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Bargain shares 2013

Benjamin Graham, the father of value investing, once said: "If we assume that it is the habit of the market to overvalue common stocks which have been showing excellent growth, or are glamorous for some other reason, it is logical to expect that it will undervalue - relatively, at least - companies that are out of favour because of unsatisfactory developments of a temporary nature. This may be set down as a fundamental law of the stock market, and it suggests an investment approach that should be both conservative and promising." And that, in a nutshell, is what our bargain portfolios are all about.

The idea behind bargain shares is very simple. It's to invest in companies where the true worth of the assets is not reflected in the share price, usually for some temporary reason, but where we can reasonably expect that it will be in due course.

It is the very essence of stock-picking, and whatever fans of passive investment might say, it works: our portfolios have beaten the FTSE All-Share index in 12 out of the 14 years in which we have run them. During that time, they've generated a compound annual return of 15 per cent, which means that £10,000 invested in our first bargain portfolio, and reinvested every subsequent year in the following portfolio, would now be worth an impressive £70,000. To put this smart performance into perspective, the same investment in a FTSE All-Share tracker would only be worth £17,300 including the reinvestment of dividends.

And last year's motley crew of bargain shares maintained this impressive track record, producing a total return of 31.9 per cent on an offer-to-bid basis, which is mainly down to the fact that my portfolio was entirely small-cap based - a segment of the market that benefited greatly from the marked improvement in investor sentiment since the summer. Moreover, my 2012 portfolio only marginally lagged behind the total return of 34.6 per cent on the Fidelity UK Smaller Caps Fund in the same period, the best-performing small-cap fund out of the 56 funds in this segment in the past year, according to Trustnet. This is no fluke, either, because over the long run our record has stood the test of time, which has been in no small part down to the stellar performance from the unloved and undervalued small-cap shares we have consistently uncovered.

For example, my 2003 Bargain Share Portfolio rocketed by 146 per cent in its first 12 months and, if you held onto the shares, the portfolio then rose in value by a further 50 per cent in the following two years to produce a three-year return of 270 per cent. My 2004 portfolio produced a 17.1 per cent return in its first 12 months and then increased in value by a further 36 per cent in its second year to produce a 24-month return of 59.6 per cent. In recent years, both the 2009 and 2010 portfolios have soared in value, producing 12-monthly gains of 53 per cent and 46 per cent, respectively.

True, the collapse in share prices following the stock market crash in 2008 wreaked havoc with that year's portfolio, but readers who kept faith subsequently recovered all their paper losses, which highlights the solid asset backing of the companies. In fact, two of those companies from the 2008 portfolio - Indian Film Company and Raven Mount - succumbed to takeovers.

Mergers and acquisitions (M&A) activity has been a recurring feature of all my portfolios, as predators, attracted by the asset backing on offer, run their slide-rule over the numbers.

So, once again, I have run the rule over around 1750 listed companies on the Alternative Investment Market (Aim) and the main market to come up with a portfolio of companies where the asset backing should be strong enough to overcome any short-term trading difficulties and, in time, reward our loyal following of long-term value investors.

 

 

OAKLEY CAPITAL INVESTMENTS (OCL)

Aim: Investments

Share price: 141p

Bid-offer spread: 139.5p-141p

Market value: £178m

Website: oakleycapitalinvestments.com

Investors should expect good news when Oakley Capital Investments (OCL), a closed end Aim-traded investment company, reports full-year results in March. That's because the company, which takes stakes in private equity ventures established by its associated limited partnership, Oakley Capital Private Equity, and provides mezzanine debt finance, has just sold one of its holdings: Emesa, an online consumer auction and booking platform for the leisure sector. Oakley owned a 68 per cent equity stake in that business and will book a gain of over £7.5m on its £20.1m original investment. That equates to a valuation uplift of 6p a share for Oakley and means that the company's net asset value (NAV) at the end of December will have increased from 171p a year earlier to 180p. So, with the shares offered in the market at 142p, the company is being valued on a hefty 21 per cent discount to its NAV of £230m.

