To recap, I originally advised buying shares in the stockbroker and financial services outsource provider 12 weeks ago when they were being offered in the market at 220p ('A solid income buy', 25 February 2013). My fair value target at the time was 260p. However, an upbeat trading statement at the company's annual meeting four weeks later sent the shares through that target price and prompted me to raise my fair value target to 285p. That target was hit yesterday when another upbeat trading statement from Jarvis prompted analyst Nick Spoliar at broking house WH Ireland to massively upgrade his earnings estimates. As a result, the investment case needs revisiting to ascertain whether there is even more share price upside to come.
Momentum across the business
On the retail side, Jarvis offers two main products: ShareDeal-Active, a low-cost execution-only service for nominee and certified accounts, Isas, Peps and Sipps; and X-O, an online share trading service enabling clients to trade for a flat fee of £5.95 per trade, one of the lowest rates in the market. Boosted by the launch of X-O, retail client numbers have been growing strongly at an annual average rate of 13.8 per cent over the past five years, with very little advertising. WH Ireland notes that the company now "has around 65,000 clients, a 15 per cent year-on-year increase". These range from multi-millionaires to day traders. Screen-based dealing accounts for half the business by volume.
On the corporate side, Jarvis provides outsourced and partnered financial administration services to a number of third-party organisations, including advisers, stockbrokers, banks and fund managers. The business tailors its administration processes by offering a bespoke service to meet the needs of each organisation and has built up a strong reputation for flexibility and cost-effectiveness. Jarvis does not disclose names of its clients, but is believed to have more than 25 household name institutional clients, including asset management group Franklin Templeton and Goldman Sachs, attracted by the convenience of outsourcing time-consuming and laborious back office/administration functions.
Cash under administration has averaged around £70m for the past couple of years and is normally placed on a short-term deposit of less than one year with triple A-rated banks. However, in a note to clients yesterday, Mr Spoliar points out that: "Rising demand for Jarvis' low-cost model continues to drive the business, while at the same time the back office outsourcing proposition with its attendant cost benefits is performing well….. Further strong client acquisitions suggest cash under administration continues to rise strongly above the £100m figure we cited at the annual meeting six weeks ago."
Earnings upgrades
So with all parts of the business performing strongly, WH Ireland has raised its profit estimates for both this year and next. For 2013, the broker next expects Jarvis to report pre-tax profits of £3m, a significant upgrade from the £2.6m previously forecast. On this basis, 2013 EPS forecasts have been upgraded from 18.1p to 21p, which means that EPS is set to increase by over 25 per cent this year alone. And because Jarvis has a policy of paying out two-thirds of net earnings as dividends, this means that shareholders can expect dividend of 14p a share. On this basis, the shares trade on a forward PE ratio of 13.5 and offer a prospective yield of 5 per cent.
For 2014, WH Ireland is now looking for pre-tax profits of £3.2m and EPS of 22.5p, earnings upgrades of 13 per cent. On this basis, the 2014 forward PE ratio drops to 12.5 and the prospective yield is 5.2 per cent based on a dividend of 15p a share. It's worth noting that the dividend is paid quarterly with the next payment of 3.5p a share due on 14 June. The ex-dividend date is 22 May.
Frankly, I would not be surprised to see further earnings upgrades later this year. WH Ireland has already lifted its 2013 pre-tax profit estimate by £700,000 since February's bumper financial results and there is no sign yet that the momentum in the business is starting to wane.
Price target upgrades
Following yesterday's trading update, WH Ireland lifted its share price target from 300p to 320p. I am following suit and can see the shares rising to at least 310p before long which is my new target price. So if you followed my earlier advice, I would ride these bumper gains to capitalise on potentially another 10 per cent share price upside. My new fair value price of 320p could yet prove conservative.
Capitalising on LMS
The first-quarter trading update from LMS Capital (LMS: 71.5p), an investment company in the process of winding itself up, made for interesting reading. It was also very positive if you followed my previous advice to buy shares in the company.
