This subject is relevant to me right now because one of the companies I recommended buying shares in, land developer, property investor and developer, and construction company Henry Boot (BHY: 233p), has just announced some major board changes.
At the end of this year, chairman John Brown and non-executive director Mike Gunston will both retire from the board having completed nine years' service. The current board of six directors have 63 years service between them so it’s not surprising that a succession plan has been under consideration for some time. It’s a sensible one too as chief executive Jamie Boot, who has 30 years’ service with the company, will step up to replace Mr Brown as non-executive chairman; John Sutcliffe, who has been finance director for the past nine years, will take over as chief executive; and Darren Littlewood, currently group financial controller, will take over as finance director. The board are also appointing three new non-executive directors.
On firm foundations for future growth
It’s fair to say that Mr Brown will be leaving the company in good shape as highlighted by a strong set of half-year results at the end of last week. One of the key takes for me was the progress made by Henry Boot’s land development arm, Hallam Land, which is benefiting from a buoyant market for strategic land. Six sites were sold in the six month period, three others were exchanged on, and the senior management team at Hallam are in negotiations for the disposal of a further 11 sites, some of which should exchange and may even complete by the year end.
Given this robust pipeline of deals, I feel very comfortable with Investec Securities' forecast that Hallam Land will increase its operating profit by almost 8 per cent to £15.2m this year to account for around half of the group operating profit forecast of £29.2m, up from £26.8m in 2014. After factoring in revaluation gains on investment properties, expect reported pre-tax profits to increase by 11 per cent to £31.6m.
It’s also apparent that future profits from Hallam Land are very well underpinned. That’s because the company received residential planning approval on 1,600 plots in the half year and now has 40 sites with residential consent encompassing a total of 12,500 plots. That’s more than double the number only three years ago and excludes a further 14,170 plots in the planning process across a further 35 sites, not to mention another 110 sites under option or subject to planning promotion agreements. These are very valuable land holdings too, a fact that is not is not reflected in the £126m value attributed in the company's accounts to land development assets. Indeed, excluding the 14,170 plots in the planning stage, the current book value of the 12,500 plots with planning consent equates to only £10,000 per plot. In turn, this explains why Henry Boot can make bumper profits on its land holdings when they are sold on and the much higher open market value is realised.
Property development arm prospering
The other key take for me in the release was the progress being made by the company’s property development and investment arm. This side of the company now has 23 projects in development, representing the highest level since 2007. Importantly, it’s not speculative which mitigates risk.
For instance, at the 200 acre Markham Vale business park in Derbyshire, Henry Boot has signed a pre-let agreement for a 479,000 sq ft distribution unit with logistics giant Great Bear Distribution and has executed a forward funding and sales contract with M&G Real Estate Investments. Work starts later this year and should complete by mid-2016. The giant industrial warehouse has a gross development value of £35m and Henry Boot should make a 10 per cent profit margin on this one deal alone. The company is also in discussions to sign a pre-let on a further 220,000 sq ft industrial unit on the site, having secured pre-lets on a further 190,000 sq ft of space in the first half with completion due by the year-end.
The former Terry’s York Factory in York is set to produce some mouth watering returns too. Contracts have been exchanged with residential developer PJ Livesey to convert the 170,000 sq ft building into 179 apartments. Development work will start in the final quarter this year and the first flats are scheduled for occupation by mid-2016. In addition, the former head office on the site has been sold to Springfield Healthcare Group and should complete by the year-end. So, combined, these two property deals have a gross development value of £40m of which Henry Boot is in line to book development profits of £10m over the next three financial years.
It’s worth noting too that there is potentially £30m of gross development profits to be made over the next three to four years in phase one of the development of the new 750,000 sq ft Aberdeen Exhibition and Conference Centre, details of which I discussed in March (‘A six shooter of small cap buys’, 10 March 2015).
Add to that the fact that Henry Boot has now achieved its budgeted 2015 construction order book, and the current order book for 2016 now equates to half of budgeted activity next year, and clearly the company is firing on all four cylinders.
Target price
So having first recommended buying Henry Boot’s shares at 202p (‘A bootiful investment’, 19 February 2015), I continue to feel there is scope for the price to rise to at least my 260p target price (‘A trio of small cap buys’, 14 July 2015) and perhaps even higher. Analyst Alison Watson at Investec has a raised target price of 292p, and Nick Spoliar at WH Ireland has a 317.5p target price.
