Contract win for Accrol
Accrol (ACRL:110p), the recently listed Aim-traded Blackburn-based maker of toilet rolls, kitchen rolls and facial tissues, has won a contract worth £10m a year with a major global retailer to supply toilet rolls. The award commences in the autumn and underpins analyst predictions that revenues will grow by 15 per cent to £138m in the financial year to end April 2017 to produce a near 10 per cent hike in cash profits to £16.4m and deliver pre-tax profits of £13.4m. On this basis, expect EPS of 10.7p and a dividend per share of 6p. Accrol will publish its maiden results for the 12 months to end April 2016 on Tuesday, 22 July and I fully expect the board to reiterate current year guidance especially as likely weaker UK economic conditions post the EU Referendum is great news for the company.
That's because over half its sales come from supplying the discount market segment with a primary focus on private labels. Chief executive Steve Crossley believes that in a period of reduced consumer expenditure, as seems likely if recent consumer confidence surveys prove accurate, it's possible that the move towards non-discretionary economy and private label products will accelerate. I would also point out that the company is fully hedged against adverse currency movements in the financial year to end April 2017, so has already taken pre-emptive action to guard against the impact of sharp falls in sterling post the Brexit result.
Moreover, unlike its larger rivals, Accrol doesn't own paper mills, but instead outsources supply so is benefiting from a global oversupply of both pulp and industrial paper reels. In fact, a further 5.5m of additional global capacity is set to come on stream by 2019, or almost five times UK consumption. This should help keep its major input cost under control. Accrol certainly looks a Brexit winner to me and rated on 10 times earnings estimates, and offering a 5.5 per cent dividend yield, I reiterate my recent buy advice ('Clean up with Accrol', 6 Jun 2016). Buy.
1pm massive earnings beat
A month ago, I felt that investors were being cautious in their valuation of Bath-based 1pm (OPM:64p), a specialist provider of finance to small- and medium-sized enterprises (SMEs) and a constituent of my 2014 Bargain Shares portfolio ('Enlightening calls, 15 Jun 2016). Reassuringly, the company has just announced that results for the 12 months to end May 2016 will be materially ahead of expectations, prompting analyst Eric Burns at house broker WH Ireland to lift his full-year revenue estimate by £3m to £66.5m and pre-tax profit estimate by 13 per cent to £3.5m, or more than double the outcome in the prior financial year. This feeds through to a 14 per cent EPS upgrade to 5.8p. On this basis, a rating of 11 times earnings implies little in the way of profit growth in the coming year, but it's one that's at odds with Mr Burns forecast of 15 per cent EPS growth.
Clearly, the Brexit vote introduces added risk for loan providers like 1pm, but equally if the large mainstream banks draw in their horns as they did in 2008, then tighter credit conditions for SMEs will be good news for 1pm as it is highly supportive of demand from this segment of the market. And credit quality is sound and so credit risk diversified as bad debt write-offs accounted for only 0.28 per cent of the loan portfolio in the first half, no single customer represents more than 0.21 per cent of the portfolio value, and an average loan size around £11,000 is manageable. A leverage ratio of 2.5 times receivables to shareholders' funds is not stretched either. Buy.
Inland anomalously priced
1pm is not the only company in my annual Bargain Shares portfolios that's being harshly treated. The same is true of Inland (INL:55p), the specialist housebuilder and brownfield land developer, whose share price has fallen steeply since my last update at 70p ('Bargain shares updates', 22 Jun 2016), albeit it's still up 134 per cent up since I initiated coverage in my 2013 Bargain share portfolio ('How the 2013 Bargain shares fared, 7 Feb 2014).
Bearing this in mind, chief executive Stephen Wicks points out that "in the two weeks since the EU Referendum vote, we have continued to see the same level of appetite from potential purchasers for our homes, which are at the more affordable end of the housing spectrum and are supported by strong fundamentals such as the current low interest rates and the Help to Buy scheme. While we are vigilant to the wider market landscape, we continue to seek opportunities that meet our strategic objectives."
Indeed, having offloaded a 1.05 acre site in Acton, West London and a 0.6 acre site in Farnborough, Hampshire for £18.1m last month, or double book value, the company has just acquired a regeneration project in Cheshunt, Hertfordshire through a joint venture partnership. Located just outside the M25 and only 27 minutes from London's Liverpool Street station by train, the 13-acre site includes the former headquarters of Tesco and forms part of a wider 20-acre site that is expected to be selected as the location for a major new urban village of up to 1,000 homes. The land purchase is being funded by £5m of equity from each joint venture party with the balance of the consideration funded by a pre-approved bank loan. This latest deal highlights the lucrative investment opportunities Inland is exploiting.
