When I initiated coverage at 97p ('Building up for a takeover', 22 Jun 2015), Ensor's days as a listed entity looked numbered after the board put the company up for sale. I subsequently reiterated that advice at 90p ('M&A updates', 9 Dec 2015). Admittedly, shareholders have had to be patient as the divestment process has taken far longer than I had envisaged. That's mainly because the board decided a series of trade sales would maximise shareholder returns rather than seeking one buyer. But that's not to say they haven't been successful. Two disposals announced a fortnight ago generated a total cash consideration of £12.5m on completion and Ensor also retained £1.62m of cash held by those businesses. The proceeds represent a hefty premium to the £4.6m-worth of net operating assets sold. Moreover, Ensor now has net funds of £13.3m, or 44.5p a share, before payment of a final dividend of 1.55p a share in late September at a cost of £463,000 (ex-dividend: 11 August).
There are decent prospects of Ensor's two remaining businesses being sold at a premium to the book value of their assets, too: Ellard, a supplier of electric motors and controls for the automation of doors and gates; and Wood Packaging, a specialist supplier of protective covers for furniture transportation, servicing major retail groups as well as the SME markets. Both are being actively marketed and Ensor's board is in discussions with interested potential buyers, but it's not going to be a fire sale as shareholder value will not be sacrificed for the sake of an early disposal. That's worth bearing in mind because I feel there is a pricing anomaly worth exploiting here. In fact, once you adjust for the latest disposals, I reckon Ensor has a pro-forma net asset value of £19m, including net funds of £13.3m. The company has a market value of £21.8m, so in effect investors are attributing a value of £8.5m to Ellard and Wood Packaging even though both are profitable and have been growing strongly.
Indeed, Ellard has increased sales at a compound annual growth rate (CAGR) of 14 per cent in the past three years and lifted operating profit by 10 per cent to £890,000 on revenues up 15 per cent to £8.5m in the 12 months to end March 2016. Wood Packaging has been growing even faster, increasing sales at a CAGR of 17 per cent in the past three years and yielding an operating profit of £628,000 on sales of £3.6m in the last financial year. So, in effect, these businesses are being valued at the equivalent of 5.5 times operating profit based on Ensor's current market capitalisation. True, US dollar exchange rates are a challenge due to the increasing levels of goods sourced and purchased in the Far East, but even so they look undervalued. A more realistic valuation of between 9 and 10 times historic operating profit values the two businesses in a range of £13.6m-£15.1m on a debt and cash-free basis, and gives Ensor a break-up value of 90p-95p a share. Admittedly, that's not what I had envisaged when I initiated coverage, but I still feel you should be able to recover your investment and I would await news on the outcome of the remaining disposals. Buy.
Bilby's bumper sales pipeline
I have been taking a close look at the full-year results of Aim-traded Bilby (BILB:125p), a provider of gas heating appliance installation and maintenance services to residential and commercial properties. Since listing last year, the company has been using its paper to expand the business through acquisition and complement the organic growth in its existing operations. This 'buy-to-build' strategy and the dynamics underpinning demand are the primary reasons why I initiated coverage at 75p ('Buy-to-build' growth play, 18 May 2015). I last rated the shares a buy around the current price ('British success stories', 29 Mar 2016).
The results for the 12 months to end March 2016 were largely as expected, with underlying pre-tax profits rising by two-thirds to £3m on revenues more than doubling to £31.5m, a performance reflecting both organic growth and the contribution from last summer's earnings-accretive acquisition of Waltham Abbey-based privately owned property services business Purdy. The purchase 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.
Just before the financial year-end the company raised £5m in a placing to fund another two earnings-enhancing acquisitions: DCB, a provider of building, refurbishment and maintenance services to housing associations and local authorities throughout Kent, Sussex, Essex and London; and Spokemead, a specialist in electrical installation, repairs and maintenance services to local authority owned housing stock. Both acquisitions should benefit from the increased purchasing power and strong financial position of being part of a larger entity while broadening Bilby's customer base and geographical reach in London and the south-east.
In turn, this should help the company tap into the business opportunity in servicing the needs of housing associations and local authorities in these regions as they seek to comply with government legislation such as the Right to Repair and the Decent Homes Standard. For instance, even after the Mayor of London secured £821m in the 2011-15 spending round period for London to improve 45,000 homes, the city still has 11 of the 12 UK local authorities where 10 per cent of the housing does not meet the Decent Homes Standard. This considerable opportunity aside, Bilby's management have also identified substantial customer and cost savings with Purdy, all of which make for a profitable growth story.
