The company reported relatively flat revenue of £26.5m last year, but with the benefit of a positive currency tailwind and a near 8 per cent rise in revenue at the core bio-decontamination business, its pre-tax profit surged by 78 per cent to £1.6m. That outcome was 15 per cent better than analyst Chris Glasper at broker N+1 Singer had predicted only a month ago. Chairman Ian Johnson notes "a number of different drivers of growth which are positively affecting our business, including the need for customers to achieve regulatory compliance, the increasing threat posed by antibiotic resistance and continuing growth in research and small scale production associated with cell-based healthcare products".
Three-quarters of Bioquell's sales are generated overseas so sterling's sharp devaluation is clearly benefiting margins, as are cost reductions from last year's restructuring programme which are now coming through, so much so that Mr Glasper predicts that pre-tax profit will rise by a fifth to £1.9m on revenue up 6.5 per cent to £28.2m and deliver a 23 per cent hike in EPS to 6.9p this year.
I would also flag up that the company retains a strong balance sheet, ending last year with closing net funds of £8.8m, a sum equating to 40p a share. This means the shares trade on 13.5 times forward earnings net of cash, falling to only 11 times in 2018, hardly an exacting valuation for a business predicted to generate 20 per cent plus earnings growth this year and next. Or to put it another way, strip out cash on the balance sheet from the market capitalisation of £29.7m and a business that has just increased cash profit by a fifth to £4.1m is effectively being valued at less than £21m. In my book, that screams value.
So, with the trading outlook positive, and the board committed to returning cash by earnings-accretive share price supportive buybacks, albeit in lieu of a cash dividend, then I have no hesitation reiterating my buy advice and 180p target price. Buy.
BATM primed for profitable growth
I feel that investors have misinterpreted the full-year results from BATM Advanced Communications (BVC:18.25p), a company focused on network solutions and biomedical laboratory systems. Both business segments have been winning a raft of new contracts as I highlighted when I included the shares in my 2017 Bargain Shares Portfolio at around the current share price.
True, there have been some timing issues as the delivery of a contract in the cyber business was moved back from the end of last year into the first quarter of 2017 due to the counterparty being late in integrating their services. However, the customer has amended the contract and its value has increased from $4.5m to $5.2m (£4.3m). There have been delays in closing some tenders in the telecom business too, but these issues really don't concern me. That's because the magnitude of the contracts awarded last year, and the ongoing momentum in the bio-medical business, suggest that the company will post a strong profit recovery in 2017.
Indeed, analyst Lorne Daniel at broker finnCap actually raised his target price from 20p to 22p post results - a target that looks way too conservative in my view. Mr Daniel now expects BATM to deliver pre-tax profit of $1.5m in 2017, around 50 per cent higher than he was forecasting when I initiated coverage last month.
The profit recovery aside, there is substantial value in the company's balance sheet. Net funds of $22m and property assets of $17.7m are worth 8.1p a share combined, and BATM also owns a 95 per cent stake in Adaltis, an Italian manufacturer of medical diagnostics equipment. Having recently sold a minority interest in that business to its Chinese partner, the pricing of that deal values Adaltis at $58m, or £47.6m. In other words, cash, property and the investment in Adaltis are worth in aggregate more than BATM's own market capitalisation of £73.6m, leaving its cyber and bio-medical businesses in the price for free.
For good measure, first-half comparables are really soft, skewing the likelihood of positive newsflow emerging in forthcoming trading updates. Chief executive and 24 per cent shareholder Dr Zvi Marom "looks to the future with increased confidence", and justifiably so. I continue to rate BATM shares a buy and have a fair value target price of 25p a share.
A golden opportunity
Pawnbroker H&T (HAT:283p) has reported a 40 per cent plus increase in both pre-tax profit and EPS to £9.7m and 20.88p, respectively, for the 2016 financial year, an outcome modestly ahead of analyst expectations.
A new format for pawnbroking services focused on higher-value loans at lower interest rates and the sharp depreciation in sterling, which has enhanced the value of dollar-denominated gold assets, were key drivers behind the improved performance. Indeed, favourable currency movements helped gross profit from gold purchasing and pawnbroking scrap soar by 150 per cent to £6m, accounting for 11 per cent of the total. The company also reported strong growth in its short-term high interest personal loan product with the net loan book here more than doubling to £9.4m in the 12-month period and generating an eye-catching risk-adjusted margin of 55 per cent. The move to diversify business activities into foreign exchange and a 'we buy anything' buyback product is clearly paying off too as gross profit from these segments jumped from £3.9m to £5.6m.
Interestingly, chairman Peter McNamara highlights "there has been some easing of the competitive environment". That's worth noting as H&T is well placed to tap its lowly geared balance sheet to grow its pledge book, and boost last year's flat gross profit contribution of £28.4m from this side of the business. A churning of the tail of the estate, and the opening of an outlet in Mayfair, London, are other initiatives to boost profitability.
