Electronic components distributor Acal released an upbeat pre-close trading statement last week which sent the shares up 23 per cent to a 12-month high. They've now risen 41 per cent since I included them in this year's portfolio.
The company's electronics division, accounting for 75 per cent of group sales, continues to see improved trading and the pipeline of orders at the end of March was 20 per cent ahead of this time last year. As a result the group's operating profit in the second half was ahead of market expectations as was the company's cash pile, which stood at £23m before the €10m (£8.7m) acquisition of BFi OPTiLAS in December.
Brokers expect modest profitability of between £2m and £3m in the current financial year to end March 2011, but key to maintaining the impressive share price rerating will be further earnings upgrades later this year. That looks a distinct possibility, with the full benefits from the BFi OPTiLAS to come and underlying operating margins set to revert from their cycle trough of around 2.5 per cent to a mid cycle level of 5 per cent. So with the shares trading in line with net asset value and underpinned by a prospective dividend yield of 3.5 per cent, I would advise running your profits.
East London house builder Telford Homes revealed a fortnight ago that it will materially exceed City forecasts for the year to end March. When the company releases its results on 26 May analysts now expect the company to report pre-tax profits of £6.9m and EPS of 12.6p. There was also good news on debt, which was significantly reduced from £70m to £37m, reflecting a 11 per cent hike in completions in the period, receipt of grants and proceeds from a £7.2m placing.
This upbeat news was the catalyst to send the shares up 11 per cent and there should be more upside to come as they still only trade on a 25 per cent discount to net asset value. Moreover, balance sheet gearing is looking far more comfortable at around 55 per cent, so the debt worries that previously held the shares back should be a thing of the past. In turn, this offers scope for the shares to fall into line with other house builders and trade closer to their net asset value of around 135p.
Bargain portfolio status
| Company | Price on 11.02.10 | Price on 26.04.10 | % chng since 11.02.10 |
|---|---|---|---|
| Acal | 141 | 200 | 41.8% |
| Delta* | 140 | 184 | 34.9% |
| Bowleven | 113.5 | 139.75 | 23.1% |
| Telford Homes | 91 | 102.5 | 12.6% |
| Gleeson (MJ)** | 130 | 127.5 | 9.6% |
| KBC Advanced Technologies | 45 | 48 | 6.7% |
| Jacques Vert | 16.25 | 15 | -7.7% |
| Bloomsbury Publishing | 124 | 110 | -11.3% |
| Average | 13.7% | ||
| FTSE All Share | 2644 | 2969 | 12.3% |
* Delta received a cash bid of 185p a share on 4 March 2010 and return includes payment of 4.8p dividend on 26 Apr (ex-div: 7 Apr) ** Gleeson paid out a special dividend of 15p a share and share price return reflects this payment Benchmark prices are taken at close of trading on 11 February to reflect the prices readers could trade at when the magazine was published on 12 February | |||
It now looks likely that UK industrial group Delta will succumb to the low-ball recommended cash bid from Valmont Industries, a corporation listed on the New York Stock Exchange. Last month, I made a strong case (Delta, Delta, 8 March 2010) that Valmont's offer, which equates to a modest 25 per cent premium to net asset value and represents an exit multiple of nine times Delta's earnings per share, was far too low for a business that is generating an impressive post-tax return on equity in excess of 16 per cent.
However, after a rival suitor pulled out of takeover talks, and Valmont and Delta's board agreed to improve the terms of the offer by paying the final dividend of 4.8p a share, the bid has now received acceptances from 48 per cent of shareholders. Ahead of the next closing date of Wednesday 28 April and, in the absence of any other bidder coming on the scene, this looks a done deal. So if you followed my advice to buy the shares at 140p in mid-February, the safest option is to sell in the market now at 184p and crystallise the 35 per cent gain to mitigate the risk that Valmont fails to get enough acceptances for the bid to go unconditional. If that were to happen Delta's share price would fall sharply as investors who have been playing the bid situation head for the exit. In the circumstances, it is best to bank the hefty profit now.
About the bargain portfolio
In February each year, I screen every single company listed on the London stock market using selection criteria based on ideas outlined more than 60 years ago by the grandfather of value investing, Ben Graham. The strategy is to uncover companies whose share prices are trading well below intrinsic value, and where there is clear potential for the valuation gap to narrow over the coming year. The catalyst for a rerating is usually an improvement in the company's operational performance, but sometimes it can be driven by other factors like takeover bids.
It's a trading system that has stood the test of time. Since 1999 my annual Bargain Portfolios have returned an average annual gain of 14.8 per cent against a meagre 0.2 per cent annual return on the FTSE All-Share. This year's motley crew are keeping up this fine record, rising by 13.7 per cent on average in the past 10 weeks.
