A good example is property and construction firm Henry Boot (BHY: 220p) whose shares I have more than a passing interest in, having recommended buying them at 205p a year ago (‘A bootiful investment’, 19 February 2015), and last re-iterated that advice at 220p a few weeks ago (‘Playing the housing market’, 3 February 2016). When I initiated coverage the six board directors had an average tenure of over a decade each including those holding non-executive positions. Since then the company has reshuffled the board (‘Planning for success’, 9 September 2015).
Jamie Boot, who has 30 years’ service with the company, stepped up from chief executive to non-executive chairman; John Sutcliffe, who had been finance director for nine years, became chief executive; and Darren Littlewood, who was previously group financial controller, took the reins as finance director. The board also appointed three new non-executive directors at the time. The point being that Henry Boot has maintained the quality of management with negligible disruption whatsoever to the actual running of the business.
Clothing retailer Moss Bros (MOSB: 102p), whose shares I have been keenly following for the past four years, fits the bill too, with the main board of directors having over six years experience each. I first spotted the company’s recovery potential when the shares were trading at 39p ('Dressed for success', 20 February 2012), so the holding has done well.
It’s therefore of interest to note news that finance director Robin Piggott, who has held the role since 2010, will be retiring next summer. The changeover should be pretty seamless as his replacement, Tony Bennett, currently holds the same position with the upmarket shirt maker and clothes retailer, Charles Tyrwhitt, a company he joined almost seven years ago, having previously been head of commercial finance at Selfridges. It’s a smart choice as Mr Bennett brings a wealth of experience in online retailing, and running an international consumer business. Moss Bros is in the process of expanding its presence in these operations, so the appointment is timely too.
In addition, a new chief operating officer, Paula Minowa, will join the company next week, having been poached from German multi-channel lifestyle retailer Straus Innovation where she was chief executive. Moss Bros chief executive Brian Brick, who has held that position for almost seven years, points towards her strong experience in brand management, multi-channel retailing and management credentials within international businesses. The appointments look sensible to me and having last updated the investment case post an upbeat pre-close trading update when the share price was 97p (‘An awesome foursome’, 18 January 2016), I feel prospects are favourable for more upside.
In fact, offering a prospective dividend yield of 5.2 per cent, rated on 16.5 times cash adjusted EPS estimates of 5.2p for the next financial year (January 2017 year-end) after stripping out current net funds of 17p a share, and on a modest enterprise value to cash profits multiple of 6.75 times, I believe that a target price of between 120p to 130p is achievable.
On a bid-offer spread of 100p to 102p, I rate Moss Bros shares a buy.
Board room ousting at Mind + Machines
Of course, it’s not always possible to find companies whose boards have long tenure. Nor is it always possible for the changeovers to be as seamless as those at Moss Bros, or Henry Boot. In fact, the board of a constituent of my 2016 Bargain shares portfolio, Mind + Machines (MMX: 8.5p), has just announced that chief executive Anthony Van Couvering has been removed from office with immediate effect and has been replaced by chief marketing officer, Toby Hall.
The company provides services in all areas of the domain name industry, ranging from registry ownership to consumer sales, and in particular, is primarily focused on the new generic top-level domain (gTLD) space which is organised and regulated by the Internet Corporation for Assigned Names and Numbers (ICANN). ICANN has been expanding the number of generic top-level domains (gTLD) beyond the standard dot.com web addresses which is why Minds + Machines is of interest to me as it’s a major player in this niche industry, having built a portfolio of over two dozen of these new domains including .miami, .work, .law and .london. In fact, it now has around 279,000 gTLDs under management, or 2.5 per cent of the total. As I pointed out in my article earlier this month, the cash rich company has been stepping up efforts to monetise the value of these gTLDs, and the ousting of Mr Van Couvering clearly indicates that the other board members felt that there was a better individual to lead this strategic move.
Guy Elliott, co-founder and non-executive chairman, notes that the board was unanimous in its decision, adding that with the company making the transition from asset gatherer to monetisation of its leading portfolio of top-level domains “a fresh approach is required to assist in this process in order to fully exploit the revenue potential of our leading portfolio”. This is the second major change to the board this month after Mr Elliott moved up from the role of non-executive director to chairman, Michael Salazar took up the dual position as chief operating and finance officer, and Henry Turcan, an experienced corporate financier based in London, joined as non-executive director.
Mr Turcan is also director of UK Smaller Companies at Henderson Volantis Capital, the company's 22 per cent shareholder, having previously founded Novum Securities, an independent UK based stockbroking house in 2006, and has also been a corporate finance director at investment bank Evolution Group.
