A prime example is Aim-traded Pittards (PTD:137p), a manufacturer of high-quality and high-performance leather products to retail brands such as Hermes, Nike and Marks and Spencer. But it wasn't operational issues that derailed the company in the first half of last year, but currency markets when sterling's strength against the US dollar sent profits tumbling and its share price too. However, with sterling weakening significantly against the greenback since the start of July, the odds favoured a major profit recovery for Pittards.
And this is exactly what has panned out as full-year results released yesterday reveal that Pittards' pre-tax profits increased by two thirds from £758,000 to £1.25m on relatively flat revenues of £17.3m in the second half of last year, a massive increase on the first half when profits fell by two thirds to £322,000 on revenues of £17.4m.
So although full-year pre-tax profits were down by £123,000 to £1.59m on revenues of £34.7m, with the benefit of a weak sterling now acting as a strong tailwind to the business - around 70 per cent of business is transacted in US dollars - then prospects are very encouraging for the year ahead. That's because the profit rebound in the second half was based on an average exchange rate of £1=US$1.626, but since then sterling has weakened even further and has averaged £1=US$1.518 in the first quarter of 2015. The cross rate is currently £1=US$1:49.
Conservative earnings estimates
This means that although broking house WH Ireland predict Pittards will deliver a 13 per cent rise in current year pre-tax profits to £1.8m on revenues of £39.5m, analyst John Cummins points out "should the exchange rate remain at current levels, we very much see the potential to raise estimates as the year progresses." Those upgrades could come sooner rather than later if political instability caused by yet another hung parliament leads to a sterling sell-off after the forthcoming UK general election in little over six weeks time. I wouldn't bet against that possibility at this stage given the current opinion polls.
The other points worth noting is that although sterling has further weakened against the US dollar, it has risen strongly against the euro. So not only is the company benefiting from selling its goods in a currency (US dollar) that is appreciating against sterling, but it's able to source some of its raw materials in a currency (euro) where it has increased buying power. In addition, although Pittards' finance expenses rose last year, it was for a good reason: the company's Ethiopian consumer division continues to grow so required more working capital. But even accounting for changes in working capital, year-end net borrowings of £7.6m equated to a comfortable 42 per cent of shareholders funds of £18.3m. It's also worth flagging up that the company has identified a number of other opportunities for expansion to grow the business, so this is not just a currency driven earnings story.
Trading well below net asset value of 196p, rated on 9 times conservative looking EPS estimates of 15.4p for fiscal 2015, and with the stock overhang cleared at the end of last year after activist investor Peter Gyllenhammar exited the share registrar, I feel Pittards' shares are well worth buying on a bid-offer spread of 133p to 137p.
Amber alert for takeover gains
Aim-traded activist investment company Crystal Amber (CRS:152p) could soon have a very cash rich balance sheet. Having raised £32.3m in a placing at 155p a share in January to support further investments in special situations, Steel Partners, the largest shareholder in packaging materials firm API Group (API:60p) is taking the company private in a deal that will release £5.4m of cash in return for Crystal Amber's 11.8 per cent shareholding. That sum is the equivalent of 5.5p per Crystal Amber to add to its £21m of cash, or 21.3p a share, on its balance sheet at the end of last month.
In addition, the long running takeover saga of Irish airline Aer Lingus (AERL:238¢) by British Airways owner International Consolidated Airlines (IAG:590p) is in its final ascent. The 250¢ a share cash bid (excluding a 5¢ dividend) is conditional on, amongst other things, irrevocable commitments from Ryanair (RYA:€10.56), a 29.5 per cent shareholder, and the Minister for Finance of Ireland, a 25.1 per cent shareholder, to accept the offer. Aer Lingus board have already recommended the deal and both IAG and the Irish government are currently in negotiations over the terms of IAG's commitment to guarantee to keep Aer Lingus's 23 pairs of Heathrow slots focused on Irish routes.
If a compromise between the parties can be reached, as seems likely, it would provide Ryanair with an exit from its own investment, having been prevented previously from taking Aer Lingus private. It would also enable Crystal Amber to release around 28.5p a share of cash on its largest investment holding, a 2.8 per cent stake in Aer Lingus, a sum that would bolster its cash pile to about 55p, representing over a third of the company's net asset value of 150p at the end of February. It's proved a smart investment too, having increased in value by 50 per cent in the second half of last year.
My decision to back Crystal Amber in this year's Bargain share portfolio was predicated on the fact that its investment managers have proved adept at successfully sourcing investment opportunities from value situations, in effect using a similar investment approach to the one I adhere to. They also regularly make open market purchases of the company's own shares through an ongoing buy-back programme in order to exploit buying opportunities when the share price discount to book value widens too far. This pro-active approach resulted in 1.2m shares being bought back at an average of 135.8p in the second half of last year. And the board have also outlined a dividend policy to pay-out 5p a share this calendar year, implying a prospective dividend yield of 3.3 per cent.