True, the shares are priced on a premium to book value of 160p, but it’s worth noting that the profits from land sales at Hallam Land are generating the best part of 10p a share net profits each year, highlighting the hidden value in the balance sheet. And there is scope for earnings to rise at a steady rate too which makes the current earnings multiple of 12.5 times Investec Securities normalised EPS estimate of 18.4p for 2015, excluding revaluation gains on the company’s investment portfolio, a decent entry point. A 2.6 per cent prospective dividend yield is also attractive based on a well covered payout of 6p this year, up from 5.6p in 2014.
On a bid-offer spread of 230p to 233p, I feel comfortable maintaining my buy recommendation on Henry Boot’s shares.
Amino has the technology
Aim-traded Amino Technologies (AMO: 162p), a Cambridge-based set-top box designer of digital entertainment systems for IPTV, home multimedia and products that deliver content over the open internet, has announced that its wholly-owned subsidiary, Finnish technology company Booxmedia, has signed a new contract with Dutch utilities and digital services company DELTA.
Booxmedia will use its white label platform and products to provide, install and maintain a new end-to-end multiscreen cloud TV solution for DELTA. Once live later this year, the new service will allow DELTA customers to enjoy the advanced features of Booxmedia's CloudTV-Everywhere Suite that includes live stream programmes, catch-up libraries, network personal video recording and "start-over-to-live" feature that enables users to watch ongoing live stream broadcasts from the beginning. DELTA expects to make the new suite of cloud TV services available to all its All-in-one Premium and Super users at the end of this year.
This contract win follows on from Amino’s recent acquisition of California-based Entone, a pioneer in IPTV and home video distribution, details of which I analysed in depth at the time (‘Primed for major re-ratings’, 22 July 2015). It was a transformational deal for the small cap company as it broadens Amino’s product offering and market reach globally across IPTV, hybrid broadcast and a range of connected home solutions. It also aligns closely with Amino’s prior acquisition of cloud-TV platform provider Booxmedia to meet the needs of customers across a range of markets as they transition to cloud-based IP-driven multi-screen entertainment delivery.
Having only just upgraded their forecasts to encompass the acquisition of Entone, analysts are maintaining their raised estimates post the Booxmedia contract with DELTA. The company should be able to increase revenues from £49.5m in the current financial year to £79m in the 12 months to end November 2016, so after factoring in £1m of cost benefits from the Entone acquisition expect pre-tax profits to rise by two thirds to £9.5m, up from £5.7m forecast in fiscal 2015, to drive up EPS from 8.5p to 11.2p. On this basis, Amino’s shares currently trade on 14.4 times fiscal 2016 earnings estimates.
However, I feel that fair value for the equity is nearer to 180p a share, or 16 times likely EPS estimates for fiscal 2016. A prospective dividend yield of 3.4 per cent based on a proposed payout of 5.5p a share this year is attractive too. I am not the only one thinking this way as analyst Oliver Knott at broking house N+1 Singer has a target price of 202p, head of research Andrew Darley at finnCap has fair value at 205p, and David Johnson at Northland Capital has a target of 210p.
So having first advised buying Amino’s shares at 83p ('Set up for a buying opportunity', 10 June 2013), and with potentially another 10 per cent or so upside on offer to my own fair value target of 180p, I would recommend running your bumper profits with the shares being offered in the market on a bid-offer spread of 157p to 162p. Run profits.
Strategic review at PV Crystalox
The board of solar wafer maker PV Crystalox Solar (PVCS: 9.5p) have announced a strategic review of the business in light of the adverse market conditions and the recent devaluation of the Chinese currency which is expected to intensify pricing pressure even further.
The global photovoltaic industry environment has deteriorated significantly this year with international trade disputes continuing and industry overcapacity, primarily in China, persisting. Pricing across the value chain has fallen sharply to historic lows, albeit wafer and cell prices have stabilised recently. Profitability remains elusive for wafer and cell manufacturing companies with market prices below the cost of production despite the benefit of lower polysilicon pricing. PV Crystalox reported a half year pre-tax loss of €9.5m (£6.9m) and burned through €8.5m of cash in the period, so with little hope of the pricing environment improving anytime soon, and the board mindful of the need to protect shareholder value, a review of the business will be completed before the year end.
Bearing this in mind, it’s worth noting that the company’s net assets of €50.3m equated to 23.5p a share at the end of June and included net funds of €17m and inventories of €27.9m. This means that cash and stocks equate to 21p a share. Of course some of that cash pile will be burned in the second half, but there is light at the end of the tunnel.
