But we need some perspective here; both the FTSE Small Cap and FTSE 250 indices are still up by over 15 per cent since the start of the year which is a storming performance. Moreover, to desert equities at this stage would be a very brave decision indeed as in effect you would be a calling a major top in the market.
My own strategy is to focus on undervalued special situations as I outlined in my column last month ('Seasonal investing strategies', 30 April 2013). Irrespective of general market movements, if the fundamentals for investing in a company are sound, and the price being offered is sufficient to allow for satisfactory future investment returns, then in time the odds favour a profitable outcome. That is the essence of stock picking.
Furthermore, when market conditions are far less favourable and gains are harder to come by than by riding off the coat-tails of a rising tide that lifts all boats, stock picking comes into its own. Personally, I love the challenge and to pit my skills and uncover the undervalued gems that have served us so well over the years. On that score, some of my recommendations need updating.
Land ahoy
It was difficult not to be impressed by the trading update from brownfield regeneration specialist and housebuilder Inland (INL: 29.5p).
Having trebled pre-tax profits to £3m in the second half of 2012, underpinned by land sales, the company has just reported buoyant trading in the first five months of 2013. Moreover, a number of acquisitions have been agreed to ramp up the housebuilding operation including a 40-unit site near St Albans with a gross development value (GDV) of £10.2m; and a new 155 unit scheme on a one acre brownfield site in Woolwich with a GDV of £32m. Terms have also been agreed on three sites in Buckinghamshire to build 220 units, and planning permission has been granted for a 101 home scheme on the southern part of St John's Hospital, Chelmsford. The GDV of that scheme alone is £34m.
Inland confirms that it has now achieved housebuilding sales of £9.1m since the start of 2013. To put that into perspective, Inland sold 15 residential units in the second half of 2012 for £3.1m and analyst Duncan Hall at broker FinnCap only expected 25 completions in the six months to June 2013, generating housebuilding revenues of £5m and a profit of £1m. Those estimates are under review, but I think you get the picture.
For the financial year to June 2014, finnCap had previously predicted 70 residential completions to generate revenues of £15.4m and profits of £3.4m. I would be astonished if those estimates were not beaten especially as Inland raised £4.9m of new funds through a placing at 27p a share on 24 May to fund the acquisition of more sites for development. Chief executive Stephen Wicks confirms that Inland is seeing strong interest from major housebuilders for undeveloped plots. In fact, it is awaiting offers on 76 plots on one site alone.
Without factoring in any of the property deals outlined above, Inland has a land bank of 1,931 plots, including 516 at the Drayton Garden Village joint venture in West London. The book value of inventory is £36m and there is a further £8.8m of investment property, so there is substantial asset backing. These valuations are likely to have risen significantly once you mark holdings to market value and factor in the strong house price growth in London and the south east this year.
So, with full-year profits to end June 2013 set to rise by at least 150 per cent to £4m, and the shares trading in line with a very conservative book value of 28.2p, which doesn't recognise the 5p a share of net profits to come from Drayton Gardens, I continue to rate Inland shares - which have so far risen by around 20 per cent since I first advised buying in February ('Bargain shares for 2013', 8 February 2013) - a solid buy at 29.5p.
A real treatt
We didn't have long to wait for shares in Treatt (TET: 545p), a world-leading manufacturer and supplier of flavour, fragrance and cosmetic ingredients, to re-rate. In fact, following an upbeat trading statement this morning, shares in the company have soared to a record high and have produced a bumper 25 per cent return in the two weeks since I highlighted the investment case ('A real treatt', 13 May 2013).
Following stronger than expected trading, sales in May have hit an all-time high. Moreover, forward order books for the rest of the third and fourth quarters are promising too. Interestingly, the "continuing transition of product mix towards added-value manufactured ingredients... coupled with significant cost saving measures, some of which have already been implemented but have not yet delivered their full-year impact, should deliver the long-term sustainable growth in earnings intended." As a result, analyst Nicola Mallard at Investec Securities has massively upgraded her pre-tax profit estimate for the 12 months to end September from £5m to £6m. On this basis, previous EPS forecasts of 34.7p are lifted to 41.9p.
Furthermore, with significant further cost savings expected, Investec increased profit and EPS estimates for the September 2014 year-end to £6.75m and EPS 47.3p (from £5.6m and 38.9p). So, even though Treatt shares have risen sharply, they still only trade on 11.4 times 2013-14 earnings estimates. Add on a full-year dividend of 18.5p a share this year, forecast to rise to 20p in 2013-14, and I continue to rate Treatt shares a buy. My new fair value target price is 600p to potentially offer us a further 10 per cent upside.
A copper-bottomed investment
Small-cap resource company Bezant Resources (BZT: 22p) has now returned £5.2m, or 8p a share, to shareholders as I noted in my article ('Double your money on a copper-bottomed investment', 20 March 2013).
Bezant was flush with cash after Gold Fields, the major gold miner, acquired a 21 per cent stake for $7.5m (£5m) and paid a further $2.5m non-refundable upfront payment to Bezant to give it the right to acquire the company's flagship Mankayan copper/gold project in the Philippines for $60.5m by the end of January 2014. Assuming Gold Fields exercises its option, Bezant's board has stated that half the cash received will be returned to shareholders.