That's because following realisations, LMS is now sitting on net cash of £42.2m, or 25 per cent of the company's market value of £160m. And net asset value per share rose from 85p to 89p in the three-month period to end-March 2013, helped by the sale of Apogee, one of the UK's leading suppliers of digital document solutions, for £16m in mid-March. This represents a 2.1 times return on the cash LMS had invested and equates to an internal rate of return of 30 per cent since Apogee's acquisition in 2010. The book value of this investment at 30 June 2012 was £13.5m, so importantly, the sale was executed at a near 20 per cent premium to book value. This highlights the quality of the investments in LMS' portfolio. Another small disposal in the same month generated proceeds of £3.3m which bolstered the company's cash pile further.
As a result, shareholders can expect another hefty return of capital later this year as this cash is recycled back to investors. Late last year, LMS repurchased 17.4 per cent of the issued share capital through a tender at 84p a share. So with the shares priced on a bid-offer spread of 71p to 71.5p, a further tender offer will not only be highly supportive of the share price, but importantly, will enable shareholders to sell down further chunks of their holdings at book value. For instance, if LMS were to use the cash pile to repurchase 25 per cent of the issued share capital at current book value of 89p, then anyone buying now at 71.5p is in effect guaranteed a 25 per cent profit on a quarter of their holding. In addition, there is scope for the share price discount to narrow, as some investors will undoubtedly use the cash proceeds from a forthcoming tender offer process to buy back the LMS shares sold (at book value), but at a lower price in the open market.
As regular readers of my columns will know, LMS is a favourite of mine. I first recommended buying the shares at 54.5p in February 2011 ('Capital returns', 11 February 2011), and have repeated that advice when the price was 64p ('Time capitalise on LMS', 25 Jun 2012), and most recently at 66p (‘Happy capital returns’, 17 December 2012). If you followed the initial recommendation, the carrying value on your retained shares is 48p after adjusting for the tender offer last year at 84p. So with the current price around 71p, the return on the net capital invested is 48 per cent in the past 26 months - almost double the return on the FTSE 250 index in the same period.
The key point to note is that a further tender offer this year - at book value - will provide another capital return to existing and new shareholders and will reduce the carrying value of readers holdings again. Clearly, there will be wind-up costs when the company finally sells off all its assets, but with net asset value around 25 per cent above the current share price you can realistically expect a healthy double-digit return on your capital over the next 18 months. LMS shares remain a low-risk buy at 71.5p.
Polo shares soar
Finally, in a separate article today, my colleague Mark Robinson has assessed the implications of the corporate activity at Aim-traded resource investment company Polo Resources (POL: 27p). It is all positive if you followed my advice to buy the shares at 24.5p three months ago ('Bargain shares', 8 February 2013). I also repeated the advice less than two weeks ago ('Bargain shares update', 3 May 2013) when the shares were being offered in the market at 22.75p.
The key point to note is that a new investor, Michael Tang, has purchased 11.77 per cent of the share capital at 40p a share through his investment vehicle, Mettiz Capital - a hefty premium to the prices we paid - in addition to the 2.78 per cent stake he already held. So with a 14.55 per cent stake in the company, he is the largest single shareholder in Polo. Mr Tang is the principal of Mettiz Capital, an investment company with corporate and financial experience in natural resources, power generation, manufacturing and real estate. He has also been appointed as co-chairman and managing director of Polo.
Clearly, Mr Tang believes there is substantial value in the shares as the price paid is a 10 per cent premium to the company's end of March 2013 net asset value of 35.9p a share, not to mention a 65 per cent premium to Polo's share price prior to the transaction being announced. In the circumstances, it is hardly surprising to see Polo shares soar to 27p following the announcement. And with the odds favouring positive trading updates to come from the company's Sierra Leone Nimini gold project and African oil explorer Signet Petroleum, and Mr Tang set to work with GCM Resources on the Bangladesh coal project, Polo shares remain a buy at 27p. My target price is 35p.
MORE FROM SIMON THOMPSON ONLINE...
I have written seven articles since the start of last week, all of which are on my homepage and include the following companies or sector trades:
KBC Advanced Technologies ('Fuelled for growth', 6 May 2013)
Communisis ('Buy the triple top breakout', 7 May 2013)
Global Energy Development ('A share priced for a sharp re-rating', 8 May 2013)
Spark Ventures, Greenko ('Awaiting another spark for a re-rating', 9 May 2013)
Thorntons ('A sweet investment', 13 May 2013)
Treatt ('A real treat, 13 May 2013)
WH Ireland, Marwyn Value Investors ('Uncovering hidden value', 14 May 2013)