The bottom line is that with the sterling gold price close to £1,000 per ounce, new revenue streams now making a decent contribution, and the trading outlook positive, H&T's profits look primed to maintain last year's momentum. In fact, analyst Jeremy Grime at brokerage finnCap believes that both EPS and dividends can grow by almost 20 per cent to 24.9p and 11p, respectively, this year. On this basis, the shares are trading on a modest 11 times forward earnings, offer a near 4 per cent prospective dividend yield and are priced slightly above book value.
So, having included H&T's shares in my 2017 Bargain Shares Portfolio at around the current share price, I continue to rate them a bargain buy.
Pension tax hits STM
Changes in pension legislation announced in last week's Budget has led to a 25 per cent plus slide in the share price of STM (STM:38p), a company specialising in the administration of assets for international clients in relation to retirement, estate and succession planning and wealth structuring. The vast majority of STM's earnings are derived from its Qualifying Recognised Overseas Pension Schemes (QROPS) business, an offshore pension scheme approved by HMRC and used by expatriates and internationally mobile employees whose tax domicile can change as a consequence of employment.
Bearing this in mind, the government's decision to introduce a 25 per cent tax on transfers into QROPS for residents located outside the EU impacts 80 per cent of all new business flows into STM's QROPS plans. The news prompted analyst Jeremy Grime at house broker finnCap to cut his 2017 revenue estimate by £1.1m to £19.5m and reduce his pre-tax profit estimate by 30 per cent to £2.9m. On this basis, diluted EPS is downgraded by a third to 4p, representing mid-single digit growth on 2016, albeit this really does look a worst-case scenario.
That's because high-margin recurring revenue from STM's existing QROPS plans accounts for £8.5m of the above forecast, and there is an obvious opportunity to use the company's net funds of £8.6m to buy smaller rival QROPs administrators that are now effectively in run-off, thus increasing recurring income and profits. The chief executive revealed during our call that STM is "a natural predator looking for easy wins in terms of consolidation". Also, the company still offers clients other financial products including Sipps following the acquisition of Haywards Heath-based London & Colonial, an independent financial services group, and a life assurance wrapper product, both of which are unaffected by the changes made in the Budget. The decision by the board to lift the dividend per share by two-thirds to 1.5p is a clear indication that the "existing business is robust", so much so that guidance is for a "20 per cent dividend hike this year".
So, although STM's shares are only 10 per cent above the 35p level at which I initiated coverage ('Tapping into a pensions payday', 27 Apr 2015), and below the 50p mark when I last advised buying ('On the financial beat', 25 Oct 2016), I feel investors have seriously overreacted to the Budget tax changes. I rate STM's shares a recovery buy on a miserly five times earnings net of cash and offering a prospective dividend yield of 5 per cent. Buy.
Stadium's robust trading outlook
Stadium (SDM:107p), a niche electronics firm specialising in wireless, power and human machine interface products, has reported a robust trading outlook, so much so that chief executive Charlie Peppiatt informed during our results call that the year-end closing order book of £25.8m, up 26 per cent year on year, has since increased to £28m, driven by growth in the higher-margin technology products division.
This segment accounts for 60 per cent of Stadium's sales, up from only 21 per cent in 2013, and reflects the transition from being an electronic manufacturer to a design-led technology company. Indeed, 70 per cent of the order book is being driven by technology products including high growth wireless devices such as insurance telematics, and the rapidly growing market for internet of things which encompasses security, smart home devices and energy management.
Interestingly, Stadium is beefing up its US operation in response to requests from existing customers who want a direct presence in the region. The profile of the business pipeline certainly supports the £0.5m investment as 20 per cent of all opportunities originate from the region. I also understand that further small complementary bolt-on acquisitions are being actively considered, a sensible strategic move given the potential to exploit high growth opportunities in areas such as single board computer technology where Stadium has been winning contracts. It's worth flagging up that the company's assembly division, which is increasingly acting as a vertically integrated supplier to the technology products unit, is winning new business and on better margins too, so it is expected to return to growth in 2017.
Moreover, with trading strong and analysts at brokerage N+1 Singer expecting diluted EPS to grow 23 per cent to 10.7p this year, and the dividend per share to be raised from 2.9p to 3.1p, I feel the shares are harshly rated on a forward PE ratio of 10. So, having first recommended buying at 75p ('Switch on to the Stadium of light', 30 Jul 2014), and last reiterated that advice at 85p ('On the upgrade, 7 Sep 2016), I rate the shares a buy at 107p and have a new target price of 130p. Buy.
Finally, I initiated coverage on Lombard Risk Management (LRM:9p), a leading provider of collateral management and regulatory reporting software products, in a 2,500 word column for online subscribers earlier this week ('Banking on regulation', 13 Mar 2017). If my analysis proves on the money, then a target price of 18p is achievable. Also, I plan publishing updates on the following companies on my active watchlist which have reported results this week: Crossrider (CROS:61p); Bango (BGO:100p); and French Connection (FCCN:37p).
MORE FROM SIMON THOMPSON...
A comprehensive list of all the investment columns I have written in 2017 is available here.
The archive of all the share recommendations I made in 2016 is available here
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com for £14.99, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source. Simon has published an article outlining the content: 'Secrets to successful stock picking