That discount looks unwarranted when you consider that prior to the Emesa disposal Oakley was sitting on around £70m, or 55p a share, of cash and deposits, which will have swelled by a further 22p a share when the £27m sale proceeds are factored in. In other words, pro-forma cash currently equates to 77p of the company's 180p NAV, so Oakley's other investments - worth 103p a share - are in the price for a bargain basement 64p a share. And it's not as if Oakley's seven main investment holdings, which have a carrying value of £119.5m, don't have potential for gains.

For example, the 51 per cent stake in Germany-based web hosting company Intergenia, a specialist in cloud computing and a business with over 7,000 sq metres of data centre space, increased in value by 12 per cent to £27.8m in the first half of 2012. Oakley also owns 84 per cent of Broadstone Pensions, a top 40 UK wealth manager with over £2bn of client funds under management. Since making an initial investment of £12.8m a couple of year ago, this stake has risen in value to £15.2m.

Oakley's other investments include a 50 per cent stake in Time Out London and 65 per cent in Time Out New York, valued at £25.8m at the time of the acquisitions in November 2010 and May 2011. This looks money well spent as Time Out has been growing its digital offering and now has 4.1m UK users, a rise of over 1.7m users in the past 12 months. Importantly, the business has been commercialising the increased online traffic and digital revenues rose by 75 per cent in the same period. Of interest, too, is the 14 per cent holding in Aim-traded Daisy Group (DAY), the fast-growing telecoms provider to small- and medium-sized enterprises (SMEs) and mid-market sectors in the UK, which now has a market value of £264m. This stake is in the books at £17.3m.

Admittedly, six major investors control 77 per cent of the share capital, which reduces liquidity in the shares, but nonetheless on a bargain rating of 1.28, Oakley's shares are a low-risk bargain buy.

 

Oakley's investment in Time Out looks like money well spent.

 

RANDALL & QUILTER (RQIH)

Aim: Insurance

Share price: 120p

Bid-offer spread: 118p-120p

Market value: £59.6m

Website: rqih.com

Founded in 1992 by executive chairman and chief executive Ken Randall and finance director Alan Quilter, Randall & Quilter (RQIH) is a specialist in managing the run-off of insurance companies and Lloyd's of London syndicates that have stopped underwriting new contracts, but have already settled liabilities arising from policies written.

This is a huge market estimated to be worth nearly £30bn in the UK alone - accounting for 15 per cent of the non-life insurance market - and in excess of $500bn (£316bn) globally. Managing the run-off of insurance companies and Lloyd's of London syndicates is also hugely profitable, which explains why Randall & Quilter's (R&Q) board has been able to pay out over 23p a share of dividends in the past three years. It's a sizeable operation, too, employing 400 professionals based in the UK, US, Bermuda and continental Europe, offering a wide service capability in both the 'live' and 'run-off' insurance markets. R&Q currently has a portfolio of 10 companies in run-off with net assets of £85.9m and owns a Lloyd's authorised managing agency and manages Lloyd's syndicates 102 and 3330, which are both in run-off.

R&Q's insurance investment business was the star performer in the first half of 2012, doubling operating profits to £6.47m, but the company's insurance services unit also makes decent returns from its principal activities of claims management, accounting, regulatory returns and reinsurance management. Profits here were up by 18 per cent to £2.3m in the same period. So, once you deduct central overheads and contributions from a couple of smaller divisions, the bottom line is that R&Q reported a 50 per cent hike in adjusted pre-tax profits to £4.6m in the first half of 2012. On the same basis, analysts at Numis Securities are looking for full-year pre-tax profits of around £9.2m and EPS of 13.4p, which will support a very progressive dividend policy: R&Q paid out dividends of 8.3p a share last year through share schemes, up from 7.65p in 2011 and 7.1p in 2010. To put that into perspective, at 120p, the shares are currently offering a chunky 6.9 per cent historic yield covered 1.6 times by forward earnings. They are modestly rated, too, on a PE ratio of nine. True, Mr Randall and his son both sold 1m shares each this week at 110p, but they still retain combined stakes of over 19m shares, or 38.2 per cent of the share capital, so I am not concerned by this selling.

The investment case is even more compelling when you consider that £13m of the company's net assets of £72.6m are in effect in the price for nothing. On a bargain rating of 0.95, and with the high-yielding shares trading 14 per cent below book value of 139p, R&Q is significantly undervalued. Buy.

