The board also confirmed that it has delivered slightly ahead of internal budgets, thus supporting analysts' expectations, which suggest it will make a small pre-tax profit of £200,000 in the 12 months to the end of May 2017. Analysts are unable to update forecasts as Avingtrans is in a takeover situation (see below), but previously had stated that contracts already in place account for the vast majority of the 33 per cent ramp-up in revenue to £32.8m forecast for the new financial year to deliver a near trebling of Avingtrans' cash profit to £2.2m and an adjusted pre-tax profit of £1.3m. Reassuringly, the directors confirm a strong current order book for its energy and medical divisions too.
Moreover, with closing year-end net funds of £26.2m on its balance sheet, and the company pondering a bid for £25m market-cap specialist engineering Hayward Tyler (HAYT:48p), there is scope for Avingtrans' shrewd management team to replicate their success on previous turnaround situations and create significant value for shareholders by exploiting the recovery potential of the indebted bid target. Bearing this in mind, the Takeover Panel have set an extended deadline of close of business on Friday, 30 June for Avingtrans to declare its hand.
The point being that after taking into account cash on its balance sheet, Avingtrans' existing businesses are effectively being valued on around 7.5 times forecast cash profits, hardly an exacting valuation and one that leaves scope for the share price to re-rate in the event of a sensibly-priced acquisition being announced. Interestingly, Hayward Tyler are scheduled to release their full-year results on Friday this week, and also have an impending deadline on the same day for the repayment of £2.4m of short-term banking facilities and the annualised measurement of the financial covenants.
Of course, you may want to wait and see whether a takeover bid is actually launched, but I see little point doing so as Avingtrans' directors are in a strong position to thrash out a deal to the benefit of its own shareholders, and if they are unable to do so the company will still retain net cash worth 134p a share on its balance sheet to deploy on another target.
So, having included the shares in my 2017 Bargain share portfolio at 200p, and last rated them a buy at 238p ('Bargain shares on a tear', 3 Apr 2017), I believe they warrant a decent premium to book value of 235p a share, with newsflow on the acquisition front set to drive the re-rating. Buy.
Mispriced value play
I feel that investors are being too cautious in their valuation of Inland Homes (INL:57p), a specialist housebuilder and brownfield land developer. After I included the shares in my 2013 Bargain Shares portfolio at 23p ('How the 2013 Bargain Shares fared, 7 February 2014), the price rose almost fourfold to an all-time high of 89p at the start of last year. However, since then it has given back almost half those gains and is below the 61p level at which I last recommended buying, pencilling in a target price of 80p at the time ('Taking profits and running gains', 4 April 2017).
The recent lacklustre share price performance can be attributed to investor caution over the company hitting analyst profit estimates for the 12 months to end-June 2017. Analysts John Cahill and Miranda Cockburn at broking house Stifel predict a pre-tax profit of around £17m, up from £14.9m the previous year. Inland reported recurring pre-tax profits of £4.4m in the first half to end-December 2016, well below the annual run rate embedded in those estimates, largely due to the timing of land sales which can be lumpy due to their very nature. However, at the time of the half-year results at the end of March, the directors appeared confident that they could make up the shortfall and even sanctioned a 25 per cent increase in the half-year dividend to 0.5p a share, supporting analyst predictions of a full-year payout of 1.6p a share, up from 1.3p a share in the 2016 financial year.
Bearing this in mind, and coming just days before its financial year-ends, Inland reported recently that it had sold off two parcel of land with planning consent for 85 affordable homes for a total of £9.5m and has entered in construction contracts with the purchasers to build the units over the next 15 to 18 months. The company has also exchanged contracts to sell a refurbished listed building at one of those developments, Queensgate, Farnborough, for £1.95m. These disposals have generated free cash flow of £8m after paying down borrowings, and add £1m to EPRA net asset value (NAV).
Embedded in Stifel's aforementioned full-year profit forecasts are expectations that Inland will sell 240 private homes at an average price of £300,000 and at a gross profit margin of 20 per cent; and sell a total of 500 plots at an average price of around £105,000 from its land bank of 7,151 plots, of which more than a third have planning permission. In the first half, private residential home sales were steady at 101 units, but, more importantly, the housebuilding division's forward order book stood at £31.8m, up 52 per cent year on year, highlighting potential for a strong second half. So, although we will have to wait until the company issues its pre-close trading update on or around 23 July to see whether Stifel's forecasts have been met, if Inland was going to miss them the directors had the opportunity to say so recently.
The point being that with the share price trading 40 per cent below Stifel's EPRA NAV estimate of 98p a share, which includes unrealised value of £73m or 36.2p a share, investors are being very cautious in their valuation. In fact, the share price is below the end-December 2016 basic NAV of 58p, and this figure excludes all the 'hidde' value inherent in the company's projects and land assets. Debt shouldn't be a concern as Stifel predicts a year-end loan-to-value ratio of 41 per cent on the company's trading and investment properties which are worth around £215m.
