Take, for example, STM (STM: 71p), the Aim-traded financial services company specialising in the administration of assets for international clients in relation to retirement, estate and succession planning and wealth structuring.
In the past week the company's share price has not just hit, but completely obliterated my conservative target price of 60p. I first advised buying the shares at 35p ('Tapping into a pensions payday', 27 Apr 2015), reiterated a buy recommendation at 47p in the summer ('Exploiting upgrades', 9 Jul 2015), and maintained that at advice at 53p following a bumper set of half-year results ('Shareholder activism works', 2 Sep 2015).
The key driver for this stellar outperformance is STM's 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. The business has been growing quickly and now has over 8,800 clients globally, having added 1,400 in the first six months of this year and received a further 1,500 applications from new clients.
And with a greater proportion of incremental income falling straight down to the bottom line, analyst Duncan Hall at broker finnCap predicts STM's pensions business will lift cash profit by 44 per cent to £2.6m on revenue up from £8m to £9.7m this year. In turn, Mr Hall believes STM's fiscal 2015 pre-tax profit will rise from £1.7m to £2.7m based on a £1.8m increase in revenue to £17.7m. On that basis, expect normalised EPS to virtually double from 2p to 3.8p. This means that once you strip out net funds of 11.5p a share on the balance sheet, STM's shares are being rated on a forward PE ratio of 15.5 times net of cash.
That's obviously a much fairer valuation than when I initiated coverage at the end of April, but is not yet full value as there is every reason for this growth rate to be maintained for some time yet. For example, having opened sales offices in South Africa, southeast Asia and the Middle East in the latest six-month trading period, and signed up more introducers than in the whole of 2014, the full benefits of this investment will be reaped from the second half of next year onwards. This supports expectations that the pension business will turn in cash profit of £3.3m on revenue of £10.3m in fiscal 2016 to support finnCap's forecast that STM will make pre-tax profit of £3.7m and EPS of 5p on revenue of £18.6m in 2016.
The bottom line is that this growth story is still not yet fully priced into the valuation with the shares being priced on 12 times fiscal 2016 earnings estimates net of cash and on a price-to-book value of 1.7 times. Trading on a bid-offer spread of 68p to 71p, I continue to rate STM's shares a buy and have upgraded my target price to 80p, or 13.5 times fiscal 2016 earnings estimates net of cash. Buy.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies in the past fortnight:
■ Trakm8: Run profits at 195p, target 220p; Character Group: Run profits at 518p, target 575p; Marwyn Value Investors: Buy at 220p; Global Energy Development: Speculative buy at 30p; Software Radio Technology: Buy at 27p, target range 40p to 43p; Globo: Buy at 33p, target 69p; Pittards: Hold at 105p ('Cashed up for cash returns, 22 Sep 2015).
■ KBC Advanced Technologies: Buy at 112p, initial target 142p; K3 Business Technology: Run profits at 298p; Cenkos Securities: Buy at 177p; Netplay TV: Buy at 10p ('Small-cap value plays', 23 Sep 2015).
■ Miton: Buy at 26.5p, target 35p; 32Red: Buy at 73.75p, target 90p; Stanley Gibbons: Buy at 138p; Vislink: Buy at 40p, target 70p ('Building momentum', 29 Sep 2015)
■ Moss Bros: Buy at 97p, target 120p; GLI Finance: Buy at 52p, target 80p; Town Centre Securities: Buy at 315p, target 350p; Globo: Buy at 39p, target 69p ('Platforms for success', 30 Sep 2015)
■ Safestyle: Run profits at 255p; Epwin: Run profits at 138p; Manx Telecom: Buy at 188p, target 210p ('Income plays with capital upside', 1 Oct)
■ LXB Retail Properties: Buy at 86p, target 99p ('Bag a retail property bargain', 5 Oct 2015)
■ Creston: Run profits at 162p, target 171p; Fairpoint: Run profits at 184p, new target range 200p to 220p; Trifast: Buy at 114p, target 140p; 600 Group: Buy at 16p, target 24p; Renew Holdings: Buy at 315p, target range 350p to 375p; Stanley Gibbons: Hold at 105p ('Engineering ratings upgrades', 6 Oct 2015)
■ STM Group: Buy at 71p, target 80p ('Riding small-cap winners', 7 October 2015)
■ First Property Group: Buy at 39.5p, target 49p ('In pole position for re-rating', 7 Oct 2015)
■ Tristel: Run profits at 99p, target 110p ('Cleaning up with superbug buster', 7 Oct 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'
