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Riding a seven-year high

Riding a seven-year high
November 10, 2015
Riding a seven-year high

I subsequently upgraded my target price to a range between 200p and 220p ('Engineering ratings upgrades', 6 Oct 2015) and I still feel this is a fair valuation, and one representing between 11 to 12 times fiscal 2015 EPS forecasts of 18.5p, up from 17.2p in 2014, according to research firm Equity Development. I also feel comfortable with predictions that the company will be able to grow EPS by 8 per cent to 20p in 2016 after factoring in a full year's contribution from recent acquisitions made in order to scale up its legal services division. On that basis, the forward PE ratio is still only 9.5 for fiscal 2016. Prospective dividend yields of 3.6 per cent and 3.8 per cent, based on a raised payout of 6.8p a share in 2015 and 7.2p a share in 2016, are also attractive in my view.

So with Fairpoint's quality of earnings improving - legal services account for two-thirds of revenues - and the full benefits of acquisitions still to be seen, I feel a higher rating is warranted. Other investors are clearly thinking the same way, warming to the change in composition of Fairpoint's business from one highly exposed to cyclical (and temporarily shrinking) insolvency market to a more broadly-based one with legal services comprising a majority of revenue and profit.

For example, this summer's bolt-on acquisition of Colemans-CTTS and Holiday Travel Watch, a provider of consumer-focused legal services specialising in volume personal injury, volume conveyancing and travel law, complements the range of services already offered by Fairpoint's legal services operation, Simpson Millar LLP, and Fosters & Partners, a Bristol-based law practice specialising in all aspects of family law. Both those law firms were acquired by Fairpoint last year and highlight the board's strategy on establishing market-leading positions in certain sectors such as travel law to diversify its activities away from IVA-related business.

In my view, this greater focus on legal services means that Fairpoint's shares should be far more closely rated in line with peers operating in legal services, of which Aim-traded Gateley (GTLY: 100p) is the most obvious. Shares in that company are trading on 11 times earnings estimates of 9p for the fiscal year to end April 2016, falling to 10.5 times earnings estimates of 9.5p for the fiscal year to end April 2017. By comparison, shares in Fairpoint are trading on a 2016 PE ratio of 9.5, representing 1.5 point earnings multiple discount to the rating currently being ascribed to Gateley. That undervaluation is hard to justify given that Fairpoint is expected to deliver EPS growth of around 8 per cent in both 2015 and 2016, so is actually growing faster than Gateley. Add to that a tasty dividend yield and I have no hesitation reiterating my positive stance on Fairpoint's shares.

On a bid-offer spread of 188p to 190p, valuing the company's equity at £86m, I would run profits and maintain a target price range between 200p and 220p.

Please note that I have written two other columns today, both of which are included in the list below.

 

MORE FROM SIMON THOMPSON...

I have published articles on the following companies in the past three weeks:

MS International: Buy at 180p, initial target price 240p ('Making waves', 19 October 2015)

Pure Wafer: Buy at 175p, new target 200p ('Valuation anomaly worth exploiting', 20 October 2015)

Greenko: Hold at 87p, new target 100p ('Greenko's cash return', 20 October 2015)

Elegant Hotels: Buy at 108p, target range 130p to 135p ('An elegant investment', 20 October 2015)

BP Marsh & Partners: Buy at 157p, target 180p ('Cash-rich value play', 21 October 2015)

Crystal Amber: Buy at 170p; Dart Group: three month trading buy at 468p; Grainger: three month trading buy at 247p; Leaf Clean Energy: await news on Invenergy asset sale ('A quadruple play', 22 October 2015)

UTV Media: Buy at 184.5p, target 215p ('On the right wavelength', 26 October 2015)

Globo: shares suspended at 28p ('Globo bombshells', 26 October 2015)

Globo: shares suspended at 28p ('The truth about Globo', 29 October 2015)

Getech: Sell at 38p ('Getech warns', 3 November 2015)

Redde: Run profits at 178.5p; Trakm8: Run profits at 250p; 32Red: Run profits at 95p; Manx Telecom: Run profits at 208p; Burford Capital: Run profits at 189p ('Five companies that keep on delivering', 3 November 2015)

Gresham House: Buy at 345p, 12-month target price 450p ('Sowing the seeds for growth', 9 November 2015)

Inland: Run profits at 73p, target 80p ('Tapping into hidden value', 9 November 2015)

K3 Business Technology: Run profits at 361p ('In the money, 9 November 2015)

Fairpoint: Run profits at 190p, target range 200p to 220p ('Riding a seven year high', 10 November 2015)

KBC Advanced Technologies: Buy at 129p, new target range 160p to 169p ('Running oily gains', 10 November 2015)

Epwin: Run profit at 138p ('Decked out for further gains', 10 November 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'