 

INLAND (INL)

Aim: Property development

Share price: 22p

Bid-offer spread: 21.75p-22p

Market value: £40.3m

Website: inlandplc.com

Inland (INL) is a residential and mixed-use property development business specialising in buying brownfield sites and enhancing their value, primarily for residential and mixed-use development. The company acquires properties with development potential, applies its experience in planning to win consents and approvals and then either sells consented land to housebuilders or works with its associated company, Howarth Homes, or another main contractor, to build, market and sell homes.

Since its incorporation in June 2005, Inland has sold a total of 926 building plots on 26 sites and 68 completed units on two sites and currently owns or controls over 1,300 building plots with planning permission and over 450 potential building plots. So it's hardly a surprise that with the housing market in far better shape than it was a few years ago, business has improved considerably. For example, in the second half of last year, Inland sold 44 plots to a national housebuilder at its Queensgate development in Hampshire for £3.1m, and completed 14 more homes. It's worth pointing out, too, that contracts are in hand for a further 283 plots, worth around £10m, which means that we could be in for some bumper trading news when Inland next reports in March.

Land sales aside, analyst Duncan Hall at brokerage finnCap expects Inland to make residential sales of around 85 units, equating to £6m in total, in the current year. But sales are set to ramp up quickly in the 2013-14 financial year when both the St John's Hospital site in Chelmsford and Carter's Quay development in Poole are forecast to deliver 50 completions each. In turn, annual revenue from housebuilding is expected "to rise quickly to £20m and the profit stream comfortably covers group operating costs", according to Mr Hall. It certainly makes sense for Inland to step up its housebuilding activities since it’s still hard to raise bank finance against pure land purchases, although the company did raise £8.5m through an issue of zero dividend preference shares at a redemption of yield of 7.3 per cent per annum at the end of last year which gives it flexibility to do deals. Prior to that fund raising, the company had net borrowings of £13.2m, so gearing was comfortable at 27 per cent of shareholders funds of £49.4m.

It's worth noting, too, that Inland has an off-balance sheet joint venture called Drayton Garden Village, Middlesex. In time, finance director Nishith Malde expects Drayton Garden to generate at least 5p of profits per share of post-tax profit. Analysts concur with that forecast.

So, with land holdings underpinning the company's valuation - Inland could have 770 consented plots worth £46m, or 25p a share by its June financial year-end - and with pre-tax profits set to more than double from £1.6m to £3.4m as revenues soar from £6.1m to £20m, expect bumper financial results when Inland issues figures in the third week of March. Trading on a 20 per cent discount to book value of 27p a share and on a bargain rating of 0.79, Inland's shares are built on solid foundations.

 

TERRACE HILL (THG)

Aim: Property development

Share price: 16.25p

Bid-offer spread: 15.75p-16.25p

Market value: £34.8m

Website: terracehill.co.uk

Shares in Aim-traded property development and investment company Terrace Hill (THG) have performed poorly over the past couple of years, but there are signs that investor interest is starting to return and with good reason, too.

That's because the company has been making stellar progress selling off its residential property to focus on more profitable food store developments where it is a major player. In fact, over the past three and a half years the company has developed or is in the process of developing new food stores to retailers in seven locations covering an aggregate floor space of over 500,000 sq ft and with a combined capital value of £121m. Currently, three new stores have been pre-let, forward funded and are under construction, another four sites are in the planning process and a further nine sites are under consideration. Forward funding the purchases mitigates risk to Terrace Hill and offers shareholders the visibility of net asset growth as profits from these schemes are banked when supermarkets complete on their property purchases. And even though the food store market is less buoyant than it once was after Tesco reined in its store expansion, Terrace Hill's chairman Robert Adair, who owns 62.87 per cent of the issued share capital, notes that the major retailers are "still acquisitive for sites that fill gaps in their portfolios". The company's clients include Sainsbury's and Asda.

 

 

In my view, investors are ignoring the fact that Terrace Hill has a secure pipeline of foodstore projects, with a build-out value of over £240m, so it's hardly short of work even if market leader Tesco has scaled back UK store expansion. That news has proved a drag on the shares and means that they are priced a hefty 38 per cent below EPRA net asset value of 26.8p. True, debt maturity on the company's loans is short-dated and has an average maturity of only 12.5 months but, with a loan-to-value ratio of less than 50 per cent and balance sheet gearing of 52.6 per cent, refinancing credit lines should not be an issue. Moreover, net borrowings have been cut from £51.4m in September 2011 to £31.7m at the start of this month, and are set to fall further as Terrace Hill exits its residential investments.

