Accelerating store openings
That looks a sensible prediction given that trading prospects for the current year are very encouraging, so much so that Moss Bros’ board have felt confident enough to markedly step up their store refurbishment programme.
The plan now is to upgrade 27 stores this year, almost double the 14 refits in the financial year just ended. True, annual capital expenditure will rise by around £6m to £14m as a result, but with a three-year cash pay-back period on investment in these spruced up stores then it makes financial sense to do so especially as new stores deliver a hefty underlying sales increase and improved profitability too. Having opened six new stores last year and closed nine existing ones, Moss Bros ended the period with an estate of 130 shops, two thirds of which will be operating in the new format by next January. Expect a further five or six new store openings too.
I would also expect cost savings to be made on the annual rent bill as Moss Bros negotiates improved terms with landlords on leases up for renewal. The average lease length is 53 months, so there is scope to churn the tail of the estate if landlords don’t agree to play ball given that there is hardly a shortage of vacant space on the high street.
Although capital expenditure in the new financial year may seem high, Moss Bros’ cash profits are expected to climb by almost 25 per cent to £12.1m according to analyst John Stevenson at Peel Hunt based on a 9 per cent increase in revenues to £125m. The company’s non-cash depreciation and amortisation charge was £4.9m last fiscal year which explains the difference between reported IFRS pre-tax profits of £4.8m and cash profits of £9.7m. This non-cash charge also explains why the company can afford to recycle all its cash profits into new store refits and more to boot, given it has the benefit of a cash rich balance sheet.
Profit estimates well underpinned
Moreover, pre-tax profit estimates of £5.7m for the 12 months to January 2016 look well underpinned by the initiatives the board have put in place and which are underpinning Moss Bros’ retail success story: a multi-channel shopping environment for customers; the launch of new brands; and investment in the hire business, a segment accounting for a fifth of gross profits.
E-commerce sales increased by more than half last year and now account for almost 8 per cent of Moss Bros’ total sales. For most retailers, e-commerce has cannibalised high street sales as customers just substitute their purchases from one channel for the other. Food retailing is a classic case of this zero sum game for retailers. However, Moss Bros has managed to increase its in store sales per sq ft by around 4 per cent over the past five years, helped in part by the ongoing successful store refit programme. In other words, online is actually proving complimentary to the company’s shop sales rather than having a negative impact on them.
For instance, the business can offload end of stock lines cost effectively through its websites targeting specific international markets including Eire, Denmark, Holland and Australia. Expect online expansion into more new overseas territories this year. And when the company’s single customer database across online and stores goes live shortly, then the business will be able to target market its client base more effectively too. And the ability to offer both a click and collect service, and home delivery for internet sales, means that Moss Bros can tempt new customers to spend online.
It’s promising too that after an underwhelming year for its hire business, primarily due to a shortfall in weddings and evening wear, that early season bookings for weddings are showing a marked improvement. Investment has been increased by £1.4m to £2.5m in new product areas including lounge suits, and new styling and variations within the morning suit offerings. It’s also clear from the ongoing increase in retail sales, up 7.5 per cent since the January financial year end, that the investment in new brands - Moss London, Moss 1851 and Moss Esquire – is paying off too.
Target price
Having seen the shares rally 35 per cent from a low of 79p when I updated my view in mid-December ('Platforms for growth', 16 December 2014), and rise 15 per cent since my last update (‘A triple play of chart break-outs, 11 February 2015), I feel the fundamental drivers are strong enough to justify a return to the 120p to 130p price band.
The chart set-up is certainly positive as Moss Bros’ shares have taken out the early March high of 105p, are not overly extended above the 20-day exponential moving average (EMA) around 101p, the 14-day relative strength indicator (RSI) has a reading in the mid-60s so is not too overbought, and for good measure the moving average convergence divergence (MACD) momentum oscillator is above zero and its signal line, and has just given an official buy signal.
In the circumstances, I feel a return to the price highs around 126p from May last year looks firmly on the cards. At this level, the company would have a market capitalisation of £127m, or the equivalent of 8 times current year cash profit estimates net of cash on the balance sheet. I feel the cash profitability of the business is the best way to value the company given the high depreciation charge, and the ongoing large investment in store refits.
Please note that I first advised buying the shares at 39p three years ago (‘Dressed for success’, 20 February 2012). Buy.
