Clearly, as new information comes to light target prices become a movable feast. For example, when I updated the investment case on Aim-traded property company Terrace Hill (THG: 24p) in November, I stated that fair value was 32p a share ('Bargain Shares Update', 12 Nov 2013). The price at the time was 27.5p. In the event, the shares rallied strongly and hit a multi-year high of 36.9p, or 15 per cent above my fair value target, on 11 December. A day later the company issued a mixed set of full-year results and I decided to bank profits when the price was 32p ('Property play fully valued', 13 Dec 2013). There are two points worth noting here.
Firstly, Terrace Hill's share price had rallied 33 per cent in the space of a month after my November article and was becoming overbought ahead of the full-year results. This increased the chances of a sell-off if the results did not meet expectations, as was the case. Secondly, the price was 15 per cent above my fair valuation on 11 December and, at 36.9p, had increased by 140 per cent since I first recommended buying the shares at 15.4p as part of my 2013 Bargain Shares Portfolio ('Bargain Shares for 2013', 8 Feb 2013). Given my repeated buy advice in the interim, this meant many investors were sitting on sizeable gains. In the circumstances, my subsequent advice to take profits at 32p prompted a sell-off which has seen the price fall to around 24p.
The other major point about target prices is that different broking houses, and all market participants for that matter, will have different views on what they deem to be a sensible valuation for a company's equity. That's what makes a market and helps explain why there can be a huge divergence between analysts in their valuations. I am no different as I use a combination of fundamental analysis, technical analysis and sector trends to determine what is a realistic valuation for any one company. I also take into consideration a read-across from other industry participants and the implications on trading trends for the company I am analysing. That's quite relevant right now because several of the companies on my watchlist have hit, or smashed through, my target prices and need updating.
Pilat in the takeover picture
Shares in Aim-traded Pilat Media Global (PGB: 91p), a supplier of business management software to the media industry, soared 24 per cent at the end of last week after the company received a recommended cash bid worth 95p a share from one of its major shareholders, SintecMedia. Directors or shareholders controlling 39.8 per cent of the company's equity have either agreed to the deal, or indicated that they will be voting for the scheme of arrangement to approve the takeover. SintecMedia already owns 22.7 per cent of the issued share capital, so with shareholders accounting for around 62 per cent of the company in the bag, this looks a done deal. The scheme document will be dispatched around 10 February and the court meeting to approve the offer is scheduled for 31 March.
It also looks a very fair offer and one that is well above my 88p target price when I last updated the investment case at 67p ('Bumper upgrades for software maestro', 2 Dec 2013). It also provides a huge return if you followed my earlier advice to buy Pilat's shares at 49p seven months ago ('Buy the breakout', 3 Jun 2013).
To put the offer into some perspective, strip out net cash on the balance sheet worth around £12.6m, or 20p a share, and the exit multiple is around 25 times earnings estimates of 2.95p a share for 2013, according to broker Shore Capital. Based on a 17 per cent rise in EPS in 2014, the exit multiple drops to 22 times earnings estimates of 3.45p a share for 2014. As I have pointed out previously, Pilat Media is firmly in the grips of an earnings upgrade cycle, so there's scope for the company to exceed this year's earnings expectations. However, on the basis that I think that a valuation of 88p is full, and the cash offer on the table is 95p a share, then I am more than happy to recommend banking the gains and recycling the cash into another investment with greater potential upside. I would therefore advise you vote in favour of the scheme of arrangement.
Target price obliterated
Pilat is not the only company I have been following whose share price has exceeded my expectations. The same is true of Entertainment One (ETO: 300p), one of the largest UK film distributors with a market share of 10 per cent. The group is also one of the largest film distributors in Canada, boasting a market share of over 20 per cent.
I initiated coverage in July when the shares were readily available in the market at 199p ('Three special situations', 2 Jul 2013), and have reiterated that advice five times since then. The combination of the company's likely inclusion as a constituent of the FTSE 250 index at the FTSE International Quarterly Review ('Playing footsie', 10 Sep 2013), the announcement of upbeat trading results and a below sector average earnings multiple convinced me that the shares had significant upside at 220p back in September. The upper range of my price target was 270p, which has now been obliterated, with the shares trading close to an all-time high. In doing so the price has taken out the 258p target price of Johnathan Barrett at broker N+1 Singer and sailed past the 280p target of Malcolm Morgan at Peel Hunt.
