Join our community of smart investors
OPINION

Running bumper profits

Running bumper profits
April 21, 2015
Running bumper profits

In fact, I updated the investment case of no fewer than 13 companies on my watch list last week, details of those articles are enclosed at the end of this column. I have also been steadily initiating coverage on new companies throughout this year including my latest offering yesterday (‘Bug busting potential’, 20 April 2015). In today’s investment column, I have been running the rule over another three companies, all of which appear to offer decent scope for further share price gains.

Stadium’s share price flashing green for gains

Aim-traded Stadium Group (SDM: 123p), a specialist provider of niche electronic technologies, released an upbeat trading update at its annual meeting at the tail end of last week and one that confirmed the company is well on track to deliver another step change in profits this year. Analyst Jon Lienard at broking house N+1 Singer is pencilling in a 29 per cent rise in fiscal 2015 revenues to £53.7m which should drive up adjusted pre-tax profits by almost half to £4m and deliver EPS of 9.5p. On this basis, expect the dividend per share to be raised by almost 30 per cent to 2.7p, covered 3.5 times by net profits, implying a prospective dividend yield of 2.2 per cent.

A prospective PE ratio of 12.5 is attractive too given the heady earnings growth rate the company is now producing. In 2014, the company increased both adjusted pre-tax profits and diluted EPS by about 40 per cent to £2.7m and 7p, respectively, which enabled the board to declare a 75 per cent hike in the dividend per share to 2.1p. It’s only fair to point out that the contribution from acquisitions is playing a major part in this stellar earnings growth story, but it’s also one well underpinned by a positive industry backdrop and the successful rationalisation of Stadium’s operations to slim down the costs base.

In the circumstances, it’s hardly a surprise that the shares have been flying, having risen by almost 60 per cent on an offer to bid basis since I initiated coverage at 75.5p ('Switch onto the Stadium of light', 30 July 2014). I last advised running profits when they were around the current level six weeks ago (‘Electrifying shares’, 11 March 2015). The positive news from the latest trading update aside, the share price is sending out positive signals too.

That’s because having hit a high of around 125p in January, a price point which acted as a ceiling in February, the share price looks on the verge of taking out that all-time high. The 14-day relative strength indicator (RSI) has unwound from an overbought position and, with the reading slightly below 60, is no longer over extended. The moving average convergence divergence (MACD) momentum oscillator is above both zero and its signal line having given a buy signal earlier this month. For good measure, the share price is no longer over extended above its short-term trend lines which are now close at hand and have played catch up following the explosive share price move earlier this year. The 20-day exponential moving average (EMA) is around 118p, and the 50-day EMA is at 115p. In my opinion, the odds of a share price break-out and a move towards my 140p target price have shortened in recent weeks.

Strong fundamental drivers

Importantly, the fundamental investment case is highly supportive too. Buoyed by some smartly timed acquisitions, the company’s technology products division is well on course to account for half of Stadium's sales, up from only 20 per cent or so in 2013, so the quality of earnings has improved especially as the company is servicing some pretty high growth markets. For instance, the acquisition of United Wireless last summer has given Stadium exposure to the design and manufacture of electronics for the machine-to-machine (M2M) wireless sector. This niche technology supports wireless connectivity between devices, primarily mobile networks, targeting businesses in the following key sectors: automotive, telematics and asset tracking. Industry experts predict that demand for M2M devices will grow at a compound annual rate of 24 per cent over the next five years.

Expect other bolt-on acquisitions as the year progresses as Stadium’s board is currently looking to boost exposure to similar high growth markets in order to complement its existing technologies. The combination of strong cash generation and a lowly geared balance sheet provide ample resources to fund any such deals.

So, trading on 12.5 times fiscal 2015 earnings estimates, falling to only 10 times 2016 earnings based on a further 30 per cent rise in earnings per share next year, I feel that the share price rating is very attractive for a company set to grow EPS by a total of 75 per cent this year and next. If you followed my previous advice, I would continue to run your bumper profits with the shares priced on a bid-offer spread of 120p to 123p.

First Property shares soar

Shares in Aim-traded property fund manager First Property Group (FPO: 39p) have surged in the past three weeks since I reiterated my medium-term target price of 38p to 40p (‘A quartet of small cap buys’, 30 March 2015) and have now more than doubled since I included the shares at 18.5p in my 2011 Bargain Shares portfolio. I have remained positive ever since and stood by that advice at the start of this year (‘Buy into an earnings upgrade’, 8 January 2015).

The fundamental case for investing also supports the latest price move. A pre-close trading statement released late last week ahead of fiscal 2015 results in June confirms that the company is trading bang in line with the high growth expectations of analysts. Chris Thomas at broking house Arden Partners believes First Property will report a 21 per cent increase in pre-tax profits and EPS to £8m and 5.8p, respectively, in the 12 months to end March 2015, albeit this does include one-off profits.

