But sometimes updates are not possible on the day of the release simply due to the volume of announcements being released during busy reporting periods. We are at the end of one of those periods right now, which explains why most of the articles I have written in the past three weeks have been on the back of company results. That said, I have also initiated coverage in the past couple of months on more than 10 companies including: Trakm8 (TRAK), Redde (REDD), Caretech (CTH), Software Radio Technology (SRT), Globo (GBO), AB Dynamics (ABDP), Inspired Capital, Walker Crips (WCW), Non-Standard Finance (NSF)
But just because I am updating my view on a company, and doing a huge amount of leg work going through results statements, analysts' notes and presentations, this doesn't mean the update is less worthy than the original investment opportunity. In fact, to give an example, I recall from late last year writing up Moss Bros (MOSB) when the shares were sitting at support levels and investors had seemed to miss the point that the company was actually trading inline with earnings estimates, so we were guaranteed a bumper set of results. It paid to reiterate a buy recommendation then as the company's share price has subsequently increased by more than a third. If I had done nothing readers would have missed this opportunity. I also recall reiterating my buy advice on the housebuilders in January this year when the sector had yet to really start its first-quarter rally. It was not too late to join that party.
And clearly when an investment hasn't gone to plan, I feel it's only fair to keep readers posted, too. Investing is never a one-way street as I am well aware. On that score I am covering the announcements from four companies today all of which have released results in the past few days. Three have yet to work out. Please note my next investment column will be released online at midday on Tuesday, 7 April.
Cenkos on a roll
Aim-traded corporate broker Cenkos Securities (CNKS: 197p) set the bar high ahead of yesterday's full-year results, but still managed to beat analysts' profit estimates. In fact, buoyed by the income from the IPO of the AA (AA.: 413p), and a raft of fundraisings on the Alternative Investment Market (Aim), fiscal 2014 pre-tax profits and EPS increased by around 150 per cent to £27m and 35.2p, well ahead of Edison's upgraded estimate of £25.6m and 33.3p.
Moreover, with cash generation robust, the board have lifted the payout per share from 12p to 17p, including a final dividend of 10p (ex-dividend date: 29 April), having returned £10.8m in January through a tender offer for 9 per cent of the issued share capital at 188p. But even after this latest hefty cash return, proforma net funds are still around £15m, or the equivalent of 10 per cent of the company's market capitalisation of £156m. It's also worth noting that since listing the shares at 91.5p on Aim in October 2006, the company has returned cash equivalent to 118p a share and that excludes the forthcoming 10p a share final dividend. The current dividend yield is 8.7 per cent.
The outlook for the current financial year is very promising, too. Boasting a client base of 130 companies, Cenkos raised a total of £2.8bn for its own clients and accounted for 15 per cent of all fundraisings on Aim last year. Expect this trend to continue as chief executive Jim Durkin noted yesterday that his company is "engaged in a number of significant fundraisings and the current pipeline is strong". Indeed, those deals include the £1.2bn acquisition and associated fundraising of BCA Group, an operator of one of Europe's largest used vehicle marketplaces, by newly listed Aim-traded acquisitive growth company Haversham (HAV). Cenkos is lead manager and broker to the transaction and the acquisition completes on Thursday this week.
Analysts at Edison Investment Research had conservatively expected Cenkos to report 'normal' pre-tax profits of £12.4m and EPS of 17.8p on revenues of £60m in 2015, but those estimates are set to be sharply upgraded. That's because Cenkos earned around £13m profit from the AA IPO, which raised £1.385bn for the company, but it has just raised £1.03bn for Haversham through an institutional share placing. It also means that a repeat of Cenkos' bumper dividend looks on the cards especially as the company is cash rich and has a policy of returning excess cash to shareholders.
So with earnings upgrades imminent, and prospects for further upgrades likely as the year progresses as Cenkos works through its pipeline of corporate transactions, then I have no hesitation rating the shares a buy on a bid-offer of 195p to 197p, pencilling in a return to last year's highs around 250p. Please note that I last updated the investment case when the price was 192p ('Buy into an earnings upgrade cycle', 8 January 2015), having initiated coverage when the price was 159p ('Broking for success', 20 May 2014). Buy.