This also means that the shares are rated on 15.5 times EPS estimates of 19.6p for the financial year to March 2014, and on 14.4 times estimates of 21p for the following financial year, according to N+1 Singer. The prospective dividend yields are 0.3 per cent and 0.7 per cent, respectively.
It's now my view that the shares have run far enough and will need upgrades in the pre-close trading statement in mid-February to justify further upside. That may well happen, as the company is trading strongly, but having assessed the balance of risk and the fact there is a 50 per cent paper gain on the table, I have decided to bank profits.
The ongoing re-rating of shares in Entertainment One is also good news if you followed my advice to buy shares in Marwyn Value Investors (MVI: 198p) earlier this year at 143p ('A highly profitable arbitrage play', 11 Feb 2013). The film producer is by far the largest investment in Marwyn's portfolio, accounting for around three-quarters of the company's net asset value of 259p a share.
Marwyn has also just redeemed 3 per cent of its issued share capital at 259p a share in order to return the equivalent of 8p a share to shareholders. Factoring in this payment this means that our holding in Marwyn shares is still slightly below my fair value target price range of 210p to 215p. A 25 per cent share price discount to net asset value still seems harsh to me, but it is no smaller than it was 11 months ago when I initiated coverage on the company. Ultimately, Marwyn's future share price performance will be dependent on that of Entertainment One, so, having advised banking profits on the latter, it is only sensible to also bank the 37 per cent gain on the holding in Marwyn.
A stamp of authority
Over the years, many of the companies I have highlighted in my annual Bargain Shares Portfolios have succumbed to takeover bids. That's hardly surprising given the whole point of this investment technique is to highlight companies that are fundamentally undervalued based on the assets held on their balance sheets. In some cases, the market value attributed to the companies is significantly less than the replacement value.
I included Pilat Media Global in my 2011 Bargain Shares Portfolio at 49p a share, so that investment has doubled in value if you followed that advice. Another company that has done well is Noble Investments (NBL), the international rare coin, banknote, medal and stamp dealer and auction house operator. I included its shares in my 2011 and 2013 portfolios. Following November's acquisition of Noble by Stanley Gibbons (SGI: 380p), the most famous name in stamps and a company that has been around for 156 years, and having made a 36 per cent gain on Noble's shares last year, I advised buying shares in Stanley Gibbons at 303p ('A stamp of authority', 16 Sep 2013), and again at 317p ('Bargain shares update', 21 Oct 2013), to play the upside from this niche area of the alternative investment market.
A trading update from the company late last week vindicated that decision. The benefits of the acquisition are already being realised through cross-selling opportunities between Stanley Gibbons and Baldwin's (Noble's highly respected brand in coins, established in 1872) as demonstrated by initial demand shown for rare coins by Stanley Gibbons' clients. I firmly expect a wider range of cross-selling opportunities across the enlarged business will drive sales in the year ahead.
There are cost benefits from the tie-up, too, and work has started on delivering integration annual cost savings of around £1.8m, around half of which should be delivered in 2014. Another benefit is to even out revenue streams across the financial year. Indeed, although January is normally a quiet time for Stanley Gibbons, Baldwin's has enjoyed a very strong start to the year, having just concluded its 'New York Sale' auctions with over $7m (£4.3m) of sales achieved. The New York sale included over $1m of Russian gold coins, which forms the first part of the substantial 'Linden Collection' to be auctioned by Baldwin's in New York, Hong Kong and London this year.
Interestingly, after the trading update, analyst Charles Hall at broker Peel Hunt raised his target price on Stanley Gibbons' shares from 350p to 400p. That doesn't seem unreasonable to me once you factor in a hefty cash pile of £17m, equating to 10 per cent of the company's market value of £166m, and the fact that pre-tax profits from the combined entity are forecast to be around £11.2m this year, rising to £13.3m in 2015. On that basis, expect EPS of 20.4p, up from 16.4p in 2013, rising to 24p in 2015. This means the prospective PE ratio is only 14 net of cash for next year, hardly an exacting valuation for a company that is expected to grow EPS by over 20 per cent over the next couple of years.
Needless to say, I continue to rate Stanley Gibbons' shares a buy on a bid-offer spread of 375p to 380p and my raised target price is 400p, a valuation that could yet prove conservative.