The company has also made great strides to boost its recurring pre-tax profit which has increased to around £7.1m, accounting for almost all of Arden’s profit estimate of £7.3m (based on revenues of £18m) for the fiscal year to end-March 2016. Recurring revenue from directly held property and funds managed – details of which I outlined in some depth in my last investment column – produces EPS of about 4.4p, which easily covers the 1.19p payout forecast by Arden for the March 2015 year-end, and the 1.26p forecast for the March 2016 fiscal year. On this basis, the shares offer a prospective dividend yield of 3.2 per cent for fiscal 2016.

Moreover, there is a realistic chance of earnings upgrades as this year progresses. That’s because First Property currently has around £12m cash available on its balance sheet for more earnings accretive acquisitions of high yielding property. That’s about £700,000 more cash than Arden had previously predicted. So although the shares hit my 40p target price on Friday 17 April, and are close to a 20-year high, I would continue to run your bumper profits as they still only trade on 9 times recurring net earnings, and are underpinned by a decent dividend yield.

Engineering share price gains

Shares in Trifast (TRI: 108p), a global manufacturer and distributor of industrial fastenings, look set to launch yet another attack on the 115p glass ceiling which has capped progress since last summer. Based on the positive technical indicators, and the strong fundamental case, I wouldn’t bet against this resistance level being taken out either. The obvious catalyst for a break-out being the financial results for the 12 months to end March 2015 due out on Tuesday, 16 June. They should make a good read as a pre-close trading update revealed that the pre-tax profits “will, at a minimum be at the upper end of consensus market expectations”.

Analyst David Buxton at finnCap predicts Trifast will deliver pre-tax profits of £13.5m and EPS of 8.1p, up from £9.2m and 6p, respectively in fiscal 2014, based on an 18 per cent rise in revenues to £153m. Jo Reedman at N+1 Singer and Nigel Harrison at Edison Investment Research have almost identical forecasts. On this basis, expect the payout per share to be raised from 1.4p to at least 1.7p (finnCap and Arden Partners estimates), and possibly as high as 1.9p (N+1 Singer), implying a prospective dividend yield of over 1.7 per cent and a PE ratio of 13.4. Moreover, based on N+1 Singer’s pre-tax profit estimate of £14.5m for the March 2016 fiscal year, expect EPS to rise to around 8.8p and the PE ratio to fall to 12.5.

Analyst Ben Thefaut at Arden Partners believes “sensitivity for fiscal 2016 forecasts remains firmly to the upside if current trends are maintained beyond the March 2015 year-end, and further to the consolidation in the share price in recent months, Trifast is a firm buy at current levels’. I would agree as it’s clear that margin enhancement from the acquisition of VIC, an Italian manufacturer and distributor of fastening systems predominantly to the white goods industry, and ongoing organic sales growth both domestically and overseas, have more than offset the negative headwind of sterling’s strength against the euro.

Indeed, Mr Thefaut points out that Trifast has been successfully extending its range of operations beyond traditional European original equipment manufacturers on a “preferred supplier basis” with its larger customers taking Trifast into sister plants in Asia and US. The company is also enjoying improved returns in the UK buoyed by restocking and increased demand from the automotive, domestic appliances and 4G business services sectors. Investment in extending overseas facilities, some of which are now operating at full capacity, should offer additional scope for upside to current year profit estimates.

So, having rallied since I last updated the investment case when the price was 99p (‘Exploiting currency tailwinds’, 11 March 2015), I rate the shares a strong buy on bid-offer spread of 107.5p to 108p ahead of the forthcoming financial results. My target price is 140p. Please note that I initiated coverage on the shares when the price was 53p a couple of years ago ('Bargain shares for 2013, 7 February 2013).

MORE FROM SIMON THOMPSON...

Please note that I have published articles on the following 14 companies since the start of last week:

Nationwide Accident Repair Services: Accept bid; SeaEnergy: Buy at 21.5p; Netplay TV: Buy at 9.5p; Stanley Gibbons: Buy at 253p (‘Profiting from M&A’, 13 April 2015)

Getech: Buy at 61p, target 80p; Cohort: Buy at 280p, target 300p; Faroe Petroleum: Buy at 86.5p, target 100p; Gama Aviation: Hold at 272.5p (‘Flying high’, 14 April 2014)

Entu: Buy at 145p, target 165p; Flowtech Fluidpower: Buy at 121p, target 150p (‘Riding the new listings gravy train’, 15 April 2015)

Inland Homes: Buy at 64.5p, target 80p; Walker Crips: Buy at 45p, target 54p; Software Radio Technology: Buy at 32p, target range 40p to 43p (‘Decision time’, 16 April 2015)

Bioquell: Buy at 124p, target range 155p to 159p ('Bug busting profit potential', 20 April 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'