services division, and the contribution from acquisitions, Renew Holdings (RNWH: 315p), an Aim-traded engineering services group specialising in the UK infrastructure market, has hit analysts’ forecasts for the financial year just ended.
Broking house WH Ireland predicts a 20 per cent rise in pre-tax profits and EPS to £19.6m and 24.9p, respectively, on revenues of £475m in the 12 months to end September 2015. On this basis, the shares are rated on 12.5 times fiscal 2015 likely earnings and offer a dividend yield of 2.1 per cent based on a full-year dividend of 6.75p a share, up from 5p a share in fiscal 2014. The results release on Tuesday, 24 November 2015 will make for a good read and one for investors to warm to.
Moreover, prospects for the new financial year look well underpinned by a number of new contracts including an award from Northumbrian Water, for sewage repairs and maintenance work, and rail work where Renew Holdings is the national leader in engineering skills for works on tunnels and bridges. I am therefore comfortable with analysts’ fiscal 2016 revenue forecasts of just under £500m to drive up pre-tax profits and EPS to £20.7m and 26.7p, respectively. On this basis, the shares are being rated on a modest 11.7 times forecast earnings and offer a forward dividend yield of 2.4 per cent after factoring in a further increase in the payout to 7.5p a share.
So having first issued a strong buy recommendation on the shares at 258p ('A small cap break-out', 14 August 2014), and maintained my positive stance at 340p ahead of the recent pre-close trading update (‘Break-out looming’, 4 August 2015), I continue to rate Renew's shares a decent buy on a bid-offer spread of 310p to 315p. Offering almost 20 per cent upside to the top of my 350p to 375p target price range, I rate the shares a buy.
600 Group tooled up for growth
In the past 12 months, the share price of Aim-traded machine tools and laser marking company 600 Group (SIXH: 16p) has bounced no fewer than five times off the 15p support level and each time this has proved a decent trading opportunity. Last week the share price tested this support level once again and with the 14-day RSI having an oversold reading in the low 20s, and the share price at the bottom of its 15p to 19.5p 12-month trading range, I feel that yet another bounce is in order.
Importantly, executive chairman Paul Dupree, a senior member of private equity firm Haddeo Partners, a 25.4 per cent shareholder in 600 Group, points out that the company is trading in line with analysts’ expectations for the current financial year. He also notes that following the acquisition of US-based laser marking company TYKMA for £3m in February, and the appointment of David Grimes, who built up the TYKMA business and subsequently integrated 600 Group’s Electrox laser marking business, as a divisional managing director, the rationalisation of these operations has “delivered a number of immediate cost benefits with further improvements expected as the year progresses.”
That’s important because a recovery in the higher margin laser marking business is key to 600 Group delivering the 50 per cent rise in current year adjusted pre-tax profits to £3m as analyst David Buxton at brokerage finnCap predicts. 600 Group’s underlying pre-tax profits only edged up to £2m in the 2015 fiscal year (March year-end) as decent progress in its machine tools and precision engineered components division was wiped out by a shortfall in the laser marking business.
Breaking down forecasts
Analyst Ian Berry at brokerage WH Ireland forecasts that the laser marking business will deliver revenues of £15m and operating profit of £1.7m in the 12 months to end March 2016 after factoring in the contribution from TYKMA, cost savings and 6 per cent growth in the market. He also believes that there is scope for the machine tools and precision engineered products division to grow revenues by just under 10 per cent to £38m and drive up operating profit from £2.9m to £3.3m. This is after factoring in 20 per cent revenue growth in the US and the UK (600 Group’s largest markets).
Bearing this in mind, Mr Dupree points out that the North American machine tools market has performed well since the March year-end which is reassuring as the region accounted for 55 per cent of group sales last year. And there is every reason for this positive trend to continue given the underlying strength in the US economy. It also helps explain why the division is expected to make progress this year even though the much smaller European market has seen a slowdown in recent months.
I am therefore positive on prospects overall. Furthermore, with 600 Group’s shares trading on eight times last year’s earnings, and a miserly six times fiscal 2016 forecasts, investors are being overly cautious. Indeed, if 600 Group hits analysts estimates this fiscal year and next, and the £4.2m earn-out from TYKMA is paid in March 2017, then I reckon net debt would halve to around £5.5m and its proforma fully diluted net asset value would be 33p a share.
So although 600 Group’s shares are below the 19p level at which I initiated coverage ('Tooled up for a strong recovery', 14 April 2014), and have drifted from 18p since my last update (‘A trio of small cap value plays’, 14 July 2015), offering 50 per cent share price upside to my fair value target of 24p, I rate them a medium-term buy on a bid-offer spread of 15.5p to 16p.
Enjoy the Creston run
Shares in small-cap marketing communications company Creston (CRE:162p) have rallied 37 per cent since I initiated coverage at 118p last autumn ('Buy the break out', 4 November 2014), and are closing in on the upgraded target price of 171p of analyst Johnathan Barrett at broking house N+1 Singer.
That target is based on a valuation of £100m for the company's equity, or 7 times likely cash profits of £14.4m in the fiscal year to end March 2016. On an earnings basis, the prospective PE ratio is still only 11.5 which is not an unreasonable valuation in my view. Analysts also predict a further rise in the payout to 4.7p a share in the current financial year to give a forward dividend yield of 2.9 per cent based on an increase in EPS from 13p to 14p.
I last updated the investment case a couple of months ago when the price moved through my target price of 150p and advised running profits at the time (‘Break-outs looming’, 4 August 2015) as investors warmed to the board's decision to deploy its bumper cash pile to make some smart looking and earnings accretive acquisitions. Although Creston has now invested all its cash pile, the business is still well funded and has scope to make additional bolt-on purchases, underpinned by annual operating cashflow of £8.6m and credit lines of £35m.