 

 

Trading on a bargain rating of 0.57 and on a massive 38 per cent discount to book value, expect the share price discount to narrow as food store schemes complete and Terrace Hill banks some chunky profits.

 

Bargain Shares Portfolio: 14-year track record

YearBargain Portfolio 1-year performance (%)
199959
200028.1
20012.5
2002-29
2003146
200417.1
200550
200616.9
2007-0.9
2008-60.1
200953.4
201046.1
2011-18.4
201231.6
Compound annual return15

Source: Investors Chronicle, returns on a total return basis

 

HERITAGE OIL (HOIL)

Main: Oil & gas

Share price: 202p

Bid-offer spread: 201.5p-202p

Market value: £521m

Website: heritageoilplc.com

A few weeks ago Tony Buckingham, chief executive of independent upstream exploration and production Heritage Oil (HOIL), commented: "The acquisition of an interest in OML 30 is proving to be a transformational deal for Heritage, providing significant increases in both production and cash flow".

His comments are not without foundation since OML 30, which is located onshore in the delta in Nigeria, less than 50 kilometres east of Warri in Southern Nigeria, was the largest of the five Shell onshore Nigerian assets sold in the past couple of years. In fact, it is one of the largest onshore licences in the country, with eight producing fields and associated infrastructure; gross proved and probable reserves of 1,114bn barrels of oil (bo); and daily production of 35704 bo, of which 11,350 bo is Heritage's share. It's certainly transformational as Heritage's average daily output was only 617 bo in the third quarter of 2012, all of which came from interests in Russia. Moreover, analysts at Canaccord Genuity believe that output could be ramped up to between 50,000 and 60,000 bo over the next year or so. OML 30 has an economic valuation of proved plus probable reserves estimated at between $3.1bn and $3.8bn (£2bn to £2.4bn).

Following a series of complex transactions to fund the $850m (£531m) acquisition, Heritage Oil has ended up with a 31.5 per cent equity holding in the investment vehicle controlling OML 30. The balance is held by Nigerian energy partner, Shoreline Energy. Importantly, by selling interests in the Miran fields in Kurdistan, Heritage funded its share without recourse to shareholders.

The acquisition not only provides significant production and cash flow to Heritage, which de-risks the company's financial profile, but there is potential to develop existing fields in OML 30 and raise output by refurbishing the gas lift system in producing wells and by restarting non-producing wells. OML 30 has over 200 wells, but only half are in production, mainly because many were vandalised in the period from 2006 to 2009. However, pipeline repairs should restore production from a large number of these wells. In the longer term, the plan is to drill over 200 new wells and restore approximately 60 wells to production with a focus on horizontal drilling. The lease on OML runs to 2019, but it is anticipated by Heritage, in accordance with the licence terms, that an extension of 30 years will be granted.

Heritage is not a one-trick pony, either, and has exploration assets in Malta, Tanzania, Pakistan, Libya and the Democratic Republic of Congo, which could provide decent newsflow. However, we are still able to buy Heritage's shares on a 50 per cent discount to risked NAV of 398p, according to analysts at First Energy, and on a modest six times their current year cash-flow per share estimate of 32.5p. On a standard earnings basis, the broker forecasts EPS of 25¢ in 2013, or around 16p a share, giving a forward PE ratio of 12.5. But with Heritage's operating cash flow forecast to ramp up from $134m to $205m over the next couple of years, that earnings multiple is set to drop rapidly. On a bargain share rating of 0.57, an investment in Heritage's shares has potential to hit pay dirt this year.

 

Heritage Oil has exploration assets in Malta, Tanzania, Pakistan, Libya and the Democratic Republic of Congo.

 

CAIRN ENERGY (CNE)

Main: Oil & gas

Share price: 291p

Bid-offer spread: 290.5p-291p

Market value: £1.75bn

Website: cairnenergy.com

Edinburgh-based Cairn Energy (CNE) has fallen out of favour with investors despite the company's enviable 20-year track record of delivering significant financial rewards to shareholders.