I actually see this latest board change in a positive light especially as the focus of the board is clearly on maximising shareholder returns in the best way possible, including that of the company's 22 per cent major shareholder. And it’s not as if the insiders are not backing this strategy with their own money. Indeed, Mr Elliott acquired 230,000 ordinary shares at a price of 8.41p per share shortly after my Bargain shares article was published on Friday, 5 February 2016. As a result, he is now interested in 21.9m shares, representing 2.89 per cent of the issued share capital. Mr Salazar owns 1.63m shares, representing 0.22 per cent of the issued share capital.
So, with 42 per cent of Mind + Machines market capitalisation of £64m backed by net cash of £27m, and the company owning over $40m (£28.2m) of domains on its balance sheet, I still believe that the risk reward is favourable if the new management team can move the operating business to break-even this year as is being targeted and looks achievable. News from a pre-close trading update ahead of results on 27 April 2016 was very encouraging, and on a bid-offer spread of 8p to 8.5p, I continue to rate the Aim-traded shares a bargain buy.
Boardroom changes at Creston
My decision to run profits at small small-cap marketing communications company Creston (CRE:103p) has proved costly (‘Engineering ratings upgrades’, 6 October 2015). The price at the time was 162p, representing a 37 per cent paper gain on the 118p buy in price when I initiated coverage ('Buy the break out', 4 November 2014), and well in excess of my 150p target price.
However, a profit warning at the end of January has seen the price retreat sharply. The problem being that although third quarter trading in the three months to end December 2015 was up 2 per cent on a like-for-like basis, Creston’s clients have become jittery since the start of 2016 in light of the changing economic background and are either cutting or putting spend on hold. A good run rate of new business wins is compensating to some extent, but not enough to prevent analyst Johnathan Barrett at brokerage N+1 Singer from slashing his EPS estimate by 17 per cent to 10.9p in the 12 months to March 2016, and by almost a fifth to 11.5p in the 2017 financial year. These forecasts are well down on the 13.1p of EPS posted in the 2015 financial year.
The savage downgrades also reflect growing headwinds facing Creston’s businesses. For instance, revenues earned from clients automotive group Jaguar, mobile telecoms giant EE and data centre operator Telecity will be impacted in the 2017 financial year due to consolidation or changes to marketing approach, while recent changes impacting the business include the relocation of food giant Danone, the merger of life assurers Aviva with Friends Life, and the exit of the chief marketing officer of technology group Canon, Creston’s second largest client, all of which are delaying projects.
Richard Huntingford, non-executive chairman, will step down from the board at the end of March and a representative from Creston’s largest shareholders, DBAY Advisors, which owns 25 per cent of the share capital, will take his role as an interim measure while a replacement is found.
The main issue concerning me is that although Creston’s shares are hardly expensive, trading on 10 times earnings for the current financial year, and offering a prospective dividend yield of 4 per cent plus, if the economic conditions that are undermining its businesses deteriorate any further, and I feel they easily could, then clients will rein back marketing spend even further. The 2016 financial results will also carry impairment charges against goodwill on businesses acquired.
In the circumstances, I feel more comfortable recommending that you exit the holding and. With the shares priced on a bid-offer spread of 103p to 104p, and after accounting for total dividend of 5.6p a share since I initiated coverage, the net loss is around 8.5 per cent on the holding, a far cry from the 37 per cent paper profit last autumn. Sell.
MORE FROM SIMON THOMPSON...
I have written articles on the following 74 companies since the start of this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)
■ 32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)
■ BP Marsh & Partners : Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)
■ Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)
■ Bloomsbury Publishing: Buy at 150p, target range 175p to 185p ('Book into a trading play', 11 February 2016)
■ PV Crystalox Solar: Speculative buy at 8.2p ('Lights brighten at PV Crystalox Solar', 11 February 2016)
■ Alpha Real Trust: Buy at 80p, target 105p ('High yield property play', 15 February 2016)
■ LMS Capital: Buy at 68p; Leaf Clean Energy: Await news on Invenergy; Eurovestech: Sell at 7p (‘Investment company watch’, 16 February 2016)
■ GLI Finance: Buy at 31p (‘GLI Finance review offers potential for gains’, 17 February 2016)
■ Trifast: Buy at 112p, target 140p (‘Engineered for a higher rating’, 17 February 2016)
■ 600 Group: Sell at 10p ('600 Group warns', 17 February 2016)
■ Marwyn Value Investors: Buy at 190p (‘Undervalued, cash rich investment, 18 February 2016)
■ 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