So with Crystal Amber set to potentially get a major cash boost in the near future to fund future specialist investment opportunities, I feel it's well worth following the smart money in the City that invested a few months back in the placing. Buy.
A Record mandate win
Specialist currency manager Record (REC:35p) has won a $1.75bn (£1.2bn) mandate with an existing client. To put this award into perspective, the company's assets under management stood at $52.7bn (£35.6bn) at the end of last year. In January, the company announced that a net $2bn of new mandates would start in the first quarter, so with Record set to announce its fourth-quarter trading update on 24 April, it's only reasonable to expect a positive update.
It's hardly a surprise that the company is winning new business as the US dollar has appreciated sharply against the euro this year (rising 10.6 per cent in the past 12 weeks), continuing a strong trend which started in the second half of last year. In turn, the strength of the greenback is encouraging Record's 51 clients to seek currency hedging strategies to protect performance against adverse currency moves, and to hedge out uncrystalised gains on assets held in foreign currencies. For instance, a US investor who bought the Eurostox 50 index at the start of this year has seen the index surge by 18.6 per cent in the past 12 weeks, but the gain is only 8 per cent on an unhedged basis due to US dollar appreciation.
Frankly, with the monetary policies being pursued by the European Central Bank and the US Federal Reserve polls apart, and with the US dollar index soaring by 8.5 per cent since the start of this year, having increased by 12.5 per cent in the second half of last year, then the divergence in monetary policies of the major world central banks can only be supportive of the need to adopt hedging strategies offered by Record to its clients.
In turn, if Record continues to win new mandates this offers potential for earnings upgrades to Edison's conservative looking EPS estimates of 2.47p for fiscal 2016, up from 2.32p in the year just ending (Record has a 31 March year-end). A payout per share of 1.5p is covered a comfortable 1.5 times by those earnings, so the dividend yield is a very decent 4.3 per cent. It's worth flagging up that Record has net cash of 12.7p per share on its balance sheet, so on a cash adjusted basis the shares are being rated on less than 9 times earnings. Buy.
Book value doubles at Arbuthnot
Aim-traded private banking group Arbuthnot Banking (ARBB:1,420p) has reported storming set of results and a doubling of net asset value per share to 1,136p. Part of that gain in book value resulted from the disposal of £25m of Aim-traded shares in Secure Trust Bank (STB: 2,925p), an unsecured lender with a market value of £532m, and a company in which Arbuthnot still owns 9.48m shares worth £277m, or 51.8 per cent of the issued share capital. That shareholding alone is worth more than Arbuthnot's own market capitalisation of £211m!
But this is not just about a glaring valuation anomaly. That's because the 65 per cent increase in Arbuthnot's underlying pre-tax profits to £30.6m in fiscal 2014 not only reflects the stellar progress at Secure Trust, but a near trebling in the profits at Arbuthnot Latham, its own private banking arm and an operation which has grown customer loans to over £500m for the first time. And analysts expect profits at the private bank to almost double again to £7m this year, buoyed by the acquisition of the residential mortgage book of Dunfermline Building Society from its administrators.
Applying a multiple of 10 times to the current year estimate of Arbuthnot Latham's post-tax profits and I reckon that the unit has a value the equivalent of around a quarter of Arbuthnot's own market capitalisation. Moreover, we are getting this business in the price for free since Arbuthnot has a market value almost 25 per cent less than the value of its shareholding in Secure Trust! Add to that the recently declared 27p a share dividend, and I feel that the valuation anomaly is worth exploiting with Arbuthnot shares rated on a forward PE ratio of 12.5 times, representing a four point earnings discount to Secure Trust's own rating despite Arbuthnot's 51 per cent stake in that business. Buy.
Funded for robust growth
Aim-traded Inspired Capital (INSC:17p), a lender to small- and medium-sized enterprises (SMEs), has agreed a credit facility with the British Business Bank. The funding will be provided as a three-year syndicated back-to-back facility with Lloyds bank, increasing the total facilities for Inspired's invoice finance business from £50m to £75m and on the same commercial terms as the Lloyds facility.
This news comes hot on the heals of an exclusive collaboration agreement between Inspired and Aim-traded PROACTIS (PHD:86.5p), a global spend control and eProcurement solution provider, to develop an accelerated payment facility (APF) for UK SMEs which will enable Inspired to accelerate the settlement of suppliers' pre-qualified invoices. PROACTIS estimates that its own 500 plus blue-chip clients are spending £60-80bn each year across one million SME suppliers, so offering a significant market opportunity.
It has a point as research conducted by the Federation of Small Businesses highlights that one in five UK SMEs are being impacted by a 'serious deterioration of payment practices' and buying organisations are increasingly exerting power on their supply chain with SMEs experiencing the adverse effects of extended terms of trade. This trend presents an opportunity for the provision of supply chain finance for SMEs, while allowing buyers to maintain their working capital position. Both PROACTIS and Inspired believe that the APF will have a high level of take-up within UK SMEs when it is launched later this year as it will offer a solution to cash-pressurised companies.