So even though Creston’s shares have hit their highest level for eight years, I would continue to run your profits on a bid-offer spread of 160p to 162p.
Fairpoint well in the money
Shares in Fairpoint (FRP:184p), a leading provider of consumer professional services including debt solutions and legal services, have rocketed by 33 per cent since I highlighted they were on the verge of giving a major buy signal at 138p (‘Break-out looming’, 4 August 2015). It’s a company I know well having included the shares in my 2013 Bargain Shares Portfolio when the price was 98.25p ('Bargain shares for 2013, 7 February 2013). Since then the company has paid out total dividends of 18.4p a share which means that you will have doubled your money if you followed that advice.
The question is whether it’s time to bank profits with the shares now within pennies of hitting my long-term target price of 190p? On valuation grounds I believe it’s worth running with the holding as the rating is still only 10 times this year's expected earnings based on an EPS estimate of 18.5p, up from 17.2p in 2014, according to analysts John Borgers and Gilbert Ellacombe at research firm Equity Development. I reckon the company is nailed onto hit those EPS estimates so there is little in the way of earnings risk. I also feel comfortable with predictions that the company will be able to turn in EPS of 20p in 2016 after factoring in the full contribution from the recent acquisitions made in order to scale up its legal services division.
It’s also fair to say that with legal services now accounting for about two thirds of Fairpoint’s revenues then the improved quality of earnings and less reliance on IVA services warrants a higher rating than 9 times fiscal 2016 likely earnings. A prospective dividend yield of 3.7 per cent, based on a raised payout of 6.8p a share, is attractive too.
Interestingly, the technical set-up is also supportive of further gains: the share price is on the verge of taking out the post results seven-year high of 185p; the rising 20-day exponential moving average (currently positioned at 176p) has caught up with the price so it’s no longer overextended above its short-term trend line; and the 14-day RSI is not too overbought so offering scope for a continuation of the rally.
From my lens at least the next stop looks to be in a price range between 200p to 220p and I would recommend running profits on the shares at 184p with this target in mind. Run profits.
Stanley Gibbons profit warning
Shares in stamp and coin dealer Stanley Gibbons (SGI: 105p), the laggard in this year's Bargain shares portfolio, plunged by 25 per cent this morning after the company issued a profit warning. Today’s announcement comes less than two weeks after the board had said the business was expected to hit full-year pre-tax profit estimates.
Sales in the first half to end September 2015 are expected to be at a similar level to the same period last year (around £27m), albeit this is after factoring in the contribution from the acquisition of antique dealer Mallett, acquired last autumn. However, margins have been hammered and analyst Charles Hall at house broker Peel Hunt now expects the company to post a small first half loss. In the first half last year the company reported pre-tax profits of £5.3m and EPS of 10p. Weakness in Asian markets, illiquidity in high value items of stock and the absence of high margin sales are the reasons given for the profit miss.
It also means that Peel Hunt’s previous full-year estimates have been shredded. In fact, even after factoring in a stronger second half performance, Peel Hunt now expect the company’s full-year pre-tax profits to fall by a third from £7.5m to £5m, representing a 50 per cent profit downgrade. Another consequence of the poor trading is that net debt is expected to be around £17m at the end of September 2015, up from £11.7m at the end of March 2015. True, borrowings should reduce materially in the second half as stocks are turned into cash, but the combination of higher debt and lower profitability makes a dividend cut look inevitable. Peel Hunt predicts EPS will decline by a third from 12.7p to 8.7p and the dividend halved to 2.5p. On this basis, the shares are rated on 12.4 times earnings estimates and the prospective dividend yield is 2.4 per cent.
The positives being that the company’s asset backing is solid enough to enable the company to trade through these difficult times. Net asset value of £82m includes stocks with a book value of £53.8m, but which have an open market value of £150m according to analysts. Of course, with fewer buyers around then the open market value of rare high quality collectibles is not easily realisable, otherwise Stanley Gibbons’ wouldn’t be warning on profits. That said, with the company’s market capitalisation of £50m well below IFRS net asset value, this is being factored into the current market pricing.
It’s also worth noting that after the savage decline in the share price, the shares are now close to the 2009 bear market low, a major support level. They are also more oversold than at any time in their history. And if management can deliver the budgeted sales from its stockholding of rare collectibles as it’s aiming to achieve, reduce costs by over £1m in a full-year, and hit its auctions schedule, then it should be able to deliver Peel Hunt’s downgraded earnings estimates. So if you followed my previous advice I would hold onto the shares at 105p.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies in the past fortnight:
■ 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 Sep 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 Sep 2015).
■ Miton: Buy at 26.5p, target 35p; 32Red: Buy at 73.75p, target 90p; Stanley Gibbons: Buy at 138p; Vislink: Buy at 40p, target 70p ('Building momentum', 29 Sep 2015)
■ Moss Bros: Buy at 97p, target 120p; GLI Finance: Buy at 52p, target 80p; Town Centre Securities: Buy at 315p, target 350p; Globo: Buy at 39p, target 69p (‘Platforms for success’, 30 September 2015)
■ Safestyle: Run profits at 255p; Epwin: Run profits at 138p; Manx Telecom: Buy at 188p, target 210p (‘Income plays with capital upside’, 1 October 2015)
■ LXB Retail Properties: Buy at 86p, target 99p ('Bag a retail property bargain', 5 October 2015)
■ Creston: Run profits at 162p, target 171p; Fairpoint: Run profits at 184p, new target range 200p to 220p; Trifast: Buy at 114p, target 140p; 600 Group: Buy at 16p, target 24p; Renew Holdings: Buy at 315p, target range 350p to 375p; Stanley Gibbons: Hold at 105p ('Engineering ratings upgrades', 6 October 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'
