By 10.50am on Friday 19 October almost 900,000 shares had been traded and there were some big buys, including two trades of 200,000 shares each (at 39p) and another of 110,000 shares (at 39.9p). This buying pressure was enough to move the share price up 4 per cent today to a tight spread of 39.75p to 40p, within touching distance of a major share price breakout and one that would be confirmed if the shares close above February's intraday high of 41p. Moreover, this follows high trading volumes yesterday when over 1m shares traded, which was enough to push the shares up 5 per cent. To put this into perspective, Communisis has 138m shares in issue so an eye-catching 1.5 per cent of the share capital of the £53m small-cap company has been traded since the start of yesterday.
The catalyst for the share buying is simple enough: Communisis hosted an investor day yesterday and clearly those attending have decided to back the company's management. This is good news for us as eight weeks ago I reiterated my advice to buy the shares ('Bargain basement small-cap buy', 20 August 2012) when they were priced at 34.5p, having first highlighted their potential six months earlier when they were ludicrously priced at 28.5p ('Small-cap trading buy', 13 February 2012). It's also worth pointing out that the institutional buying is based on sound foundations.
Strong fundamentals
For the current financial year to end-December 2012, brokers expect the company's underlying pre-tax profits to increase from £9m to £10.5m to produce adjusted EPS of 5.7p, up from 4.4p reported in 2011. And, following upgrades, pre-tax profits are now forecast to rise to £11.2m and £11.8m, respectively, in the next two financial years to produce EPS of 6.1p and 6.5p. To put the strength of the earnings upgrade cycle into perspective, those 2013 estimates are 26 per cent higher than N+1 Brewin's numbers in March last year.
But this earnings upgrade cycle has yet to be fully reflected in the company's valuation as the shares, at 40p, are only rated on seven times current-year earnings forecasts, falling to 6.5 times in 2013. There is a decent yield, too, as factoring in a 10 per cent increase in the half-year payout to 0.55p (ex-div: 5 September) and a likely 10 per cent hike in the final dividend to 1.1p as analysts predict, the prospective dividend yield is over 4 per cent.
Substantial asset backing
Communisis shares are still deep in bargain-basement territory if we adopt a balance sheet approach as the company's market value of £53m is significantly below net asset value of £128m. Or, to put it another way, we are getting 51.5p a share of assets thrown in for free for every share we buy at 40p.
Chart breakout
If Communisis' share price can rise and close above 41p, as I firmly believe it will, then a major share price breakout will have been confirmed, opening the door to an immediate rise to the previous high of 49p in January 2009. If this is cleared, which I also believe is highly likely, a move to a major former support level at 55p is on the cards. This 55p level supported the share price between August 2006 and September 2008 before it finally gave way when markets crashed post the Lehman Brothers collapse in the autumn of 2008.
Trading strategy
Although Communisis' share price is up 39 per cent (on an offer-to-bid basis) since I first highlighted the company's recovery potential in February, on any basis they are still hugely undervalued. Given the improving technical situation, I now rate the shares a very strong short-term buy and upgrade my immediate target price to 49p, which, if achieved, offers us a potential 25 per cent further upside. Strong trading buy.
