Taking stock

Despite the market carnage in the last quarter, this year’s Bargain Share portfolio is creating a significant amount of Alpha. Including dividend income, the portfolio is showing an average gain of 11 per cent against a market that has risen 2.3 per cent since mid-February (Bargain Shares for 2010, 12 February 2010). Moreover, the UK stock market has fallen 9 per cent since I last updated the portfolio (Finding Alpha, 26 April 2010), whereas the return on my Bargain Share portfolio is only down less than 3 percentage points. And there is every possibility that this outperformance is likely to continue if recent newsflow is anything to go by.

Specialist electronics distributor Acal is providing an exciting recovery story and has managed to return to profit, reporting underlying pre-tax profit of £700,000 for the second half and like-for-like sales growth of 18 per cent since the March year-end. Restructuring has trimmed the company’s cost base and improved margins as has a shift in focus towards the supply of niche, higher-margin specialist electronics, where Acal is European market leader. Trading at a 12 per cent discount to the end March net asset value of 183p a share, including net cash of 49p, the share price is underpinned by significant asset backing. Acal’s shares also remain an attractively priced recovery play at 167.5p, with analysts expecting EPS of 6.4p in the current financial year, rising to around 20p the year after.

Women's retailer Jacques Vert also put in a chic performance, more than doubling operating profits from £2.4m to £5.35m in the year to 24 April, helped by higher gross margins, an improved sales performance from the company’s online offerings and from its Jacques Vert and Precis Petit brands, in particular. Like-for-like sales rose 2.8 per cent in the 12 month trading period and this sales momentum has continued into the current financial year with total sales 3.8 per cent ahead in the nine weeks since the end of April.

Moreover, with net cash of £12.6m on the balance sheet - equating to 6.5p a share - and cash generation robust, the company has made a return to the dividend list after a break of 15 years. The final dividend of 0.65p goes ex-dividend on 15 September and means the shares, at 17.25p, sport a 3.8 per cent yield. And with broker Seymour Pierce expecting pre-tax profits of £5.5m and EPS of 2.6p in the 12 months to end April 2011, you can still buy into this recovery story on a modest 7 times earnings estimates.

In a pre-close trading statement, refineries-focused engineering consultant KBC Advanced Technologies has reported an improvement in trading conditions. June was the company’s best month this year with £6m of new contract wins and the consultant workforce is busier than at any time this year. Consultant utilisation rates are expected to improve further as the year progresses underpinned by a strong pipeline of sales contract opportunities and an order book of around £40m, close to the level at the end of 2009. KBC is also keeping a close eye on costs and has reduced its annualised fixed cost base by a further £1.3m. This helps support brokers' pre-tax profit estimates of £5.1m for the current financial year which means the shares trade on a modest 7.5 times earnings forecasts of 5.9p a share. Add on a yield of around 3.5 per cent and a cash rich balance sheet and the investment case remains pretty solid.

Shares in Bowleven, the West Africa focused oil and gas exploration group, have risen 34 per cent and received a boost last week following a positive update from an appraisal well that Bowleven is drilling to test its IE gas discovery off the coast of Cameroon. The low-risk prospect could potentially hold 32m barrels of gas condensate and 27m barrels oil equivalent of gas and news is expected in the coming weeks. The IE-3 well was drilled to a final depth of 3,048 metres and the company is currently preparing to conduct a multiple test programme of up to four drill stem tests. Once complete, Bowleven will start drilling the nearby but higher risk MLHP-5 exploration well which has potential for up to 500m barrels of oil equivalent.

The shares admittedly have a higher-risk profile due to the nature of the business, but underpinned by net assets of 142p a share and net cash of around £72m, the risk:reward ratio remains favourable and the shares remain a buy at 152p.

MJ Gleeson, the urban regeneration and strategic land specialist, has boosted its burgeoning cash pile by £6.6m after selling its Powerminster subsidiary to Morgan Sindall. Powerminster provides planned and responsive repairs and maintenance services, largely for social housing bodies, and was deemed non-core. Gleeson's big attraction remains the strength of its debt free balance sheet and this deal highlights the significant value in the company’s assets. By my calculations Gleeson is now sitting on £19m of net cash even after paying out a special dividend of 15p a share this year and retains pro-forma net assets of 183p a share. Admittedly it will take time to realise the value in the company’s landbank of 3,858 acres in the south of England, including 1,700 plots of residential land with approved planning consent. However, with the shares trading at 109p - 40 per cent below net asset value - and the company rewarding shareholders with bumper payouts, the potential long-term returns for shareholders could be significant.