Time to make the link again
Shares in Vislink (VLK: 47p), a global technology business specialising in the collection and delivery of high-quality video and data from the field to the point of usage, have pulled back on profit taking to their 50-day EMA post this week’s bumper financial results having tested the 53p resistance price level dating back to November 2013. I feel this offers a good opportunity to buy in if you missed my earlier buy recommendation at 41p (‘Punching above its weight’, 27 January 2015), or when I initiated coverage last summer at 43p ('Time to make the link', 26 August 2014). I have good reason to think this way.
Firstly, the cash rich company delivered a significant earnings beat as adjusted operating profits surged by two thirds to £7.2m, way above the £6.2m estimate of research firm Equity Development and beating consensus by around 7 per cent. Second half operating profits trebled to £5.5m, a barnstorming performance driven by a robust showing from Vislink’s surveillance division and the acquisition of Weybridge-based Pebble Beach Systems.
Founded in 2000, and employing over 60 staff, Pebble Beach is a leading developer and supplier of automation, 'channel in a box' and content management services for TV broadcasters, cable and satellite operators. The business has developed a portfolio of software products to support a wide range of broadcast applications for clients including TV Globo Brazil, Fox News and Viasat UK. It’s growing incredibly quickly with revenues surging by 50 per cent last year, and by 230 per cent in the past 18 months. Moreover, margins are high as Pebble Beach reported operating profit of £3.3m on revenues of £8.3m for the nine month period under Vislink’s ownership in 2014.
That makes the initial consideration of £8.8m (after adjusting for cash on Pebble Beach’s balance sheet at the time of the acquisition 12 months ago) an absolute steel. I expect this division to be a key driver of Vislink’s profits in the year ahead as Peeble Beach reaps the benefit of a strategic five-year partnership with Nasdaq-quoted Harmonic Inc (US: HLIT), a worldwide leader in video delivery infrastructure for emerging television and video services. The contribution from this business unit also means that 15 per cent of Vislink’s revenues from software are now recurring, so improving the quality and stability of its income stream.
Terrorist threats buoy surveillance industry
The company's surveillance division also turned in a strong result thanks to a Home Office order to equip 15 helicopters. Vislink’s airbourne downlink equipment has been deployed by the Metropolitan Police for the past nine years so the compamny has a record of servicing government contracts. Frankly, given the heightened extremist terrorist threats in the western world, I can only see further demand for surveillance systems from governments across the world in order to counter the threat of incidents such as the sickening attacks we witnessed in Paris earlier this year. Vislink’s surveillance and public safety increased revenues by 35 per cent to £15.9m last year and now accounts for a quarter of group turnover, offsetting weakness in the broadcast hardware market.
It’s also worth flagging up that the weakness of sterling is important to Vislink. That’s because a third of the company’s revenues are generated in North America, around a fifth in Europe, and a similar percentage in Asia and the Middle East and Africa. Currency gains accounted for around £500,000 of Vislink’s profit uplift last year, and with sterling weakening by almost 5 per cent against the greenback since the financial year-end, then I can see scope for more currency led profit gains in the year ahead. As I have noted in recent articles, I foresee turbulence on the foreign exchange markets in the months ahead in the event of another UK hung parliament as seems the likely outcome at this stage. In fact, some analysts are even suggesting the possibility of a second general election in the autumn. Political instability is never good for the stability of a country’s currency.
But even without factoring in foreign exchange movements, analysts still expect another year of strong growth. Tintin Stormont at N+1 Singer predicts EPS growth of around 9 per cent this year to 4.5p and a maintained dividend per share of 1.5p based on pre-tax profits rising from £7.1m to £7.7m on revenues of £63.7m. On this basis, Vislink’s shares are priced on just 10 times earnings forecasts and offer a dividend yield of 3.2 per cent. They are also rated bang in line with book value, a valuation that seems at odds with a company that is generating a post tax return on equity of 10 per cent.
Needless to say, I rate the shares a buy on a bid-offer spread of 46.5p to 47p and feel my target price of 60p is very achievable. Buy.
MORE FROM SIMON THOMPSON...
Please note that since the start of March I have written articles on a total of 46 companies, 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 (‘Buy-outs and bumper profits’, 25 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'