To put the scale of the company's undervaluation into perspective, after factoring in the return of $3.5bn (£2.2bn) to shareholders last year; the $196m cash paid as part of the $375m acquisition of Agora Oil & Gas in May and a further $558m for the purchase of Nautical Petroleum last August, net cash on Cairn's balance sheet was still £1bn at the end of September. To this you can add the market value of a 10 per cent interest in Cairn India – which has the potential to account for more than 30 per cent of India's oil production - worth around £700m. Cairn realised $1.3bn last year by selling down 11.5 per cent of its holding in Cairn India.

 

 

So, in effect, the combined value of Cairn's cash pile and the 10 per cent stake in Cairn India equates to the company's market value of £1.7bn. This means both the Nautical Petroleum and Agora acquisitions are in the price for free and we have a free ride on significant exploration upside from Cairn’s interests in the Atlantic Margin, including Greenland, and Morocco along with the Mediterranean.

True, reservations over capital costs at Cairn's Greenland assets, which consumed $1bn in 2011 to no avail, help explain why the shares trade 20 per cent below the company's last reported book value of 362p a share since part of that huge cash pile will be used to fund capital expenditure on pre-development and exploration assets. That said, the risk profile of the company is lower than it was 12 months ago since the Agora and Nautical acquisitions add lower risk, near-term exploration, appraisal and development assets to Cairn's balanced portfolio and provide a platform to build the company's interests in the UK and Norwegian North Seas. In addition, the Agora team that joined Cairn has a proven ability to create and realise value through exploration, appraisal and development. The same team built Revus Energy from an initial value of $170m in 2005 to its $750m sale value in 2008.

Trading on a bargain rating of 0.47 after adjusting for the corporate activity since the June half-year end, and priced on a hefty 26 per cent discount to my estimate of the current pro-forma book value, Cairn's shares have scope for a significant re-rating on any positive news from its exploration activities.

 

There could be big upside from Cairn's interests in Greenland.

 

POLO RESOURCES (POL)

Aim: Resources investment company

Share price: 25p

Bid-offer spread: 24.7-25p

Market value: £67.4m

Website: poloresources.com

Shares in Aim-traded investment company Polo Resources (POL) have been range-bound for the past year, hitting a glass ceiling at around 31p and finding major support at 22p. However, there are sound reasons to believe that a share price break-out could finally take place in 2013 as there are a number of potential catalysts to spark greater investor interest in the company. Not only is the share price trading a third below book value of 36.3p, but cash, short-term investments and receivables are worth £26.1m, or 10p a share, which limits the downside risk.

In effect, we are getting all that cash in the price for nothing, which is anomalous considering the upside potential on several of Polo's listed and unlisted investments, which account for £71.4m of the company's £97.5m book value. Now that would be warranted if Polo's directors had an indifferent track record. But that clearly is not the case as in the past few years they have crystallised significant gains from Polo's investments and returned over £110m of cash to shareholders. Prospects for the current portfolio look just as promising as some of those past winners.

For example, substantial progress is being made at Polo's 90 per cent-owned Nimini Sierra Leone gold project. An independent estimate by SGS Canada last year revealed an indicated gold resource at the site of 521,000 ounces and another 263,000 inferred ounces of gold, bringing the total potential resource to 784,000 ounces. A new resource update will be published in the coming months, so there could be further good news on this front, especially as Polo's investment in Nimini-Komahun is only in the books at £24.1m - the equivalent of 8.9p per Polo share. Even before any resource upgrades, the current valuation looks far too conservative since it implies each ounce of Nimini's gold is being valued at less than $50, a sizeable discount to the sector peer average of $84 an ounce.

Other interests include a 48 per cent stake in African oil and gas explorer Signet Petroleum, worth £27.3m, a company that has four prospective assets in Benin, Burundi, Namibia and Tanzania. Interestingly, Signet holds an 80 per cent interest in Hydrotanz, a company that has a production-sharing agreement with the United Republic of Tanzania and the Tanzania Petroleum Development Corporation on the offshore North Mnazi Bay Block. This prospect is adjacent to BG and Ophir Energy's offshore Chaza 1 gas discovery well, which is targeting an eye-catching 12 trillion cubic feet of gas. 2D seismic analysis suggests a possible extension of Chaza 1 through to Mnazi Bay North and any positive news on drilling has the potential to set a rocket under Polo's share price. It's also worth noting that the company has been significantly increasing its stake in Signet since last summer.

