In the circumstances, for Miton to end the financial year with AUM of £2.9bn, up from £2.78bn 12 months earlier, was quite some achievement. The first quartile investment performance of eight of Miton's 14 funds and investment trusts was a key contributing factor, and one that helped propel AUM up by an eye-catching 85 per cent to £238m at its US Opportunities Fund, and led to £171m of net inflows into its multi-asset funds. New funds are playing their part: the European Opportunities Fund has been gaining traction since launch 13 months ago; and Miton has just recruited a fund manager for the pending launch of a new fund specialising in global equity infrastructure.
The bottom line is that analyst Stuart Duncan at brokerage Peel Hunt now expects Miton's pre-tax profits to rise by 60 per cent to £4.8m for last year, an outcome that would lift EPS by three-quarters to 2.1p and support a 14 per cent hike in the dividend per share to 0.8p as he predicts. He also points out that the current funds' momentum supports expectations of a further sharp increase in pre-tax profits to £5.4m in the current financial year to boost EPS to 2.4p and underpin a dividend of 0.9p a share. Those forecasts look achievable to me, especially as it's only reasonable to expect operating margins to rise as Miton's smaller funds scale up, so having a positive operational gearing effect on profits.
I would also flag up that Miton's net funds rose by half to £21.3m last year, a sum equating to a third of its market capitalisation, so providing ample capital to invest in new fund offerings. And these positive dynamics are simply not in the price: strip out net funds and the shares are only rated on 10 times EPS estimates.
So, having first advised buying at 23p ('Poised for a profitable recovery', 4 Apr 2015), and last reiterated that advice at 31.5p ('On the financial beat', 25 Oct 2016), I feel that my previous target price of 38p needs some upwards revision in light of the building momentum in the business. Other investors clearly share this view which is why the share price has just taken out last April's high of 34.75p. From a technical perspective, there is no overhead resistance until the December 2013 high of 50p which if achieved would place the shares on a cash-adjusted PE ratio of 12 for 2017 based on Peel Hunt's estimates, not an unreasonable valuation in my view. I rate the shares a strong buy.
Watkin Jones re-rating further to run
Investors are finally cottoning on to the investment potential of Watkin Jones (WJG:134.5p), a construction company specialising in purpose-built student accommodation (PBSA). It's a company I know well, having done extensive research into the business ahead of last year's Aim listing which prompted me to advise buying the shares around the 103p mark ('A profitable education', 3 Apr 2016). I last rated them a buy at 118.5p ahead of last week's full-year results ('Small cap value plays', 5 Dec 2016), noting that my 140p target price was looking increasingly conservative. The results did little to alter that view.
The company completed 10 schemes encompassing 3,819 beds in the 12 months to end September 2016, a performance that increased pre-tax profits by a quarter to £40.3m and delivered EPS of 12.6p. This supported a maiden full-year dividend of 4p a share. Moreover, the company has 21 developments with 6,800 beds slated for delivery during 2017 and 2018. The pipeline beyond 2018 is looking just as robust given that six sites have already been secured, including the largest project to date, a 511-bed scheme worth £100m in Stratford, east London, which Watkin Jones forward sold in late December.
Importantly, future earnings have been de-risked through the substantial number of forward sales of schemes to institutional investors. In fact, all bar one of the 10 projects slated for delivery in the current financial year have been sold and the one other is in legal negotiation for sale. Forward selling sites reduces the company's working capital requirements as the end-purchaser finances the development and is billed on a monthly basis, as opposed to a non-forward-sold development where revenue is only received on sale of the asset post completion. As a result Watkin Jones looks nailed on to deliver a 10 per cent hike in EPS to 13.7p in the 12 months to 30 September 2017, implying the shares are being rated on less than 10 times earnings estimates and on an attractive PEG ratio of one. Furthermore, with the benefit of a cash-rich balance sheet - net funds of £32.2m equates to 12.6p a share - expectations of a 6.3p-a-share payout as analyst Andy Hanson at brokerage Zeus Capital predicts look sound, suggesting the prospective dividend yield is close to 5 per cent. Mr Hanson is pencilling in a further rise in EPS to 14.6p the year after too.
So, given the company's robust pipeline, the significant de-risking of earnings, and prospects for a progressive dividend policy being adopted, I feel that my previous target price of 140p is too conservative and have raised it to 155p, in line with analyst Gavin Jago at broking house Peel Hunt, but slightly below the 160p target of Mr Hanson at Zeus Capital. Buy.
