On the money
Shares in Aim-traded online gaming company 32Red (TTR: 133p) rallied a further 15 per cent to within pennies of their March 2006 all-time high of 174p after I recommended running profits at 147p four weeks ago ('Chipping in', 12 January 2016). I originally recommended buying at 51.75p ('Game on', 7 July 2013), so the holding is currently showing a total return of 172 per cent after factoring in dividends of 7.8p a share.
Although the price has fallen back sharply on profit-taking following a pre-close trading update at the end of last month, the company certainly didn't disappoint. Annual net gaming revenues rose by more than half to £48.6m in 2015, a record level, reflecting an acceleration of organic growth in the company's operations and the contribution from last summer's earnings accretive acquisition of Roxy Palace.
That acquisition fits in well with 32Red's regulated markets growth strategy and is enabling the company's management team, led by chief executive Ed Ware, 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 completed in mid-July 2015, Roxy has reported net gaming revenue of £5.4m, a performance better than some analysts had predicted during the integration period, especially as the operation has since been relocated to Gibraltar.
The other key take for me in the trading update was the 34 per cent increase in net gaming revenues at 32Red casino, a performance that was buoyed by increased investment in targeted marketing with a strict focus on return on investment. Betting on mobile devices has surged, so much so that customers placing bets on mobile devices now account for 44 per cent of that business segment, up from less than a third in 2014. There was good news from 32Red's small Italian business, too, where net gaming revenues increased by more than half to £1.7m and the unit is "in good shape to move towards break-even in 2016".
Importantly, these positive trends have continued into the new financial year with revenues in the first three weeks of January up 27 per cent on the same period in 2015, and up by 54 per cent, including the contribution from Roxy Palace. That news prompted analyst Ivor Jones at brokerage Numis Securities to lift his 2016 cash profit estimate by 10 per cent to £11m, up from £6.3m forecast in the 2015 financial year, a forecast that suggests pre-tax profits will rise from £5.9m to £10.5m this year. On this basis, expect current year EPS to increase by two thirds to 11.4p, representing a 9 per cent upgrade, with the payout hiked by around 10 per cent to 3.04p a share.
News on the company's cash flow performance was better than I had anticipated and Mr Jones expects 32Red to have ended last year with net funds of £9m. To put this into some perspective, at the end of June 2015, 32Red had net funds of £6.7m and subsequently spent £2m of that cash pile on Roxy Palace with the balance of the £6.4m consideration settled by issuing 10m new shares. The bumper cash pile is now worth 10.7p a share and rising as Mr Jones predicts it will increase to 19p by the year-end, reflecting the highly cash-generative nature of the business.
This means that post last month's upgrades, 32Red's shares are rated on 11.7 times earnings estimates for 2016, or on 10.6 times net of its cash pile. That valuation still doesn't look too punchy to me and neither does it to Mr Jones who has a new target price of 200p, up from 160p previously. So with 32Red clearly thriving in the post-Point of Consumption duty gaming market, winning customers from operators unable to compete in the more onerous tax environment, and the Roxy Palace acquisition delivering, I feel it's worth running your hefty gains ahead of the next trading update on Thursday, 10 March 2016. Run profits.
easyHotel acquisition spree
My decision to recommend buying shares in budget hotel chain easyHotel (EZH: 99p) has been vindicated after the share price moved sharply up from 85p to my initial target price of 100p ('Check in for a profitable booking', 14 December 2015).
It's easy to understand why investors are warming to the investment case as the company's new management team has wasted no time at all in ramping up the hotel expansion strategy. In fact, since my last update four weeks ago, ('easyHotel ramps up expansion', 14 January 2016), the company has been granted planning permission for a 116-room easyHotel at Bradley House in Manchester and has now completed the purchase of the building; been granted planning permission for a 77-room owned hotel at 47 Castle Street in Liverpool; and has conditionally acquired the 125-year leasehold of 81-91 John Bright Street in Birmingham, subject to obtaining planning consent for a hotel.
The property is situated in the heart of the city centre, close to the new entrance to Birmingham New Street Station and within 500 metres from the Bullring shopping centre. The company plans to convert the building into an 84-room easyHotel at a total cost of £4.5m, including the purchase price of the site. Expect the new hotel to open in 2017.
In addition, its Benelux franchisee has purchased a property on Arena Boulevard in Amsterdam, which it plans to convert into a 131-room easyHotel. Nearly 7.5m visitors came to the city in 2015, making it one of the top five most visited cities in Europe, a point bourne out by the performance of easyHotel's Amsterdam City Centre South hotel, which is one of top-performing hotels in the chain. This means that after factoring in the development of this hotel and the 107-room easyHotel in Brussels, the company's Benelux franchisee is set to add 238 rooms to the easyHotel network within the next 12 months. It also continues to seek further sites for hotels in the Benelux region.