Trading on a bargain rating of 0.47 and priced 31 per cent below book value, Polo's shares not only offer value but, more importantly, positive news from the company's interests in Tanzania or Sierra Leone would be the obvious catalysts to spark a well overdue re-rating in the coming months.

 

TRIFAST (TRI)

Main: Engineering

Share price: 53p

Bid-offer spread: 51.25p-53p

Market value: £57.2m

Website: trifast.com

Established in 1973, nuts-and-bolts specialist Trifast (TRE) is a leading global manufacturer and distributor of industrial fastenings, employing over 1,000 staff around the world. It's a competitive market to be in, so to stay ahead of the game and keep its cost base low, the company operates from six low-cost manufacturing sites in Asia (Singapore, Malaysia, Taiwan and China), and has a global logistics network in 20 locations in the UK, Europe and US and Asia.

Having streamlined the business, management is now far more discerning about the level of profit margins on the business it takes on, so much so that older contracts will either be renegotiated upwards or withdrawn. Improved sourcing from suppliers has resulted in better pricing, quality and lead times, while product innovation has not only enhanced the offering, but has also resulted in Trifast winning new contracts.

The UK and European automotive industry and Asian electronics were the drivers behind a buoyant first-half trading performance, during which time the business delivered a 10 per cent rise in revenues to £61.2m. Profits did even better, soaring over 50 per cent to £4m as operating margins shot up a third to 6.4 per cent. There is little to suggest these trends will not continue given the company's increasing exposure to overseas growth markets. In fact, analyst Matthew Davis at broker WH Ireland expects pre-tax profits for the 12 months to the end of March 2013 to increase from £5m to £7.1m, lifting EPS by over a fifth to 4.6p, based on revenues of £123m.

However, with operating margins almost 2 percentage points below their previous peak of 8.2 per cent, the incremental rises in revenues will have an accentuated impact on profits as the twin effect of sales and margin growth kick in. For example, a 7 per cent rise in turnover to £132m for the year to March 2014 translates into pre-tax profits of £8.3m and EPS of 5.4p based on broker forecasts. On that basis the prospective PE ratio is a modest 10.0. Moreover, with net borrowings falling sharply and the dividend reinstated last year, shareholders can expect some sharp increases in the payout: analysts believe the dividend could double from 0.5p last year to 1p a share in the 2013-14 financial year. That looks a realistic possibility given that Trifast has been paying down borrowings and gearing is only 14 per cent.

A rock-solid balance sheet is a further plus, especially since the shares are trading bang in line with book value of 51p a share. On a bargain rating of 0.40, it's time to fasten Trifast's shares to your portfolio.

 

NOBLE INVESTMENT (NBL)

Aim: Alternative investments

Share price: 203p

Bid-offer spread: 198p-203p

Market value: £34.1m

Website: nobleinvestmentsplc.com

Shares in international rare coin, banknote, medal and stamp dealer and auction house Noble Investments (NBL) have yet to enjoy the rating they fully deserve, mainly because the company is off the radar of most investors.

It's not a difficult business to understand 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. In fact, Noble calculates there are now around 30m stamp enthusiasts worldwide and over 10m rare coin collectors. It's highly profitable, too, as profits rocketed by over a fifth to £3.7m in the 12 months to the end of August 2012, and, buoyed by a cash-rich balance sheet, the payout was raised by a fifth to 5.25p a share.

Worth noting, too, is the company's rock-solid balance sheet and one that looks conservative. Noble's last set of accounts reveal that the London headquarters are in the books for £1.13m, whereas 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 since the acquisition and, if these stocks are marked to market value, this adds a further £1.8m to the company's book value. That's important because value inventories and property assets at market value and Noble's NAV rises to around £23.8m, the equivalent of 145p a share, after factoring in the recent acquisition of The Fine Art Auction Group, a business that includes auctioneers Dreweatts and Bloomsbury.