So, if you followed my initial advice to buy the shares at 25.5p a couple of months ago ahead of the capital return your net investment is now 17.5p a share, well below the current market price with the shares priced on a bid-offer spread of 20.5p to 22p. Furthermore, you could receive a further cash return of 24p a share early next year and still end up holding shares backed by 16p a share of cash, after adjusting for tax liabilities on the disposal and Bezant's operating costs and capital expenditure over the next year. Bezant shares continue to rate a decent medium-term value buy.
Food for thought
We are guaranteed a good news story when Aim-traded property developer and investor Terrace Hill (THG: 20p) reports half-year results on Wednesday 5 June.
That’s because following a site sale and forward funding agreement for the company's 1,104-unit student accommodation scheme in Southampton, and the disposal of the majority of its remaining residential assets, the company's balance sheet gearing has been slashed to 35 per cent. This mitigates financial risk which was the major reason the shares had been previously shunned by investors.
Moreover, there is scope for further debt reductions as Terrace Hill has just bought out a joint venture partner to take ownership of 47 residential assets worth £5.3m, all of which will be sold off on a piece meal basis. The focus will be on commercial property developments and food stores in particular.
Prospects look good. The company has just completed two pre-sold and pre-let Sainsbury’s foodstore developments in the North East of England and will shortly complete on a 41,800 sq ft Asda supermarket in Skelton. Terrace Hill's chief executive Philip Leech points out: "Despite recent commentary about the slowdown in the growth of the large foodstore market, we are experiencing good demand from retailers for the right type of store in the right location. Our close relationships with retailers, and our expertise in sourcing sites and obtaining planning, means that our pipeline of development projects is progressing well."
This has not been completely lost on investors since Terrace Hill's shares are up 30 per cent since I advised buying in February at 15.4p. However, trading 25 per cent below EPRA net asset value of 26.8p, the discount to book value is still too wide. My six-month target price is 23p.
Hyper value gains
Aim-traded investment company BP Marsh & Partners (BPM: 125p) will be announcing some impressive results next week too.
The company's balance sheet has been transformed by the sale of 80 per cent of its stake in global insurance broker Hyperion Insurance Group to global private equity firm General Atlantic in a £29.2m deal. The acquirer has a call option to purchase the balance of the stake for £7.3m when Hyperion undertakes an initial public offering (IPO), or upon the third anniversary of completion of the disposal. Dependent on certain price conditions being met, there could be a further £2m cash payout for BP Marsh if Hyperion undertakes an IPO within 12 months.
I calculate that the £29.2m cash proceeds from the sale, the carrying value of the remaining 2.76 per cent stake in Hyperion (worth £7.3m, or 25p a share) and a £6.1m loan made by BP Marsh to Hyperion at a minimum interest rate of 7.5 per cent are worth 20 per cent more than BP Marsh's own market value of £35.6m. Adjust for the Hyperion disposal and BP Marsh has net funds of £20m, worth 68p a share, and a further 45p a share of equity and loans in Hyperion. This means investments in another eight investee companies, worth 57p a share, are in the price for free.
I first advised buying BP Marsh’s shares at 88p ('Hyper value small-cap buy', 25 January 2012) and reiterated the advice at 90p ('Hyper value gains', 26 October 2012). Since then they have risen more than 40 per cent, buoyed by the news of the Hyperion disposal, but still trade a third below pro-forma book value of 189p. Buy.
Green energy offers bumper potential gains
Shares in Greenko (GKO: 125p), the Indian developer, owner and operator of clean energy projects, continue to mark time 10 per cent below my advised buy-in price of 138.5p ('Buy signal flashing green', 18 Mar 2013). This is harsh considering the company has a realistic prospect of ramping up pre-tax profits by around 80 per cent in the current financial year.
My interest in the company was sparked by the £100m investment in Greenko Mauritius by an affiliate of the government of Singapore Investment Corporation, one of the world's leading sovereign wealth funds. The shares are convertible on a one-for-one basis into ordinary shares in Greenko subject to final adjustment between 1 July 2015 and 30 June 2017. The initial investment is equivalent to a minimum of 19.5 per cent of Greenko's share capital on a fully diluted basis.
Importantly, the new funds will enable the company to ramp up the construction of its substantial power portfolio in India. This is exactly what Greenko revealed in a trading statement last week. Currently, the company has four wind farm and two hydro projects under construction with a total capacity of 454 megawatts (MW) and will start the construction of a further 200MW of wind capacity later this year. With the £100m new funding in place, Greenko is targeting 2,000 MW of operating capacity in 2018, double the target for 2015.
Robust earnings growth forecast
Following the trading update, analyst Adam Forsyth at Arden Partners left his forecasts unchanged, but notes that Greenko is "re-establishing visibility in the execution of the projects... and a period of de-risking has begun."
Arden forecasts revenues of €42.8m and operating profits of €16.3m in the 12 months to March 2013, rising to €78.2m and €40.4m, respectively, in the financial year to March 2014. The estimates for the 12 months to March 2015 are for revenues of €128m and operating profits of €78m. On that basis, EPS rises from 4.5¢ in 2013, to 6.75¢ in 2014 and 16.2¢ in 2015. Analyst Gurpreet Gurjal at brokerage N+1 Singer notes that if all the assets are commissioned on time, they "could add between €30m to €40m of cash profits in the financial year to March 2015."
Trading on nine times March 2015 earnings estimates, I continue to see upside potential in Greenko's shares as the power generation assets come on stream and revenues ramp up. Ahead of full-year results on 22 July, I remain a buyer.
