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OPINION

Targeting record highs

Targeting record highs
November 21, 2016
Targeting record highs

A good example is Aim-traded AB Dynamics (ABDP:490p), a UK designer, manufacturer and supplier of advanced testing systems and measurement products to the global automotive industry. I included the shares in my 2015 Bargain Shares Portfolio at 173p, recommended buying them at 425p a few weeks after the EU Referendum ('Business as usual', 13 Jul 2016), and then advised running profits at 470p ahead of last week’s full-year results ('Manufacturing currency gains', 5 Oct 2016).

The price subsequently hit my 500p target price, and with good reason as the company has just reported a 23 per cent hike in both revenues and adjusted pre-tax profits to £20.5m and £4.7m, respectively, in the 12 months to the end of August 2016. The performance is being largely driven by the car industry’s investment in new car models with a focus on advanced safety systems, and sales of both track and lab testing products. AB Dynamics revenues from track testing systems (robots and soft crash vehicles) increased by a third in the financial year to account for three-quarters of turnover. Analysts believe that this segment should maintain double-digit growth in the next financial year.

The company’s laboratory testing business has racy prospects too, driven by a strategic partnership with Williams Advanced Engineering, the technology and engineering services business of the Williams Group, to bring virtual vehicle dynamic simulators to the global automotive sector. Analyst Richard Hickinbotham at brokerage Cantor Fitzgerald points out that around 30 per cent of vehicle development costs could be saved through advanced simulation, so there are obvious gains to be made by car manufacturers here.

The fall in sterling is highly supportive too as over 90 per cent of sales come from overseas customers. Given the multiple positive drivers at work here, I would certainly not discount the possibility of analysts’ forecasts being surpassed again, having seen them upgraded no less than three times in the past year. For now though, Mr Hickinbotham expects AB Dynamics to lift pre-tax profits by 10 per cent to £5.1m on revenues of £24.4m in the 12 months to end August 2017, a conservative looking estimate in my view given that the company’s growing order book already covers budgeted revenues through to the third quarter of 2017.

True, the shares are priced on 15 times forecast operating profit to enterprise value, but that’s still an attractive rating if the earnings upgrade cycle has further to run, as I believe it will. I would flag up too that a close above last month’s all-time closing high of 512.5p would signal a triple top point & figure chart break-out, and improves the chances of further blue sky gains. My advice here is simple: run your 183 per cent bumper profits, and target a break-out of the 515p resistance level. Run profits.

Burford shares hit record highs

Aim-traded shares in Burford Capital (BUR:505p), the world's largest provider of investment capital and professional services for litigation cases to lawyers and clients engaged in major litigation and arbitration, have also hit a record high. In fact, they have risen by 245 per cent since I recommended buying at 146p less than 18 months ago ('Legal eagles', 8 Jun 2015), have soared by 67 per cent after I reiterated my buy advice at 310p just after the EU Referendum ('Brexit: reality check', 28 Jun 2016), and are up by 30 per cent since my last article ('Brexit winners', 1 Aug 2016). The board has also paid out total dividends of 7.7p a share since I initiated coverage.

It’s not difficult to see why investors have been warming to the company as its team of legal eagles have been clearly working their magic: litigation investment income more than doubled to $64m (£48.8m) in the six months to end June 2016, driving up pre-tax profit by 135 per cent to $55.8m; and buoyed by $84m of cashflow from litigation finance, Burford has cash balances and money market deposits of $207m available to fund new investments. Furthermore, the $251m debt outstanding from its two London Stock Exchange listed retail bond offerings mature in 2022 and 2024, well after the settlement dates of the investments being made.

Sterling’s devaluation post the EU Referendum is proving beneficial too. That’s because 94 per cent of Burford’s assets are denominated in US dollars; the business incurs significant expenses in sterling but earns the majority of income in US dollars; US dollar dividends are worth more in sterling to UK shareholders; and UK courts and arbitral institutions (and the UK lawyers who practice in them) are more competitive globally. Burford is also well placed to benefit from the uncertainty leading up to the UK’s exit from the EU, and well beyond for that matter, given the possibility of more litigation as a result of Brexit.

Moreover, like AB Dynamics, Burford is in an earnings upgrade cycle: Trevor Griffiths at brokerage N+1 Singer raised his full-year EPS estimates by a third to 34.7¢ post the interim results, and lifted his 2017 forecast by 11 per cent to 40.2¢, although these estimates are still well below consensus, so could easily be surpassed. On this basis, Burford's shares are trading on a reasonable 15.5 times next year's likely earnings and, assuming the full-year dividend is lifted by a fifth to 9.5¢ this year, rising to 11¢ in 2017, the prospective dividend yield is 1.8 per cent.