So, with easyHotel likely to deploy its cash pile on further hotel developments in the coming months, which in turn offers scope for upside to the earnings projections in coming years, I would recommend running your healthy short-term profits. Run profits.
Bilby hits record high
Shares in Aim-traded Bilby (BILB:136.5p), a provider of gas heating appliance installation and maintenance services to residential and commercial properties, surged to an all-time high of 175p last month following a bumper set of half-year results and news of a transformational contract win.
Having initiated coverage on the shares at 75p ('Buy-to-build' growth play, 18 May 2015), I upgraded my target price to 120p last summer ('Acquisitions drive earnings upgrades', 17 July 2015) and advised running profits ahead of the half-year results ('Bilby's share price sparked alight', 18 November 2015); I subsequently upgraded my fair value target to a range between 150p and 160p a share and upgraded my advice back to buy at 132p ('Bilby set for new highs', 10 December 2015).
In the circumstances, it's hardly a surprise that some investors who invested at 75p last May, or for that matter at 132p in December, decided to bank a massive gain on the investment at last month's all-time high of 175p. However, the sharp pullback on profit-taking means that the shares are now only trading on 12 times earnings estimates of 11.4p for the financial year to March 2017, based on forecasts from analyst Michael Donnelly at brokerage Panmure Gordon. That prediction is well underpinned by a lucrative gas support contract for the South East Consortium (SEC), a group of housing associations responsible for over 140,000 homes in the region, which Bilby announced last autumn. Moreover, more than 90 per cent of Bilby's contracts are from customers who have employed the company in the prior year, so there is a high level of repeat business which improves the quality of its revenue.
Last summer's earnings-accretive acquisition of Waltham Abbey-based privately-owned property services business Purdy is of interest too, having expanded Bilby's services and geographical scope from its core gas maintenance installation and building maintenance services speciality into new areas of heating, building and complementary electrical services in neighbouring boroughs in north east London.
The important point being that the earnings growth Bilby is set to produce, and which is underpinned by a raft of solid contract wins - it has £180m of visible revenue over the next seven years - is not reflected in a forward PE ratio of 12. That's because for the financial year to end-March 2016, Panmure predicts Bilby's revenues will rise from £14.9m to £32.9m to drive up pre-tax profit by more than half to £3.1m and EPS by 18 per cent 7.2p. On that basis, expect a dividend per share of 2.8p. But for the following financial year to end-March 2017, Mr Donnelly at Panmure predicts pre-tax profit will rise by more than half again to £4.9m based on revenue rising to £49.4m, implying a pre-tax profit margin of 10 per cent. On that basis, expect EPS of 11.3p and a dividend of 3p.
In my view, a prospective earnings multiple of 12 is too low for a company that should be capable of generating earnings growth in excess of 50 per cent in the forthcoming financial year. Buy.
Burford's shares soar to record high
It's proved the right call to stay long of Aim-traded Burford Capital (BUR: 230p), the world's largest provider of investment capital and professional services for litigation cases to lawyers and clients engaged in major litigation and arbitration.
I recommended buying the shares at 146p last summer ('Legal eagles', 8 June 2015), updated my view when the share price was closing in on my target price of 190p ('Five companies that keep on delivering', 3 November 2015), and last advised running profits at 196p at the start of January ('Stock check', 5 January 2016). The price has risen a further 17 per cent since that last article in a market down 8 per cent. The fact that the shares have a beta of zero has undoubtedly proved attractive for investors in these uncertain times as the returns derived from successfully backing commercial litigation cases is uncorrelated with the economic backdrop and fluctuations in the general stock market.
I also feel that investors have rightly warmed to a landmark $45m (£31m) deal Burford Capital signed earlier this year to provide third-party litigation funding to a FTSE 100 company, believed to be telecoms giant BT Group, according to The Lawyer. I understand that Burford will finance BT's portfolio of pending litigation cases. According to data from The Lawyer Market Intelligence, BT is the most active litigant in the FTSE 100, but has very rarely used external law firms, so this is a very interesting development.
It's also worth pointing out that even after rising by 57 per cent since I initiated coverage eight months ago, during which time the FTSE All-Share index has fallen by 14 per cent, Burford shares are still not that expensively rated. In fact, based on forecasts from analyst Trevor Griffiths at broking house N+1 Singer, expect EPS of 26.3¢ (18.1p) in 2016, up from consensus of 23.7¢ in 2015, implying that the shares are rated on 12.7 times prospective earnings, a discount to the speciality finance sector average. They also offer a forward dividend yield of 2.5 per cent. There is substantial asset backing, too: Burford's last reported cash pile equates to a third of its current market capitalisation and litigation investments are being very conservatively valued in its accounts, too.
My advice here is simple: run your 57 per cent paper gains ahead of full-year results on Wednesday, 23 March 2015. They are unlikely to disappoint. Run profits.
MORE FROM SIMON THOMPSON...
I have written articles on the following 60 companies since the start of this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)
■ 32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)
■ 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