Gama Aviation in the ascent
Shares in Aim-traded Gama Aviation (GMAA:175p), an operator of privately-owned jet aircraft, had a turbulent passage last year, but are now firmly in the ascent. A pre-close trading update certainly reassured investors, revealing that revenues increased 10 per cent year-on-year, fuelled by a 12 per cent rise in aircraft under management.
True, the company's European air operations continue to face challenging market conditions, but a focus on cost savings helped margins improve to such an extent that analyst Robin Byde expects the division's cash profits to decline by just US$200,000 to US$1.9m even though revenues could be down more than a fifth to US$106m. The higher-margin European ground handling business came under pressure too, but Mr Byde still expects this segment to report cash profits of US$11.3m on revenues of US$38.3m, albeit that's some way off the US$14.4m of profits in the prior year. The good news is that Gama Aviation's fast growing US air and ground handling services businesses are forecast to increase their cash profit contribution by US$1m to US$8.4m, fuelled by double-digit organic revenue growth and the addition of new bases.
The bottom line is that before restructuring costs and one-off items, Gama Aviation's underlying cash profits are only likely to be down by less than $1m to US$19.5m, far better than the precipitous fall in profits some investors were expecting when the shares went into a tailspin last year. And because one-offs will be substantially less than in the previous year, Mr Byde expects the company's reported EPS to almost double to 37¢ when it reports full-year results on Monday 27 March. Based on an average exchange rate of £1=US$1.35 this equates to 27p, although I prefer to focus on his lower underlying EPS forecast of 30¢ which equates to around 22.4p.
The other reason why the shares are now heading skywards is because the company is merging its US aircraft management and charter business with that of BBA Aviation (BBA). With the addition of over 90 aircraft to Gama Aviation's current US managed fleet, the combined business, with over 200 aircraft under management, will be the US's largest aircraft management business. Customers will benefit from enhanced national and global service coverage, while improved buying power should lead to lower costs. The merger is expected to deliver significant additional growth for Gama Aviation's US ground business through cross selling maintenance services to the additional aircraft now under management.
It's fairly neutral on EPS expectations for the next few years, but with costs taken out of the business, analyst expectations of a 10 per cent rise in underlying EPS of 33 cents this year seem a sensible prediction and suggest a sharp rise in sterling EPS to 26.3p based on a lower average sterling:US dollar exchange rate of US$1.25. This means the shares are trading on a miserly 6.75 times earnings estimates, offer a 1.5 per cent dividend yield, and are rated on a price-to-book value ratio of 1.3 times. In my book, that rates value.
So, having last recommended buying at 162p when I interviewed the directors at the time of the half-year results ('Broking for capital gains', 20 Sep 2016), well below the 225p level at which I initiated coverage ('Ready for take-off', 12 May 2014) although the price did hit a high of 365p at one stage, the reassuring trading update certainly suggests that my revised target price of 225p is achievable. Buy.
Another chic performance
It's only fair to say that high street clothing retailer Moss Bros (MOSB:99p) owes this column absolutely nothing. Not only has the share price risen by 160 per cent since I first spotted the recovery potential when the shares were on sale at 38p ('Dressed for success', 20 Feb 2012), but the company has paid out dividends of 19p a share to give a total return of 210 per cent on the holding.
A pre-close trading update earlier this month delivered the robust sales growth figures we have been accustomed to: like-for-like sales shot up more than 6 per cent in the first 23 weeks of the second half; e-commerce sales surged by 25 per cent to account for 11 per cent of total revenue; and gross margins keep on rising, the additional profits from which have helped fund a store refurbishment programme that saw another 11 stores spruced up since last January.
It's also fair to say that the company is nailed on to hit analysts' expectations of a 15 per cent increase in both full-year pre-tax profits and EPS to £6.8m and 5.3p, respectively, on 5 per cent higher revenues of £127m, when it reports full-year results on Tuesday, 28 March. There are prospects of a higher payout too because with net funds rising from £17.3m to £19.5m in the past year, a sum worth almost 20p a share, Moss Bros can continue with its policy of paying out all of its net profits as dividends, and more. A near-6 per cent prospective dividend yield based on a payout of 5.8p a share is clearly supportive. Moreover, once you deduct that burgeoning cash pile from the market capitalisation, the company is effectively being valued on only six times its cash profits of £13.3m. This is my preferred way of valuing the business given the cash-rich balance sheet and chunky non-cash charges that subdue the pre-tax profit line.
So, although Moss Bros's shares have flat-lined since I last rated them a buy at 103p ('High yielding cash rich small cap gems', 29 Sep 2016), I still feel that the forthcoming results could be the catalyst to push them towards the top end of the current trading range between 87p and 111p, and well beyond. Buy.
MORE FROM SIMON THOMPSON...
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