Renew Holdings (RNWH: 362p), an Aim-traded engineering services group specialising in the UK infrastructure market, has issued top of the range results, a positive outlook statement and declared a robust increase in the dividend for good measure.
The board can certainly afford the 40 per cent hike in the payout to 7p a share, as the company ended the 12-month period to 30 September 2015 with net debt of only £4.8m, down 70 per cent year on year. Balance sheet gearing is now only 20 per cent of shareholders funds, and falling. Indeed, with the business cash generative and analyst Nick Spoliar at brokerage WH Ireland upgrading his fiscal 2016 pre-tax profit estimate by 8 per cent to £21.1m and lifting his EPS estimate by 10 per cent to 27.5p, then guidance is for the company to turn into a net cash position in the current fiscal year. Mr Spoliar expects the dividend per share to be hiked a further 12 per cent to 8p. On this basis, the shares are being rated on 13 times earnings forecasts and offer a 2.2 per cent dividend yield.
Importantly, those estimates are well underpinned by an order book up 14 per cent year on year to over £500m, buoyed by specialist hazard risk reduction work in nuclear energy, and at Sellafield in particular, and by renewable energy contracts with clients including E.ON, SSE and Scottish Water. The company has been winning a raft of infrastructure contracts elsewhere including one with Northumbrian Water, for sewage repairs and maintenance work, and for rail work where Renew Holdings is the national leader in engineering skills for works on tunnels and bridges.
For instance, Renew successfully carried out repair work on the Dawlish lower sea wall following last year's severe storms, which cut off rail access to south west England, and has subsequently won a contract to protect the coastal line at Saltcoats in Scotland. These awards helped drive both operating profit and EPS up by a quarter to £20.4m and 26p, respectively, on revenues ahead 12 per cent to £520m in the latest 12-month trading period, easily beating consensus estimates.
In the circumstances, it's hardly surprising that investors have been warming to the shares with the price now in the middle of my target price range of 350p to 375p, having risen by 40 per cent since I recommended buying at 258p ('A small-cap break-out', 14 August 2014). I last advised buying at 315p ahead of the results ('Engineering ratings upgrades', 6 October 2015). Investors are likely to remain positive, too, because the board are on the look-out for more earnings accretive acquisitions.
Bearing this in mind, the company has completed six major deals since 2006 without seeking recourse to shareholders for funding. And with its key engineering services division, accounting for 85 per cent of turnover, posting 22 per cent underlying revenue growth in the fiscal year just ended, excluding the contribution from acquisitions, then Renew's board is proving adept at generating organic growth, too.
Reflecting the aforementioned earnings upgrades, and potential for earnings accretive bolt-on deals in the coming months, I am raising my target price range to between 390p to 400p, implying a rating of 14 times earnings estimates. It's worth noting that Renew's share price has just taken out its summer highs post this week's results and has given a swing and point and figure buy signal on the charts. It's one worth following and, on a bid-offer spread of 358p to 362p, I rate the shares a buy.
Stepping up a gear
A few months ago I made a pretty strong case for investors to gain exposure to the car retail sector and to Cambria Automobiles (CAMB: 73p), in particular ('Drive a re-rating', 13 Jul 2015). I wasn't the only one who had formed this view as the shares subsequently re-rated 30 per cent from my advised buy-in price of 57.5p to my target of 75p.
Investors then eased off the accelerator ahead of this week's 2015 results (August year-end), but with earnings 4 per cent ahead of forecast, and that's after upgrades at the time of the pre-close statement in September, and analysts upgrading 2016 forecasts, too, then I expect the share price to cruise past the 75p resistance level to close in on my new target price of 90p in the coming months. I have good reason to think this way.
Firstly, Cambria's shrewd management team not only have an enviable track record of buying underperforming dealerships and turning them round, but they are proving equally adept at buying premium dealerships which offer a sound strategic fit. The acquisition of Jaguar and Land Rover dealerships in Barnet, London, in July 2014, and the Swindon Land Rover franchise last April, are a case in point. Combined, these acquisitions cost £18.1m and both have integrated well.
I would expect more deals to follow because a key take in this week's results was Cambria's eye-catching cash conversion. Net cash generated from operating activities was £15m, well ahead of operating profits of £8.5m, and reflects tight working capital management. This enabled the company to invest £8.4m in its business, including £7.6m in the Swindon acquisition, and still have net funds of £1m at the August year-end, reversing a net debt position of £4.6m a year earlier. Since then the board has signed a new five-year revolving banking facility of £37m, leaving substantial headroom for more bolt-on acquisitions. Shareholders are being rewarded too with the dividend raised by 25 per cent to 0.75p a share, a payout covered 8 times over by EPS of 6.1p, up from 4.2p a year earlier.
Another key take was the company's return on equity: net profit of £6m equates to a record 19.6 per cent of average shareholders' funds over the financial year. Of course, a benign economic backdrop is providing a decent tailwind for the business with 2.6m new cars registered in the UK in the past 12 months alone. Cambria's gross retail profit on new car sales rose 12.5 per cent to £1,476 per unit in the period, mainly reflecting the move upmarket and 9 per cent growth in total unit sales. Furthermore, with the new car parc recovering strongly since its cyclical low point in 2009, then this is in turn helping the trade in used cars, too. Cambria's gross profit per unit here rose 5 per cent to just shy of £1,400, but its return on investment of 137 per cent is almost double the industry average of 77 per cent, indicating the ability to source decent quality stock and maintain a high level of stock turn. Indeed, Cambria's stock turn on used vehicles is around 27 days, half the industry average, which significantly mitigates the risk of taking a hit on used cars when prices are weak.