New mining tax threat hits Bezant shares
Uncertainty over a potential new mining tax law in the Philippines continues to cast a shadow over Bezant Resources (BZT: 2.5p), the Aim-listed copper-gold exploration and development company operating in both the Philippines and Argentina, so much so that results yesterday revealed that the company's market value of £2.08m is now the same as its cash pile, not to mention a thumping 85 per cent below its book value of £14.7m, or 17.7p a share. This means that Bezant's flagship Mankayan copper/gold project in the Philippines is being attributed no value whatsoever in the share price even though discussions are ongoing with interested parties over the potential sale or joint venture of the project.
Clearly, no deal can be struck until there is clarity on whether the Philippines government will go ahead with implementing a punitive tax on the mining industry. The current proposal is to levy a 55 per cent tax on adjusted net mining revenue or 10 per cent tax on gross revenue. I would stress that no decision has yet been made in the Philippines and The Chamber of Mines in the country remains in dialogue with the government. I would also point out that Bezant's board believe the company's current cash position is sufficient for it to cover all its mandatory license obligations for Mankayan until the aforementioned mining tax issue is resolved. In the second half of last year, Bezant made an operating loss of £237,000 and the board have agreed to a salary and wage cut to ensure the company maintains a secure financial footing and is able to crystallise value from its investments.
I am in no doubt that there is value in Manyakan. Mining major Gold Fields (SA:GFI) certainly thought so as the company had previously taken out a call option on the project valuing it at $60.5m (£37m). Gold Fields still retains a 21.7 per cent equity stake in Bezant, having subscribed for new equity at a share price of around 26p in January 2013, before letting the option lapse a year later in light of the commodity sector downturn. Part of the funds realised from that stake sale were returned to Bezant shareholders as an 8p a share cash dividend, but even after factoring in that payout the shares are still well down on my buy recommendation ('Double your money on a copper bottom investment', 20 March 2013), reflecting the lack of progress on a sale of Manyakan. I last updated the investment case when I moved my recommendation to hold at 4p ('Catch 22', 18 November 2014) in light of the potential change in tax law.
It's still a waiting game, but it's one that is worth persevering with if you followed my previous advice given the prospect of a substantial cash return to shareholders on a sale of Manyakan. The project has JORC compliant Probable Ore Reserves of 189m tonnes grading at 0.46 per cent copper and 0.49 grammes/tonne gold, and total recoverable reserves of 811,000 tonnes of copper and 2.21m ounces of gold. Bezant also owns the wholly-owned Eureka copper-gold project in Argentina, acquired at a cost of $2.6m, and which has around 52,000 ounces of gold and around 62m tonnes of copper with a grade of 1 per cent. Work there has been on hold pending resolution of the sale of Mankayan.
The bottom line is that that Bezant's bombed out share price is in effect a low-cost call option (and one backed by cash on the balance sheet) on the eventual sale of Mankayan, and any value being realised from Eureka through potential joint ventures. Hold.
Unloved Greenko
Aim-traded shares in Greenko (GKO: 104p), the Indian developer, owner and operator of clean energy projects, have endured a roller coaster ride since I initiated coverage at 138p a couple of years ago ('Buy signal flashing green', 18 March 2013), but operationally the company continues to hit its milestones.
Following a change of financial year-end, power generation of 1,565GWh in the nine months to end December 2014 was 46 per cent higher than in the previous 12-month period to produce an increase in revenues from $71m to $100m, slightly better than analysts had anticipated. There was an earnings beat, too: adjusted pre-tax profit of $35m (£23.6m) was $5m ahead of forecast even though a net finance charge of $40m was $6m higher than predicted, a consequence of the board’s decision to sensibly hedge out the currency risk on its US dollar denominated debt. Last year, Greenko successfully raised $550m (£369m) though a five-year bond issued on the Singapore Stock Exchange and secured a US$125m (£84m) six-year credit line from EIG Global Energy Partners.
Importantly, the company looks set fair for the year ahead with the board reiterating guidance yesterday to hit operating generating capacity of 1GW during 2015, up from 715MW at the end of last year. The company currently has 550MW of wind and hydro projects under construction, and a further 1,350 MW at the development stage.
But there are a few negatives, too. Firstly, shareholders will have to wait for an inaugural dividend as the board now intend to consider a cash return at the time of the interim results in September. Analyst Adam Forsyth at Arden Partners had forecast a 2.5c a share dividend alongside this week's figures.