Clearly, there are risks investing in a fast growing company targeting the SME lending market. However, with Inspired's shares still trading on a 8 per cent discount to book value, and with funding lines in place and its technology platform capable of being scaled up to service a £400m loan book, or six times more than gross lending at the end of last year, there could be decent upside here. Buy.
Stanley Gibbons buying opportunity
Whereas shares in all the five companies mentioned above are trading in line or above the opening offer prices when my 2015 Bargain share portfolio was launched on Friday, 6 February 2014, those of Stanley Gibbons (SGI:257p), the most famous name in stamps and a business now encompassing coins, collectables, antiques and auctions, have slipped by around 9 per cent from 282p on the offer to 257p now.
As a result of the share price drift, they are now massively oversold with the 14-day relative strength indicator below 20, and the price close to the support levels from last autumn. It also means that the shares are very modestly rated and the risk:reward ratio is skewed to the upside considering that we can expect a bumper set of full-year results from Stanley Gibbons for the 12 months to the end of March 2015.
Ahead of a pre-close trading update, and factoring in a maiden 12-month contribution from the acquisition of Noble Investments, the international rare coin, banknote, medal and stamp dealer and auction house, analyst Charles Hall at broking house Peel Hunt predicts a doubling of full-year pre-tax profit to £11.2m to drive EPS up by around 25 per cent to 20.3p. On this basis, the shares are rated on a modest 12.5 times earnings' estimates for the year just ending and offer a 3 per cent prospective yield.
Moreover, with the upside to come from the recent acquisition of antique dealer Mallett, combined with cross selling opportunities and cost savings, Mr Hall anticipates pre-tax profit will hit £13.6m on revenues of £72m in the 12 months to end March 2016 to produce EPS of 24.5p and underpin a dividend per share of 8p. In other words, Stanley Gibbons shares are being rated on a miserly 10 times earnings estimates for fiscal 2016, a rating completely out of sync with a company generating 20 per cent plus earnings growth. In the circumstances, I would use the unwarranted share price weakness in the past few weeks as an opportune buying opportunity to add the Aim-traded shares to your collection. Buy.
MORE FROM SIMON THOMPSON...
Please note that since the start of March I have written articles on a total of 41 companies, all of which are available on my IC homepage... and are detailed in chronological order below with the relevant web links for ease of reference.
■ Non-Standard Finance: Buy at 103p ('A non-standard investment', 2 Mar 2015)
■ WH Ireland: Buy at 92p, target 140p ('A non-standard investment', 2 Mar 2015)
■ Software Radio Technology: Buy at 31.25p, target range 40p to 43p ('On the radar', 3 Mar 2015)
■ Vislink: Buy at 48.5p, target 60p ('Tapping into e-commerce profits', 4 Mar 2015)
■ Sanderson: Buy at 68p, target 80p to 85p ('Tapping into e-commerce profits', 4 Mar 2015)
■ Town Centre Securities: Run profits at 292p ('To bank profits or not?', 5 Mar 2015)
■ Sutton Harbour: Buy at 36.5p ('To bank profits or not?', 5 Mar 2015)
■ Housebuilders: Run profits on Persimmon, Bellway, Barratt Developments, Taylor Wimpey, Berkeley Group. Bank profits on Crest Nicholson, Bovis Homes, Galliford Try and Redrow. Buy Inland at 64p) ('Housebuilders: trading gains', 9 Mar 2015)
■ Walker Crips: Buy at 47p; Henry Boot: Buy at 232p; H&T: Buy at 179.5p; Nationwide Accident Repair Services: Buy at 85p; Communisis: Buy at 56p; Global Energy Development: Speculative buy at 44p ('Six-shooter of small-cap buys', 10 Mar 2015)
■ Stadium: Run profits at 123p; Pure Wafer: Hold at 42p ('Electrifying shares', 11 Mar 2015)
■ CareTech: Buy at 230p, target 300p ('Time to take care', 16 Mar 2015)
■ LMS Capital: Buy at 77.5p; Globo: Run profits at 55.5p; Trifast: Buy at 99p, target 140p ('Exploiting currency moves', 17 Mar 2015)
■KBC Advanced Technologies: Buy at 87p, target 165p; K3 Business Technology : Buy at 227p, target 275p; Fairpoint: Buy at 123p, target 190p ('Blow out results', 18 Mar 2015)
■ Charlemagne Capital: Buy at 10.75p; Bloomsbury Publishing: Hold at 155p ('Below the radar', 19 Mar 2015)
■ Redde: Buy at 108p, target 125p ('In the fast lane', 23 March 2015)
■ Simon Thompson's 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 stockpicking'