Moreover, the company has substantial value in its land bank of 5,672 plots of which 1,146 have planning consent, 1,000 are awaiting planning decisions, and almost 2,000 are in the pre-application stage with planners. Analyst Duncan Hall at brokerage finnCap believes that the company's is capable of generating annual land sales of between 300 to 500 plots to deliver revenue of £30m on a margin of 50 per cent. That doesn't seem unrealistic to me even in a post Brexit environment given the heavy geographic bias to the affluent south of England property market.
I would also flag up that Inland shares are now being priced on a thumping 42 per cent discount to Stifel's spot EPRA net asset value estimate of 93p, on 8 times likely earnings of 6.6p for the financial year to end June 2016, and offer a prospective dividend yield of over 2 per cent. In my book that's great value and I strongly feel that the extent of the housing market slowdown embedded in the current valuation is being massively overplayed. Buy.
A low risk property play
The commercial property fallout from the EU referendum has forced open ended commercial property funds to gate their investors, preventing withdrawals in the near term as the funds try to liquidate billions of pounds worth of assets to meet investor redemption requests. Some of these funds have been selling down their most liquid assets, shareholdings in the large UK listed REITs to do so, acerbating share price falls of the likes of British Land (BLND) and Land Securities (LAND).
Indeed, the blow-out in unleveraged implied yields to around 5.7 per cent means that the spread over 10-year gilts is close to a record; and share price discounts to appraised value of assets held are at historic extreme levels. While uncertainty dominates the sector, and volatility is likely to remain, on the market has disproportionately punished the large REITs. Backed by 9 to 10 year upward-only leases on high quality assets, low vacancy rates, and relatively modestly geared balance sheets, the investment risk here is to the upside.
It also remains to the upside for shares of LXB Retail Properties (LXB:56p), a Jersey resident closed-end real estate investment company focused on edge-of-town and out-of-town retail assets and one which is being wound down with cash proceeds being returned to shareholders. I initiated coverage last autumn at 85p ('Bag a retail property bargain', 6 Oct 2015), so after adjusting for a 38p subsequent cash return ('Exploiting a valuation anomaly', 11 May 2016), this gives an entry point of 47p. I last advised running profits at 64p ahead of the EU Referendum ('LXB's new mandate', 8 Jun 2016).
At the current price LXB's shares are priced a hefty 29 per cent below Stifel's end September 2016 net asset value estimate of 79p even though the board have stated that they expect future capital returns to shareholders to exceed the 64.2p a share end March 2016 net asset value by a "comfortable margin." With the majority of the portfolio forward funded and pre-sold to institutions, so guaranteeing cash receipts when they are handed over on completion, the share price discount to net asset value is anomalous.
The insiders at LXB Partners LLP, the investment adviser to the company, are clearly of this opinion too: Tim Walton has just purchased 1.2m shares at 54.3p and now holds 12.6m shares, or 7.5 per cent of the issued share capital; and Jo Duffield purchased 521,867 shares at an average price of 63.13p and now holds 1.64m shares, or 0.98 per cent of the issued share capital. The main board directors are confident too as Daniel Kitchen has purchased 60,984 shares at 67p per share to take his stake to 622,927 shares, and Steve Webb purchased 75,661 shares at 66p and now holds 319,046 shares. With potentially a total capital return of 25 per cent on offer over the next 12 months, I would follow their lead. Buy.
Amino currency tailwinds
Aim-traded shares of Amino Technologies (AMO: 111p), a Cambridge-based set-top box designer of digital entertainment systems for IPTV, home multimedia and products that deliver content over the open internet, looks firmly back on track.
The key takes for me in this week's interim results was the record order intake in the six months to end May 2016, a strong order backlog for the second half, successful integration of the two acquisitions made in 2015, and cash generation well ahead of previous guidance. Free cash flow of £3.6m compares favourably with £2.6m for the whole of last year and means the company is now in a net cash position of £3.1m. Underlying EPS rose 9 per cent to 6p to account for more than half of the full-year estimate of 11.4p and means that guidance for a 10 per cent hike in the full-year payout to 6.1p a share is well underpinned.
I would also point out that 55 per cent of first half revenue was derived from North America, and almost a third from Europe, so sterling's devaluation is likely to provide a currency headwind on translation of these overseas earnings. Rated on 10 times earnings estimates, and offering a 5.5 per cent prospective dividend yield, I continue to rate Amino's shares a buy at 111p, having first advised buying at 83p ('Set up for a buying opportunity', 10 Jun 2013), and maintained that stance ahead of this week's trading update ('Amino awaits re-rating', 6 Jun 2016). Buy.
