The underpricing of shares in investment company LMS Capital (LMS: 80p) is a case in point as I noted yesterday ('LMS tender in the money', 1 Dec 2015), otherwise we shouldn't have been able to make a quickfire 15 per cent return simply by buying the shares a fortnight ago ahead of the formal announcement of details of a substantial tender offer. Investors could have done the sums, as I had done, and spotted the anomaly.
Another good example is that of the sixth-largest car dealer in the UK, Vertu Motors (VTU: 68p), whose shares were marked down to my recommended buy-in level of 66p ('Poised for a strong rally', 6 Sep 2015) when the Volkswagen global emissions testing scandal was grabbing the headlines. As I noted when I updated my view at the time ('The virtue of Vertu', 15 Oct 2015), the scandal represented an opportunity to exploit rather than a cost to this niche retail sub sector.
Investors have cottoned on and Vertu's share price has risen 15 per cent to 78p in the past six weeks and in a flat market, too. It's now approaching my previous fair value estimate of 80p to 85p, a level at which the rating would still be a reasonable 12 times EPS estimates of 6.3p for the financial year to the end of February 2017 after stripping out the company's cash pile. But there is scope for those earnings to be upgraded given that Vertu's board has been making some astute acquisitions to make better use of its bumper cash pile and strong cash generation.
The cash generation of existing businesses is playing its part, too, as net cash more than doubled to £32.1m between February and August this year, a sum worth almost 9.5p a share, or 12 per cent of the company's share price. Redeploying this cash into earnings-enhancing acquisitions only makes sense.
Earnings-enhancing acquisitions
And that's exactly what the company has been doing. Not only did Vertu acquire a Volkswagen and Audi dealership based in Hereford for a bargain six times cash profits in early October, using £12.8m of that cash pile, but it has just acquired Aceparts, a well-established non-franchised online vehicle parts business (www.aceparts.com) headquartered in Sittingbourne, Kent. The latest acquisition offers scope for synergy benefits with Vertu's franchised parts operations. It will also be earnings enhancing immediately as the initial cash consideration of £1.8m represents a multiple of three times Aceparts' cash profits in the financial year to the end of March 2015. It's high margin, too, as those cash profits earned a decent margin of 16 per cent on sales of £4.8m in the 12-month period.
It's certainly an interesting acquisition and one that will lead to upgrades when analysts tweak their numbers again. Prior to the Aceparts deal, EPS estimates for the 12 months to the end of February 2016 were around 5.82p based on Vertu's full-year pre-tax profit increasing by 15 per cent to £25.4m, rising to EPS of 6.3p on pre-tax profit of £27.5m for the following financial year. Add to that a dividend forecast to increase from 1.05p to 1.3p a share in the current financial year (February 2016 year-end), rising to 1.5p the year after, and in my opinion Vertu's shares still offer value. In fact, I am tweaking my target range to 85p to 90p ahead of analysts' earnings upgrades.
Trading on a bid-offer spread of 78p to 78.5p, I rate the shares a buy.
Please note that for a limited period of time, my book Stock Picking for Profit is being offered for sale at a promotional price of £11.99 plus postage, subject to availability, full details enclosed below.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies since the start of last week:
■ Ensor: Buy at 99p, target 125p ('Bid watch', 23 Nov 2015)
■ Marwyn Value Investors: Buy at 216p ('Cashing in on a top performer', 23 Nov 2015)
■ Trakm8: Run profits at 262p ('On track for record earnings', 24 Nov 2015)
■ Walker Crips Group: Buy at 49p, target 60p ('Profit from a profit surge', 24 Nov 2015)
■ Renew Holdings: Buy at 362p, new target range 390p to 400p; Cambria Automobiles: Buy at 73p, new target 90p; Tristel: Run profits at 142p; Pure Wafer: Sit tight at 165p and await details of capital distribution ('Running small cap winners', 25 November 2015)
■ Cohort: Run profits at 418p; Inland Homes: Run profits at 70p ('Riding momentum stocks', 26 November 2015)
■ Record: Hold at 28.75p ('Record awaits the Fed decision', 26 November 2015)
■ First Property: Run profits at 47.5p ('Investing for bumper gains', 30 November 2015)
■ Paragon: Run profits at 384p; Redde: Run profits at 174p; Fairpoint: Run profits at 175p ('Capitalising on investor overreactions', 1 December 2015)
■ LMS Capital: Tender your pro-rata allocation ('LMS tender on the money', 1 December 2015)
■ Vertu Motors: Buy at 78p, new target range of 85p to 90p ('In the fast lane', 2 December 2015)
■ MS International: Run profits at 210p, target bull market high of 240p ('Engineered recovery', 2 December 2015)
■ Mountview Estates: Buy at 11,500p ('Mountview's accounts reveal hidden value', 2 December 2015)
■ Character Group: Buy at 485p, new target 600p ('Playtime for a popular Character', 2 December 2015)
■ For a limited period and strictly subject to stock availability, Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com at a special promotional price of £11.99, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
