At this week's annual meeting the board confirmed that trading is in line with expectations, which point towards pre-tax profits rising from £10.46m to £11.1m in the 12 months to end December 2016, according to analysts Roger Leboff and Hannah Crowe at equity research firm Equity Development. Part of this growth represents the full benefits of last summer's 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. The Colemans trading brand has since been retired and all legal activity is now harmonised under the Simpson Millar brand, a consumer legal services business that was acquired by Fairpoint in June 2014.
I understand the integration process is going well, albeit conveyancing activity in the first quarter was quieter than expected on the back of lower levels of housing transactions. That said this segment only accounts for 10 per cent of divisional revenues and growth in legal services compensated for the shortfall. To put this side of the business into some perspective, analyst Michael Donnelly at Panmure Gordon expects Fairpoint's legal services division to increase operating profits from £4.5m in 2015 to £7.1m in 2016 based on divisional revenues rising from £31.6m to £49m and after factoring in a full 12-month contribution from the Colemans acquisition. On this basis, legal services is set to account for almost three quarters of current year revenue estimates of £65.8m, and 60 per cent of operating profits. Those forecasts still look sound.
True, market conditions in the company's debt solutions businesses remain challenging. However, this is hardly breaking news as this has been the case for some time, and well documented, too. Moreover, both the IVA and debt management plans businesses are still very profitable and analysts expect these two divisions to contribute cumulative operating profits of £3.8m this year. The cash flow generated is not only supportive of the board's progressive dividend policy, but enables Fairpoint to invest in its legal services arm to grow that side of the business.
High yielding and lowly rated
The company certainly has the financial power to make further earnings-enhancing bolt-on acquisitions in this area as year-end net debt of £13.6m equates to only a third of shareholders' funds of £39.6m, implying £11.4m headroom on its £25m long-term debt facility. The likelihood of some acquisition activity looks a real possibility given there are around 10,000 providers in the fragmented legal services market employing less than 10 people, so offering the potential for Fairpoint to act as a consolidator.
Admittedly, the decision of finance director John Gittins to step down from the board may have raised a few eyebrows, but he is 56 years old, has been a success in the role since his appointment in October 2011, and is fully entitled to pursue a portfolio career of non-executive positions. He was appointed a non-executive at soft drinks maker Nichols last year, so has already been taking on such roles. The process of appointing a successor is underway, and with a £300,000 plus annual package on the table I don't expect Fairpoint to be short of able applicants to fill the role.
The bottom line is that at the current price Fairpoints's shares are valued on a modest 6.8 times last year's earnings, a rating that implies the company has gone ex-growth even though guidance points to a year of single-digit EPS growth. The rating doesn’t reflect a well covered dividend per share of 6.8p that analysts expect to rise to 7.2p either. On this basis, the prospective dividend yield is over 5.5 per cent. The shares are also priced on a modest price-to-book value ratio of 1.4 times.
In my view the valuation is attractive, so if you followed my earlier advice I would continue to run profits.