That’s because one of the remaining two contracts the company signed in 2008 and 2010 to purchase polysilicon will expire at the end of this year. The other smaller contract was amended in 2014 and the balance of the delivery is now being spread over a longer period until 2018. The company has also exited the fixed price supply agreements it signed with customers in 2008 apart from one long-term contract with one of the world’s largest PV companies which has failed to purchase wafers in line with its obligations. A request for arbitration was filed by PV Crystalox in March 2015 with the International Court of Arbitration of the International Chamber of Commerce. The €400,000 costs of this action are reflected in the aforementioned operating loss.
Also, reflecting the difference between the contracted price under the purchase contracts of raw material, and the anticipated selling price of the end product, PV Crystalox has made an onerous contract provision of €7.4m as of the end of June 2015. This is reflected in the balance sheet and auditors have taken this into consideration when calculating the companby’s latest net asset value.
The likely end game
The bottom line is that in light of the current market environment a wind down of the business appears a very realisitic prospect given that PV Crystalox could sell its inventories, and then trade the polysilcon it’s obliged to buy under the one remaining supply contract. Alternatively, the company could try to agree a financial settlement with that supplier to exit the contract altogether given that the contracted polysilicon purchase volumes are considerably in excess of requirements. The company also has one claim outstanding (to supply wafers) with the administrator of a customer in insolvency. This is due for settlement before the year-end.
So although PV Crystalox’s shares have drifted 10 per cent to 9.5p since I last updated the investment case at the time of my 2014 Bargain share portfolio review, and are half the level I originally recommended buying at over 18 months ago, albeit the price did rally by 53 per cent at one point, I would hold on if you followed my advice and await the outcome of the strategic review. That’s because I still believe there is scope for the share price discount to book value to narrow if the company takes the sensible course of action and winds down the business. I am sure other shareholders will be thinking the same way too. Hold.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies in the past month:
■ Non-Standard Finance: Buy at 107.5p; Software Radio Technology: Buy at 27.5p, target 40p; Character Group: Run profits at 500p; Communisis: Hold at 50p ('Value judgements', 3 Aug 2015)
■ Fairpoint: Buy at 138p, target 190p; Creston: Run profits at 155p; Sanderson: Buy at 71p, target 80p to 85p; Renew Holdings: Buy at 340p, target 375p ('Break-outs looming', 4 Aug 2015)
■ Globo: Buy at 42.75p, target 69p; Cambria Automobiles: Run profits at 72p ('Short sellers in for shock treatment', 5 Aug 2015)
■ Cohort: Run profits at 357p, target 375p; Cineworld: Run profits at 530p; Paragon: Buy at 412p ('Acquisitive growth drives re-ratings', 6 Aug 2015)
■ PROACTIS: Buy at 93p, target 117p ('Procuring growth', 10 Aug 2015)
■ Town Centre Securities: Buy at 310p, target 350p ('Equity market watch', 11 August 2015)
■ Equity market strategy ('Equity market watch', 11 August 2015)
■ KBC Advanced Technologies: Buy at 122p, target 165p; Getech: Buy at 59p, target 80p ('Fuelled for strong growth', 12 August 2015)
■ Pure Wafer: Run profits at 162p, target 178p; Inland: Run profits at 71.5p, next target 80p; Macau Property Opportunities: Take profits at 189p ('Bumper cash returns', 13 August 2015)
■ Inspired Capital: Accept cash offer of 21.5p; Record: Buy at 40p; Pittards: Buy at 128p; Netplay TV: Buy at 9.5p ('Bargain shares updates', 17 August 2015)
■ Equity market strategy ('Stay calm', 25 August 2015)
■ Capital & Regional: Run profits at 67p; Redde: Run profits at 152.5p; Cineworld: Run profits at 578p; Cohort: Run profits at 375p; H&T: Buy at 195p; Record: Buy at 33.5p; Bioquell: Buy at 137p, target range 170p to 185p ('Running bumper profits', 27 August 2015)
■ Equity market strategy ('A sense of perspective', 1 September 2015)
■ LMS Capital: Buy at 73p ahead of tender offer; STM: Buy at 53p, target 60p; Entu: Hold at 65p ('Shareholder activism works', 2 September 2015)
■ Henry Boot: Buy at 235p, target 260p; Amino Technologies: Run profits at 162p, target 180p; PV Crystalox Solar: Hold at 9.5p (‘Planning for success’, 3 September 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