Furthermore, the 'hidden' value in the land bank has increased this year as the company has announced a number of planning consent awards in the past six weeks, including a development of 88 private homes with a gross development value (GDV) of £28m, and a new 46,000 sq ft hotel in the West Cliff area of Bournemouth; a 148-unit scheme with a GDV of £30m at Sherbourne Wharf, adjacent to Birmingham Canal and located one mile for New Street Station; and a 58-unit scheme with a GDV of £21m in St Albans, located at a 15-minute walk from the train station which provides a 20-minute commute access to central London. In the first quarter this year, the company secured planning permissions or resolutions to grant planning permission for the construction of over 1,250 homes. A geographic bias to the south east of England housing market, and no exposure to the prime end of the market are other positives.
So, ahead of the company's pre-close trading update in around four weeks' time, I feel Inland's shares are too lowly rated on eight times EPS estimates of 6.8p, and on a thumping 42 per cent discount to forecast year-end EPRA NAV. Buy.
On the mend
Aim-traded Bilby (BILB:78p), a provider of gas heating appliance installation and maintenance services to residential and commercial properties, has delivered a 9 per cent pre-tax profit beat on the previously upgraded estimates of house broker Northland Capital.
In the 12 months to end-March 2017, the company delivered pre-tax profits of £3.32m on revenues of £64m, helped by work on certain contracts commencing earlier than expected, and contributions from last year's acquisitions of DCB and Spokesmead, both of which have met their initial earn-out conditions. DCB is a provider of building, refurbishment and maintenance services to housing associations and local authorities throughout Kent, Sussex, Essex and London; and Spokemead is a specialist in electrical installation, repairs and maintenance services to local authority-owned housing stock. Bilby paid a total of £12.7m for these businesses, including deferred consideration.
True, the underlying pre-tax figure excludes £3.25m of exceptional charges, including £395,000 for acquisition costs, £341,000 for share-based payments, £358,000 for restructuring and £1.79m for amortisation of customer relationships. However, it's clear from the second-half trading performance that the problems that beset the company last year and which I discussed at length when I advised holding the shares for recovery at 49p ('On a roll', 20 December 2016) are history. In fact, I subsequently rated them a buy at 67p ahead of the recent results, targeting a price range of between 85p and 90p ('Five small-cap opportunities', 23 May 2017). That range was hit a few weeks ago.
A key reason for adopting a more positive stance was evidence of contract momentum building in the business, which in turn improves sales visibility and de-risks profit estimates. Recent awards include an eight-year gas servicing contract with East Kent Housing that has been expanded to cover 16,700 properties and provide a range of building maintenance and electrical works, as well as the installation of 1,500 new boilers each year; a seven-year gas servicing contract with Walterton and Elgin Community Housing for work on more than 400 properties; and a three-year gas servicing contract, with a two-year extension option, with Sussex and Hampshire housing association Saxon Weald, for work on more than 4,000 properties. Following these contract wins, Bilby now services more than 300,000 properties, significantly increasing revenue visibility, and the earnings analysts are predicting.
Importantly, the company's balance sheet is strong enough to fund the working capital requirements for Bilby to achieve the 11 per cent increase in revenues that analysts at Northland predict this year, and deliver a 33 per cent increase in cash profits to £5.2m and produce underlying pre-tax profits of £4.8m. Net debt of £3.95m equates to balance sheet gearing of 29 per cent, funded by £8.7m of credit lines, including a five-year term loan of £5.7m with HSBC priced at 2.75 per cent above the Bank of England's base rate and maturing in July 2020, a 10-year mortgage taken out at the same time and charged at 1.9 per cent above base rate, and an untapped HSBC overdraft facility of £2.25m at 2.5 per cent above the base rate. Operating profit of £3.55m covered the finance charge 15 times over, so there shouldn't be any covenant issues, and in the absence of one-off charges there is scope for the dividend to recover strongly, too.
The board declared a final dividend of 1.5p to make a total for the year to 1.75p, albeit this was a penny a share less than in the prior year, reflecting the problems the company faced in its first half when the payout was only 0.25p a share. However, Northland Capital believe that if adjusted EPS can grow by 10 per cent from 7.7p to 8.5p in the 12 months to end-March 2017, the dividend can be increased to 2.5p. On this basis, Bilby's shares are rated on nine times forward earnings and offer a prospective dividend yield of 3.2 per cent.
Clearly, that's a fairer valuation than the one when I turned a buyer in late May ('Five small-cap opportunities', 23 May 2017), albeit the share price is now only back above the 75p level at which I initiated coverage when the company floated on Aim ('Buy-to-build' growth play, 18 May 2015), and is still well below the 175p subsequent all-time high. That said, if the company can build on the current contract momentum then there is scope for some multiple expansion and a higher target price range than my current one of 85p to 90p. Buy.
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
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