The bottom line is that analysts expect Cambria to lift revenues by around 7 per cent to £563m in fiscal 2016 and grow pre-tax profits and EPS by a further 17 per cent to £9m and 7.1p, respectively. On this basis, expect a 20 per cent hike in the payout to 0.9p a share. So with the shares trading on 10 times forward earnings, offering a prospective dividend yield of 1.3 per cent, and with property accounting for more than half the market value, Cambria's shares should offer decent mileage to my upgraded target price of 90p. That’s marginally above the 86p fair value estimate of Matthew McEachran of broking house N+1 Singer, but significantly less than the 116p medium-term target of Mike Allen at Zeus Capital. Needless to say, on a bid-offer spread of 70p to 73p, and offering a further 23 per cent potential upside, I rate Cambria's shares a buy.
Pure Wafer chips in a stock market exit
My faith in Aim-traded Pure Wafer (PUR: 165p), a leading global provider of high-quality silicon wafer reclaim services to some of the world's largest semiconductor makers and foundries, has proved justified.
Having initiated coverage at 72.5p ('Time to chip in', 10 October 2013), and seen the price hit my 175p previous target price post the 2015 financial results last month ('Valuation anomaly worth exploiting', 20 October 2015), the company has just announced the proposed disposal of its last remaining business, a US wafer reclaim operation in Prescott Arizona. The sale price of $16m equates to £10.5m at current exchange rates and represents a valuation of four times cash profits. Pure Wafer had net funds of $85.3m at the end of June following the settlement of an insurance claim on its Swansea facility which was destroyed by fire.
The most likely scenario that is set to pan out now is for Pure Wafer's shareholders to approve the sale of the US business - directors controlling 7.8 per cent of the share capital plan to vote the disposal through at a forthcoming general meeting; and then receive a substantial interim capital distribution early next year after appointing liquidators to wind up the company at a subsequent general meeting. A notice of liquidation will be sent to shareholders next month to outline the quantum of the total distribution and the likely timing. The shares will then delist from Aim.
Bearing this in mind, the company’s last reported net asset value was $94.7m, or £62.3m. So based on a diluted share capital of 32.4m shares, after factoring in options and warrants of 3.3m shares, this implies a book value per share of 192p. As a result, I can foresee a capital distribution being made to shareholders north of 180p a share, so if you followed my earlier advice I would sit tight on your 127 per cent paper gain and await the precise details of the cash distribution in the forthcoming shareholder circular. Sit tight.
Record high for bug buster
Shares in Aim-traded Tristel (TSTL: 142p), a maker of infection prevention, and hygiene products, have surged through my previously upgraded target price range of between 130p to 135p, and are now up 133 per cent since I first advised buying them at 60p ('Clean up on superbugs', 6 May 2014). I previewed last month's bumper full-year results seven weeks ago, so the price has rallied 45 per cent since that article ('Cleaning up with a superbug buster', 7 October 2015).
To put the valuation into perspective, for the current financial year to end-June 2016, analysts Paul Hill and Gilbert Ellacombe at research firm Equity Development predicts Tristel should be able to increase revenues by 15 per cent to £17.6m and drive up both pre-tax profits and adjusted EPS up by almost a fifth to £2.95m and 5.89p, respectively. On this basis, the shares now trade on 24 times forward earnings. For the year after, they predict revenues growing by a further 15 per cent to deliver EPS north of 7p, implying a forward PE ratio of20.
That looks a fair valuation to me, but clearly other investors are betting that the earnings upgrade cycle has further to go. For instance, Tristel is entering new markets - the board is currently in the process of obtaining regulatory approval to sell its products in the US - so expect the proportion of its overseas revenue to grow. There is also a possibility of Tristel becoming a bid target as undoubtedly a fast growing cash rich and highly profitable company selling high-margin patented chlorine dioxide technology infection control healthcare products would represent a decent bolt-on purchase for a larger rival. In the circumstances, I would run your bumper gains.
MORE FROM SIMON THOMPSON...
I have published 238 articles on the following companies in the past six months and five features on equity market strategy:
■ Bioquell: Buy at 137p, target range 170p to 185p ('Bug busting potential for short-term gains', 16 Nov 2015)
■ Communisis: Hold at 45p ('Communisis slammed for earnings miss', 16 Nov 2015)
■ AB Dynamics: Run profits at 320p; Stanley Gibbons: Hold at 90p; Pittards: Hold at 94p ('Bargain shares updates', 17 Nov 2015)
■ Bilby: Run profits at 133p ('Bilby's share price sparked alight', 18 Nov 2015)
■ GLI Finance: Buy at 45.25p ('High yield P2P play', 18 Nov 2015)
■ LMS Capital: Buy at 72p; Cenkos Securities: Buy at 180p ('Capitalising on tender offers', 19 Nov 2015)
■ Ensor: Buy at 99p, target 125p ('Bid watch', 23 Nov 2015)
■ Marwyn Value Investors: Buy at 216p ('Cashing in on a top performer', 23 Nov 2015)
■ Trakm8: Run profits at 262p ('On track for record earnings', 24 Nov 2015)
■ Walker Crips Group: Buy at 49p, target 60p ('Profit from a profit surge', 24 Nov 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'
