However, this is the mouth watering investment we have on offer with international rare coin, banknote, medal and stamp dealer and auction house Noble Investments (NBL: 167p) which is due to report its results for the financial year to 31 August 2012 in little over six weeks time. To say the market has got this one wrong would be the understatement of the year as this is a company that is set to grow profits by 25 per cent and raise its dividend by 17 per cent.
Clearly, Noble is off the radar of most investors otherwise the shares would not be priced on such an anomalous earnings multiple. It’s not a difficult business to understand either as Noble operates through two main business units: Baldwins, which was established in 1872 and is a leader in the field of numismatics; and Apex Philatelics, which focuses on the auctioning of world stamps. These niche segments of the alternative investment world are attracting increasing amounts of interest and Noble calculates there are now around 30m stamp enthusiasts worldwide and over 10m rare coin collectors. Moreover, this is a highly profitable area to be operating in.
At the interim stage, Noble raised its pre-tax profits from £1.5m to £2.4m helped by the success of the ancient Greek Prospero auction in New York which raised $26m (£16m) in January. For the second half to end August, analyst John Goodall at broker WH Ireland is forecasting profits of £1.4m, more or less in line with the same six month period last year. That’s hardly exacting and, if achieved, would mean Noble reporting pre-tax profits of £3.8m for the 12-month period as a whole and EPS of 19.7p, up from £3m and 15.2p, respectively, in the prior financial year. What’s more, underpinned by decent cash generation - cash balance rose by £1.9m to £3.3m in the first half alone - Mr Goodall expects the full-year dividend to be raised from 4.3p to 5p a share. Conceivably, the board could be even more generous having already raised the interim pay out by 29 per cent to 2.25p. With managing director and Noble’s founder, Ian Goldbart, holding 10.65 per cent of the share capital, insider interests are aligned with other shareholders, too.
So with the share price currently around 167p, the forward yield is a decent 3.1 per cent and the PE ratio a miserly 8. But it’s worth pointing out that Noble’s net cash balance at the interim stage equated to 13 per cent of the company’s market value of £25.5m. Strip out low-yielding cash, equivalent to 21p a share, and the prospective PE ratio drops even further to 7. Worth noting, too, is the company’s rock solid balance sheet and one that looks very conservative. In fact, Noble’s last set of accounts reveal that the London headquarters are in the books for £1.13m whereas Mr Goodall believes the market value of the property is nearer £3m. Inventories of coins acquired as part of the takeover of AH Baldwin seven years ago are being significantly undervalued, too. Factor in annual price appreciation of 10 per cent over this period and, if these stocks are marked to market value, this would add a further £1.8m to the company’s net asset value according to Mr Goodall. That’s important because adjusting for these two factors boosts Noble’s last reported net asset value from £16.7m to £20.35m, the equivalent of 131p a share. To this you can add around 7p of EPS for the six months to end August less the aforementioned interim dividend pay-out of 2.25p. In other words, by my calculations, Noble’s pro-forma net asset value at the end of its August year-end was around 136p a share which means the shares are being valued on a very modest price-to-book value multiple of 1.2.
Not only is that well into bargain basement territory, but investors are also ignoring the fact that both gold and silver prices are soaring once again, buoyed by the combination of the European Central Bank’s sovereign bond buying programme and money printing on both sides of the Atlantic. This should be good news for the rare coins market since the opportunity cost of holding this type of alternative investment is incredibly low in such a low interest rate environment and demand is likely to be buoyed further by investors wanting exposure to precious metals. Rising gold and silver prices should also further stimulate demand amongst Noble’s 45,000-strong active client base of collectors who have been enjoying strong returns over the past few years.
The longer-term investment case is equally sound as the ancient coin market is, by its nature, constrained on the supply side. As such, growing investor interest in the market should help support rising prices over the medium to long-term as has proved the case in the past. According to Noble, rare coin collections have achieved compound annual returns of between 8.7 to 10.5 per cent over a period of 50 years plus, easily outstripping the performance of the FTSE All-Share.
Interestingly, from a charting perspective, the share price is at a major support level with the 14-day relative-strength indicator (RSI) in heavily oversold territory. Add to that the obvious value inherent in the company based on a fundamental investment approach and I rate the shares, at 167p, a very strong buy ahead of the forthcoming full-year results. My conservative two month target price is 200p.