Secondly, factoring in slightly higher operating costs, cash profits for the 2015 fiscal year have been pared back a few percentage points to $121m, albeit this still represents a hefty increase on the $80m announced for the nine month reporting period in 2014. However, the hit to the pre-tax line is far greater. That’s because after accounting for the impact of higher net interest charges, and stripping out a $6.3m non-cash gain on acquisitions, Arden have sliced their 2015 pre-tax profit estimate by a quarter to $44.4m on revenues 85 per cent higher to $185m. Mr Forsyth has also adjusted his post-tax earnings estimates to account for a high minorities’ charge which means that Greenko is now expected to make net profits this year of $28.3m, rather than $47m previously forecast. That’s a big difference and on an EPS basis the downgrade is even greater partly due to dilution from the EIG warrants issued on the above fundraise, but also taking into account shares to be issued from previous fundraises.
Impact on EPS estimates
The Government of Singapore (GIC) which invested £100m a couple of years ago in Greenko Mauritius, and Global Environment Emerging Markets (invested in 2009), have the right to exchange their investments for shares in Greenko between 1 July 2015 and 30 June 2017. This will lead to at least 74m new shares being issued. As a result Mr Forsyth now factors in an issued share capital of 243m shares this year, up from 153m at the end of 2014, rather than 210m in his previous estimates. The net result of all these adjustments is that Arden now expects Greenko to report EPS of 11.6¢ in 2015, or 7.9p a share, half his previous estimate.
The positive is that this still represents a step change on the EPS figure of 6.1¢ reported for the last fiscal year. And with the roll-out of the new power plants on track, then it’s realistic to expect Greenko to hit Mr Forsyth’s revenue figure of $258m for 2016. On this basis, cash profits rise again to $174m to produce pre-tax profits of $68.7m and EPS of 16.5¢, or 11p at current exchange rates. This means the shares are still only being rated on about 9 times earnings estimates for 2016, hardly a high rating for company that’s expected to increase EPS by 170 per cent over the next two financial years. And there are prospects of a dividend too, albeit later than original estimates.
Of course this growth is being debt funded and current net borrowings of $656m are forecast to rise to $919m by the end of 2015. Balance sheet gearing is over 150 per cent of shareholders funds of $428m. That may raise eyebrows for some investors, but interest cover is not an issue as Greenko’s sharply rising operating profits easily cover the finance charge on credit lines. Indeed, assuming net debt increases to $1.05bn at the end of 2016 as analysts predict, then it still only represents six times forecast operating profit of $174m for 2016, or 8 times the current year forecast of $121m.
So although the earnings downgrades take some of the shine off the investment case, and Greenko’s shares have fallen a long way from last autumn’s highs around 186p, I still feel they are under-rated on a bid-offer spread of 103p to 104p. So if you followed my advice to buy them at 123p ('Valuable points to make', 4 February 2015), I would hold for recovery.
Polo lacks a catalyst
It’s also fair to say that shares in Aim-traded investment company Polo Resources (POL: 6.75p) remain severely under-rated, albeit a catalyst to narrow the huge discount to book value is still as elusive as it was when I last updated the investment case when the price was 7p ('Unloved and undervalued', 18 December 2014).
It’s been frustrating to say the least especially as the company’s latest portfolio update shows a small rise in net asset value to 27.7p a share since the half year-end of December 2014. And net cash on the balance sheet is around 5.75p a share, representing almost 90 per cent of the current share price. This means that all the company’s investments – book value of 22p a share – are being attributed a value of 0.5p a share.
Clearly, a net asset value accretive share buy-back programme would be a sensible use of some of the company’s net funds given Polo’s book value is more than four times the current share price. I can’t think of any other investment that has potential to generate such a return. It would also remove stale bulls from the market of which there will be many given the bombed out shares are trading at a record low, having fallen steadily from the 22p level in the past year. However, at present this obvious course of action is not being pursued by Polo’s board despite the compelling logic of doing so as it would support the battered share price, reward existing shareholders and enable sellers to be cleared out.
