In the 12 months to end May 2014, the company’s lease portfolio increased by a third to £20m driven by new business of around £10.8m. There has been no shortage of customers to service the financial needs of given the reluctance of banks to lend in this area, but the key is to make sure that they are of the highest quality possible so that the risk adjusted returns are maximised. To achieve this 1pm sources clients through a network of 100 finance brokers, and adheres to a rigorous underwriting procedure. In fact, defaults are at an all-time low of less than 0.7 per cent of the lending book. So with bad debts low and revenues rising by over a third to £4.2m, pre-tax profits soared by almost three quarters to £1.35m to produce EPS of 3.54p. Those figures were more than 10 per cent ahead of what analyst Eric Burns at W.H. Ireland had anticipated when I last updated the investment case (‘Award winning growth’, 5 June 2014).
But like the companies it lends to, 1pm needs capital to fund this stellar growth. In the year to end May this was achieved by raising £11.3m of additional funding. 1pm now needs more capital if its board of directors is to fulfil its target of lifting the loan portfolio to £75m within the next three to four years. So to create the platform for this 1pm is raising £3.8m net of expenses through the placing and open offer of 6.6m shares at 61p each. The oversubscribed placing raised £3m and the balance will come from an open offer (ex-date of Monday, 22 September) to existing shareholders on the basis of one new share for every 18 held. The total capital raise equates to 22 per cent of the existing share capital of 29.9m shares.
Of the proceeds £3m will be used to write new business for the company’s loan book lending. The balance of £800,000 will be used to increase headcount from 16 to 29 employees over the next year; fund a move to new and larger premises by November; invest in a new IT billing system; and cover the cost of expanding the network of brokers from whom business is generated. It looks a sensible use of funds to me and because the yield on both the lease and loan portfolios is around 20 per cent, the return on capital employed on the funds raised should exceed the cost of capital and boost EPS too.
Due to the fundraising, new analyst estimates can only be updated once the capital raise is completed, but my forecast is that 1pm should still be able to deliver adjusted pre-tax profits of at least between £1.5m to £1.6m and fully diluted EPS in the range of 3.8p to 4p in the current financial year to May 2015, ramping up the year after. In addition, I understand the board intend to pay a maiden dividend in the current financial year and one equivalent to around 10 per cent of net profits. Based on my profit estimates, and a 22 per cent tax rate, then I would envisage a dividend of around 0.33p a share.
So with 1pm appealing to both growth and income investors, I feel there is upside to the shares which I included in my 2014 Bargain Shares Portfolio when the price was 54p on Friday, 7 February. I continue to rate 1pm shares a buy on a bid offer spread of 66p to 68p and would take-up the open offer.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