 

 

True, that acquisition will not have a huge impact on current year profits since "September to December is traditionally the far busier period for Fine Art Auction", according to analyst Eric Burns at broker WH Ireland. However, the full benefits should be seen in the financial year to August 2014, when Mr Burns expects Noble to report pre-tax profits of £4.1m and EPS of 20.3p. That would represent 16 per cent growth on the 17.5p a share forecast in the 12 months to August 2013 and supports a further rise in the dividend to 5.5p. So, with the acquisition taking Noble into the wider collectables market to add to its expertise in coins and stamps, and the shares rated on 11 times current year earnings estimates net of cash, the valuation is hardly exacting.

That low rating is partly due to uncertainty over the £2.2m commission Noble is owed from the Prospero Auction of rare Greek coin in New York when a "well-known Qatari collector" failed to settle up having bought $20m of the $25m (£15.6m) of coins sold. However, the company does not part with goods until payment is received; so it still holds the coins and can re-auction them if need be. Moreover, Baldwin's has won a worldwide freezing order of $15m over the purchaser's assets, so the outstanding monies should be recovered in time. Any news on this front would undoubtedly act as a catalyst for a re-rating. The shares are worth buying before that happens.

 

Shares in rare coin dealer Noble Investments have yet to enjoy the rating they fully deserve.

 

FAIRPOINT (FRP)

Aim: Debt management

Share price: 99p

Bid-offer spread: 96-99p

Market value: £41.5m

Website: fairpoint.co.uk

Debt management specialist Fairpoint (FRP) has been enjoying a strong turnaround and one that analysts at broker Shore Capital predict will have sent the company's full-year adjusted pre-tax profits soaring from £3m to £7.6m last year, giving EPS of 13p (6.8p for 2011).

That bumper performance is partly down to a return to profitability from the company's core individual voluntary arrangement (IVA) service. A lower cost base and higher supervisory fees meant that side of the business posted a profit of £1.4m in the first half of last year, even though the number of IVAs generating fees only rose slightly rose to 20,772. Fairpoint has seen a sharp increase in revenue from non-IVA activities, too, which account for just under two-fifths of turnover. For example, fee income from debt management plans was up 11 per cent in the first half, driven by a 9 per cent rise in case numbers to 16,090. Fairpoint has also been encouraging IVA clients to make claims on payment protection insurance (PPI) to good effect; fees there more than quadrupled to £2.6m in the six months to the end of June.

 

 

We will get a fuller picture of the full-year performance when the company releases its results on Thursday 14 March 2013, but what is clear is that there is strong momentum across the business, which is why analysts at Shore Capital predict that pre-tax profits will rise again this year to around £8.1m and produce EPS of 13.6p. In my opinion, these estimates could prove conservative, so there is a chance of upgrades as the year progresses.

What's more, with the company sitting on net cash of £1.6m, having paid down £8m of borrowings in the past 12 months, and an asset-based revolving credit facility of £13m in place, Fairpoint has the flexibility to grow non-IVA activities to further diversify the product mix. Shareholders are being rewarded, too, since the board raised the dividend by 10 per cent to 1.95p at the half-year stage and, on the basis of a 5p forecast payout for the full year, the yield is over 5 per cent. Fairpoint has also been returning surplus cash through an earnings-enhancing share buy-back programme.

However, despite the operational progress being made, the shares are still only priced on 1.2 times book value, 7.3 times earnings estimates for 2013 and offer a forward yield of 5.5 per cent, based on a further rise in the dividend to 5.5p a share in 2013. On a bargain rating of 0.38, Fairpoint's shares are a buy.

 

Bargain Shares Portfolio 2013

Company nameTIDMMarketActivityBid price (p)Market value (£m)Bargain rating
Oakley Capital InvestmentsOCLAimPrivate equity investments1411781.29
Randall &QuilterRQIHAimInsurance services12059.60.95
Inland HomesINLAimProperty2240.30.79
Terrace HillTHGAimProperty developer16.2534.80.57
Heritage OilHOILMain Oil &gas exploration &production2025210.57
Cairn EnergyCNEMain Oil &gas exploration &production2911,7550.47
Polo ResourcesPOLAimResource investment company2567.40.47
Trifast TRIMain Engineering5357.20.4
Noble InvestmentsNBLAimStamps, coins &collectibles20334.10.38
FairpointFRPAimDebt management services9941.50.38