Shares in Telford Homes have yet to make any headway, but operationally the business looks to be on solid foundations. The company reported at last week's annual meeting that conditions in its heartland, the East London property market, have been improving and a steady rate of new sales has been achieved on its completed developments. In the past seven weeks the company has sold around 60 homes to take the current year sales to 153 units. In the 12 months to March 2010, Telford sold 389 units and reported pre-tax profits of £8.1m, a 10 per cent rise on the prior year.

The investment case for buying Telford's shares lies in the value in its developments and land bank and the ability of the company to crystalise this. On both counts progress is being made which makes the yawning gap between the company’s net assets of 126p a share and its current share price of 85.5p anomalous. And with net borrowings reduced to £37.2m from over £100m a year ago, there are no funding concerns as gearing is pretty conservative at 59 per cent. Investors also have a useful 2p a share dividend to generate some income while Telford is realising the value of its assets.

The performance of Bloomsbury Publishing shares has been far from magical as the publisher repositions itself post Harry Potter. However, on the trading front the company has enjoyed a buoyant first quarter in the UK with both academic and professional lists in its UK specialist division performing ahead of internal budgets and the trade division reporting high demand for its current and backlist. In addition, Bloomsbury's Public Library Online now reaches over 5m people in the UK through 10 library authorities and Bloomsbury started expanding the service internationally last month. And progress is being made boosting margins in the German business while in the US, the academic business is gathering momentum.

The balance sheet remains as robust as ever with net cash of £37m, or 50p a share, at the end of April, accounting for almost half the market value. Trading on a 25 per cent discount to net asset value of 153p, the shares continue to rate a medium-term recovery play at 116p.

Trading Updates

If you followed my advice to buy shares in Ideal Shopping Direct (IDS) last autumn at 91p (Investing in an Ideal World, 12 October 2009) you are now 74 per cent in profit with the shares at 158p. It could potentially get even better as the board is now conducting a strategic review which may lead to the sale of the company. It is therefore worth noting that IDS is sitting on £13.4m of net cash, has freehold property on its balance sheet worth £6.7m and retains unutilised tax losses to offset the corporation tax liability on its profits. Brokers at Singer Capital Markets expect the profit recovery to gather momentum, forecasting adjusted pre-tax profits of £5m this year and EPS of 12.3p, rising to £7.5m and 15.5p in 2011. Bid or no bid, the shares continue to rate a strong recovery buy and I maintain my previous fair value estimate of 200p a share.

Property investment company Wichford is continuing to make progress on extending its credit facilities. The company has now completed on all the necessary acquisitions to extend both its Gamma and Delta facilities, accounting for 60 per cent of total borrowings of £521m, it has extended its £46m Zeta facility until May 2013 and has been granted a loan-to-value waiver on its €53.6m VBG2 facility. The company continues to pay out significant dividends and we have banked dividends of 0.63p since I advised buying the shares at 8.125p when the company was in the process of raising £52m by way of a seven-for-one rights issue at 7p a share (Real estate profits, 17 August 2009). Trading on a modest discount to EPRA net asset value of 8.56p and yielding over 8 per cent, Wichford shares still have decent medium-term prospects at 7.75p.

Sometimes it is better to travel than arrive and the rollercoaster journey on ITV shares is a case in point. Having made a strong investment case at 61p (Tune into ITV, 6 April 2010) ahead of May’s trading update, placing a 75p three month target price, the shares duly rallied to 71.75p by the end of April before being battered in the market carnage which triggered my 50p stop loss. In hindsight I should have placed a trailing 10 per cent stop-loss on the position to protect those quick fire gains.

I decided not to buy the rejects of the FTSE 100 trade following the June FTSE International index review. The last trade in March - buying Resolution which was rejected from the index and simultaneously short selling the FTSE 100 - turned in a modest profit, but this trade is only a bull-market phenomenon and I remain cautious given my outlook on equity markets.

Finally, shares in interior furnishings group Walker Greenbank, whose brands include Sanderson, Morris & Co., Harlequin and Zoffany, have risen 22 per cent to 27p since I recommended buying ('Luxury at a bargain price', 8 February 2010), but have slipped from April’s 12-month high of 36p. This looks a buying opportunity to me as analysts expect adjusted EPS to rise from 3.1p to 4p in the year to January 2011, based on a recovery in underlying pre-tax profits from £2.4m to £3.1m. The dividend is also expected to be raised 30 per cent to 0.65p a share. And there is every reason to expect these forecasts to be hit as the comparables with last year’s first half are pretty soft and trading has been going well. The company will next update the market at its annual general meeting on 28 July which could be the catalyst for a rerating towards my 40p February 2011 target price.