In a nut shell, my aim is to seek out shares in companies which are priced well below intrinsic value, but have clear scope for significant re-ratings when others recognise the value on offer. A vast amount of research goes into the process to identify the best investment opportunities around, but it is well worth doing as it has reaped significant dividends for the loyal followers of this column. And post the corporate results season, a number of those recommendations are in need of an update.
Lights, camera and ready for action Stateside
Bollywood film producer Eros is seeking the love of investors on the New York Stock Exchange and plans to delist from Aim on Tuesday 8 May. Transferring its listing to the US main market looks a smart move for the company, because although the shares have performed relatively well since I advised buying at 247p (Movie Time, 22 February 2011), they remain significantly undervalued and have been for some time.
They have risen 16 per cent to 286.5p since my buy advice 14 months ago - during which time the FTSE Aim 100 index has fallen 17 per cent - but they still only trade on a miserly 10 times earnings estimates for the 12 months to March 2012, falling to around nine times for the current financial year. I can't see such a lowly rating lasting long once US investors get a chance to buy, and with good reason.
Firstly, as part of the initial public offering (IPO), Eros will be raising upto $250m (£156m) from new investors - so with a market value of around $800m when it lists in New York the company is large enough to be on the radar of institutions there. More importantly, the US listing will bring into focus the valuation discrepancy with its peer group on that stock exchange. For instance, Eros is currently being valued on a very modest enterprise value to cash profit forward multiple of nine times. To put that into perspective, that rating is a 10 per cent discount to Dreamworks and half the rating enjoyed by Lionsgate.
True, some UK investors may be unwilling or unable to hold US stock, but in my view this is likely to be more than offset by interest from US investors in what is a highly profitable and fast growing business exposed to emerging market growth on the sub-continent. Moreover, liquidity in the shares is likely to be much improved on the larger US market, which in turn will help the company enjoy a higher rating than in London as it will also benefit from a larger potential investor base.
It's worth noting that Eros is having a three-into-one share consolidation to facilitate the listing on the New York Stock Exchange. So if you followed my earlier buy advice, the new US-quoted shares will be credited to your broker's Crest account automatically, to replace the Aim-quoted shares. However, if you hold the shares in paper form, then a new certificate will be issued and you will only be able to trade the newly listed US shares through a broker offering such dealing facilities. Either way, with the company modestly rated against its US peer group, I expect the rerating - which started after news emerged of the planned US listing - to continue in the months ahead to remove the valuation anomaly.
Needless to say I continue to rate the shares a strong trading buy and have a 350p a share price target (TIDM: EROS) which equates to a New York Stock Exchange price of $16.80 post the share consolidation. Potentially that should offer us a further 22 per cent upside. If you would like to buy the shares ahead of the US listing, you can do so until Friday 4 May on the London market when the Aim-quoted shares will be suspended ahead of the US listing.
• Coming up tomorrow: updates on Communisis, Netcall, Moss Bros and other small-cap stock ideas from late 2011 and early 2012...