I would flag up that there has been some positive newsflow since my last update on a claim Burford has backed relating to the 2012 expropriation by Argentina of a majority interest in YPF, the New York Stock Exchange-listed energy company formerly owned by Repsol, the Spanish energy major. At the time of the expropriation, Repsol owned more than 50 per cent of YPF and the Petersen Group, another Spanish firm, owned 25 per cent of YPF. After suing, Repsol ultimately settled its claims and received a payment of approximately $5bn (£4bn) from Argentina and YPF. Burford has been appointed to provide financing to the liquidators of the Petersen Group, which went bankrupt after the expropriation, who are proceeding with claims worth $3bn against both YPF and Argentina. Burford is entitled to 70 per cent (less expenses) in the YPF-related claim.

Bearing this in mind, Mr Griffiths at N+1 Singer notes that Judge Preska of the US Federal District Court (New York Southern) has issued her 47 page opinion and order concerning the defendants’ (Argentina and YPF) motion to dismiss the plaintiffs’ action. The judge found for the plaintiffs effectively on all points which means not only is there a case to answer, but the probability of ultimate success for Burford and its client has increased, albeit there is substantive litigation risk, and the claim still has a long path to follow before a final outcome is known. However, in the event of as successful outcome, it’s worth noting Mr Griffiths points out that the state has settled similar such cases at 50¢ in the dollar, so there is potential for a significant windfall payout for Burford's shareholders.

So, with the business firing on all cylinders, and the risk to earnings skewed to the upside, I still feel its team of legal eagles are worth backing. Run profits.

Cohort wins yet more contracts

Shares in Aim-traded UK defence group Cohort (CHRT:395p) have passed through the 387p target price I outlined when I last rated them a buy at 350p ('Riding small cap bumper gains', 24 Oct 2016). I initiated coverage at 214p ('Blue-sky buy', 6 Oct 2014), subsequently advised top slicing two-thirds of your holdings at 415p ('On a roll', 15 Dec 2015), and running profits at 315p (‘In defence’, 6 Jul 2016).

The driver behind the latest share price move was news that Cohort’s subsidiary SEA, an advanced systems and software business operating in the defence, transport and offshore energy market sectors, has been awarded contracts by Transport for London (TfL) to develop and provide ongoing support of its Digital Traffic Enforcement System (DTES) and a Parking Enforcement Solution (PES) mobile application. The combined orders are valued at £7m and include 10 years of support for both systems. SEA originally developed the DTES system on behalf of TfL, and has provided support since it entered service seven years ago.

The announcement was made a matter of weeks after Cohort’s Cambridgeshire-based subsidiary MASS, a specialist systems house with a focus on electronic warfare operational support, cyber defence and secure information systems, won a nine-year extension worth £12m to its managed IT service contract at RAF Waddington. Chief executive Andy Thomis points out that the awards "add further visibility to our order book, which underpins a significant proportion of revenues for Cohort's current financial year".

He has a point as analysts anticipate that £60m worth of contract renewals and new orders will convert in the financial year to end April 2017, accounting for almost half of revenue estimates of £132m, and help deliver a 20 per cent increase in Cohort’s full-year pre-tax profits to £14.3m, rising to £15.6m the following year. On this basis, expect full-year EPS of about 26p, rising to 31.6p the year after, implying the shares are rated on 12.5 times earnings estimates. That’s still not a punchy rating for a lowly geared highly cash generative company, and one where the board are expected to raise the dividend per share from 6p to 7p.

With major contracts being won, and the company well on course to deliver double digit earnings growth, I would not rule out the share price returning to the November 2015 all-time high of 432p. Run profits.

Blue sky gains

Shares in aircraft leasing company Avation (AVAP:195p) have broken out to new highs and are well on their way to achieving my 225p to 240p target price range.

Last month, the company received an unsolicited approach to buy its wholly owned portfolio of 22 ATR72 turboprop aircraft, and has since appointed financial advisers to evaluate the proposal and engage with the wider investor market to determine the open market value of the portfolio. The aircraft have an average remaining lease term of 6.3 years and unexpired revenue of US$305m. Analyst John Cummins at house broker WH Ireland estimates the fleet value of these 22 ATR72 planes is around $385m (£315m) post depreciation, implying a net asset value of $85m net of borrowings. That sum is worth 118p a share, or just under half Avation’s last reported net asset value of 250p. The balance of the fleet comprises five Fokker 100s, nine Airbus A321s and A320s, and two ATR72s subject to finance leases.

At last week’s annual meeting, the board announced it “would consider paying a dividend using part of proceeds from the profit of any sale....and reinvesting the remainder to rebuild the fleet”. That’s worth considering given that a disposal will only be considered at a premium to book value, so any cash return would further highlight the obvious value on offer here. The shares are up a third since I rated them a buy at the time of the full-year results ('In the ascent', 12 Sep 2016), and have risen by 15 per cent since my last update (‘Exploiting undervalued situations’, 31 Oct 2016), but are still only rated on modest seven times forecast earnings, and on a 22 per cent discount to a conservative looking book value. Buy.