It hasn’t helped sentiment either that shortly after Polo subscribed for £1.6m of new shares in November in exchange for a 7 per cent stake in Aim-traded Weatherly International (Aim: WTI), a mining, development and exploration company focusing on Copper in Namibia, it hit problems. Recovery from the initial leach pads at Weatherly’s open pit Tschudi Project was below expectations due to contamination from upper overburden materials, and combined with lower copper prices, this has adversely impacted its financial position. Weatherly is now in discussions with its financiers to determine its financial resources to meet short term needs and loan repayments. The investment accounts for only 2 per cent of Polo's net asset value, but it does raise further doubts in the minds of investors over the quality of the portfolio.
It also doesn't help matters that there continues to be a lack of transparency in reporting over Polo's unlisted interests in Signet Petroleum and Regalis Petroleum, companies with exploration interests in Tanzania and Chad, respectively.
So with a share buy-back not on the agenda, further cash realisations from Signet now unlikely anytime soon given the current oil price environment, and the ebola outbreak undermining progress in the Nimini gold project in Sierra Leone, I have belatedly decided to cut my losses. I originally included the shares in my 2013 Bargain share portfolio at 19.25p. Sell.
MORE FROM SIMON THOMPSON...
Please note that I have written articles on a total of 54 companies in March, all of which are available on my IC homepage... and are detailed in chronological order below with the relevant web links for ease of reference.
■ Non-Standard Finance: Buy at 103p ('A non-standard investment', 2 Mar 2015)
■ WH Ireland: Buy at 92p, target 140p ('A non-standard investment', 2 Mar 2015)
■ Software Radio Technology: Buy at 31.25p, target range 40p to 43p ('On the radar', 3 Mar 2015)
■ Vislink: Buy at 48.5p, target 60p ('Tapping into e-commerce profits', 4 Mar 2015)
■ Sanderson: Buy at 68p, target 80p to 85p ('Tapping into e-commerce profits', 4 Mar 2015)
■ Town Centre Securities: Run profits at 292p ('To bank profits or not?', 5 Mar 2015)
■ Sutton Harbour: Buy at 36.5p ('To bank profits or not?', 5 Mar 2015)
■ Housebuilders: Run profits on Persimmon, Bellway, Barratt Developments, Taylor Wimpey, Berkeley Group. Bank profits on Crest Nicholson, Bovis Homes, Galliford Try and Redrow. Buy Inland at 64p) ('Housebuilders: trading gains', 9 Mar 2015)
■ Walker Crips: Buy at 47p; Henry Boot: Buy at 232p; H&T: Buy at 179.5p; Nationwide Accident Repair Services: Buy at 85p; Communisis: Buy at 56p; Global Energy Development: Speculative buy at 44p ('Six-shooter of small-cap buys', 10 Mar 2015)
■ Stadium: Run profits at 123p; Pure Wafer: Hold at 42p ('Electrifying shares', 11 Mar 2015)
■ CareTech: Buy at 230p, target 300p ('Time to take care', 16 Mar 2015)
■ LMS Capital: Buy at 77.5p; Globo: Run profits at 55.5p; Trifast: Buy at 99p, target 140p ('Exploiting currency moves', 17 Mar 2015)
■KBC Advanced Technologies: Buy at 87p, target 165p; K3 Business Technology : Buy at 227p, target 275p; Fairpoint: Buy at 123p, target 190p ('Blow out results', 18 Mar 2015)
■ Charlemagne Capital: Buy at 10.75p; Bloomsbury Publishing: Hold at 155p ('Below the radar', 19 Mar 2015)
■ Redde: Buy at 108p, target 125p ('In the fast lane', 23 March 2015)
■ Pittards: Buy at 137p; Crystal Amber: Buy at 152p; Record: Buy at 35p; Arbuthnot Banking: Buy at 1,420p; Inspired Capital: Buy at 17p; Stanley Gibbons: Buy at 257p (‘Bargain shares updates 2015’, 23 March 2015)
■ Accumuli: Accept NCC offer; Getech: Buy at 49p, target 67p; Faroe Petroleum: Trading buy at 79.5p, target 94p (‘Buyouts and bumper profits’, 25 March 2015)
■ Moss Bros: Buy at 108p, target range 120p to 130p; Vislink: Buy at 47p, target 60p ('Suitable investments for growth', 26 March 2015)
■ Safestyle: Buy at 180p, target 230p; GLI Finance: Buy at 57.5p, targte 80p; Oakley: Buy at 165p, target 180p; First Property: Buy at 34p, target 380 to 40p ('A quartet of small cap buys', 30 March 2015)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