Drilling through the numbers, analyst Michael Donnelly at brokerage Panmure Gordon believes that the two complementary acquisitions should contribute combined pre-tax profit of £2m on revenues of £26m in the current financial year, a performance that warrants the maximum consideration payable of £4m for DCB and £8.7m for Spokemead. Earn-outs based on future revenue performance, renewal and continuation of key contractual agreements are incentives for incumbent management to deliver. So, after factoring in these contributions and a full 12 months from Purdy, Bilby's revenues are now expected to more than double again to £69m in the current financial year to boost pre-tax profit from £3m to £5.7m and lift EPS from 7.4p to 12.1p following analyst upgrades post results.
These estimates look solid when you consider that Bilby has £240m of visible revenue from existing contracts, or more than three years' worth of annual sales, and more than 90 per cent of contracts are from customers who have employed the company in the previous 12 months, so there is a high level of repeat business. Furthermore, Panmure has taken a conservative approach and not factored in any revenue from a gas support contract for the South East Consortium (SEC), a group of housing associations responsible for more than 140,000 homes in the region, which Bilby announced last autumn.
In my view, a forward prospective PE ratio of 10 and a historic dividend yield of 2.2 per cent, based on the recently declared final payout of 2.75p a share and a progressive one too, offers an attractive entry point and I continue to rate Bilby's shares a buy at 125p.
Bloomsbury tales
This month's capital markets day at publisher Bloomsbury Publishing (BMY:172p) has been well received by investors. I included the shares in my 2014 Bargain Shares portfolio, and recommended buying at 150p earlier this year ('Book into a trading play', 11 Feb 2016), and reiterated that advice at 158p ('Bargain shares updates', 24 May 2016). Interestingly, the share price has traded between 140p and 185p for almost three years now, rallying off support on four occasions before hitting a glass ceiling at the top end of the range. History is repeating itself, and justifiably so.
A 9 per cent hike in revenues in the first three months of the new financial year, and a doubling of sales from the digital segment - in a quarter that traditionally generates the smallest profit for the company - is clearly helping sentiment. Also, the board has guided investors to expect a £500,000 profit uplift from its Australian business in the 2017-18 financial year, having recently reached a new agreement on sales and distribution. This will result in substantial savings on sales commission following the decision to take the responsibility in-house for selling to key customers that account for half of the region's sales. A strategic initiative, Bloomsbury 2020, to accelerate the growth of digital revenues and reposition the company from primarily a consumer publisher to a digital B2B publisher in the academic and professional information market is another reason for the positive sentiment. The aim of this initiative is to lift revenues from digital resource publishing to £15m by the 2021-22 financial year and deliver profits of £5m.
Trading on 14 times earnings estimates, and offering a prospective dividend yield of 3.8 per cent, I have a fair value price range of 175p-185p. Run profits.
Mountview valuation anomaly
The latest annual report and accounts of residential property investment company Mountview Estates (MTVW:10,250p) is very revealing and worth a read.
Mountview's policy is to conservatively value its property at cost in the accounts, so there is a marked difference between cost and open-market prices following the boom in house prices in London (accounting for half of trading properties by value), and southern England (around 14 per cent of stocks). And because Mountview's estate consists of almost 3,900 units subject to regulated tenancies, life tenancies, assured tenancies and ground rents, there is an added profit windfall when these properties become vacant and are sold on the open market.
Bearing this in mind, the company offloaded 209 units at an average price of £294,000 to generate total sales proceeds of £61.6m in the 12 months to end March 2016. To put that sum into perspective, it represents almost three times the £21m cost of the properties. Moreover, in note 4 of the latest accounts, Mountview's directors reveal that Allsop valued these 209 properties at £42.6m in September 2014, a valuation made on the basis that the properties are sold subject to existing tenancies and leases. In other words, the sales have achieved a chunky 44 per cent premium to Allsop's valuation. That's interesting because Mountview's portfolio of trading properties was valued independently by Allsop at £666m in September 2014, or double cost of £318m at the time. The £348m surplus equates to 8,900p a share, or more than double Mountview's latest book value per share of 7,990p, up from 7,380p a year earlier. The latest sales clearly highlight potential upside to Allsop's valuation even in a softer housing market.
Mountview's low gearing is eye-catching too: net debt of £41.3m represents a loan-to-value ratio of 6 per cent once you mark property to market value, so the company has ample firepower to take advantage of buying opportunities in a softer housing market post Brexit. The board is also rewarding shareholders by declaring a 9 per cent dividend hike to 300p a share, so not only are the shares trading 40 per cent below adjusted book value at around 17,000p, but the dividend yield is not bad either. Having included the shares in my 2015 Bargain Shares portfolio at 11,096p, and banked dividends of 275p a share to date, I feel the company is being harshly valued. Buy.
