Bug busting potential
Aim-traded Tristel (TSTL: 96p), a maker of infection prevention, contamination control and hygiene products, has reported yet another upbeat trading statement and one that has prompted analysts to upgrade their earnings estimates yet again. It also guarantees that the company will report record results for the fifth consecutive six month period when it releases its full-year pre-close trading statement late next month.
In fact, with the company performing ahead of budget in terms of both sales and profit over the ten months to 30 April 2015, buoyed by strong profit contributions from direct sales operations in the UK, Germany and Australasia, Tristel’s board now predict that pre-tax profits (before share-based payments) will be not less than £2.5m for the 12 months to end June 2015. To put the raised guidance into some perspective, full-year profits will now be at least £200,000 higher than analysts had previously predicted and a whopping 38 per cent more than the £1.8m of profits reported in fiscal 2014. Analysts Paul Hill and Hannah Crowe at research firm Equity Development are pencilling in full-year revenues of £15.5m, implying 15 per cent like-for-like sales growth in the 12 months to end June 2015 and an operating margin north of 16 per cent, a 2.6 percentage point hike on the previous financial year.
Importantly, there is every reason to expect the robust growth to continue into the new financial year and beyond given that Tristel’s board have a stated target of increasing annual revenues by at least 50 per cent by the 2016/17 fiscal year, implying a turnover figure north of £20m. Key to maintaining this impressive double digit sales growth rate is Tristel’s high-margin and patented chlorine dioxide technology healthcare products, accounting for 85 per cent of sales.
Prospects look well underpinned. Indeed,with MRSA and Clostridium difficile still affecting one in every 16 patients in NHS hospitals, then it’s hardly surprising that the company’s best in class clinically proven consumables product, Tristel Wipes, has become the most widely used decontamination method in ear, nose and throat, cardiology and ultrasound departments of UK hospitals. Moreover, as the latest trading update confirmed, the technology is also proving popular abroad: sales from human health products overseas jumped by 21 per cent on like-for-like basis in the first half, a trend that has clearly remained positive since then.
Steep profit growth trajectory
Furthermore, Mr Hill and Ms Crowe note that “with operational best practice being rolled out across its third party channel partners, we reckon it’s only a matter of time before distributor volumes catch up.” I agree and also feel that there is potential upside to Equity Development’s fiscal 2016 revenue estimate of £17.8m even after factoring in another 15 per cent hike in forecast underlying sales. But even without upgrades, the predicted profit growth is mightily impressive as Tristel is forecast to lift operating profit and EPS by a fifth to £3m and 5.25p, respectively, in the 12 months to end June 2016.
And as I noted when I first advised buying Tristel shares at 60p (‘Clean up on superbugs’, 6 May 2014), and when I updated the investment case at 80p earlier this year (‘Riding bumper profits’, 26 February 2015), the company is highly cash generative. Net funds were just shy of £3m, or the equivalent of 7p a share, at the end of December 2015 and expect a figure closer to £3.7m, or 9p a share, at the end of this month. In turn, this robust cash flow performance should result in a full-year payout of 2.3p a share, up from 1.6p in fiscal 2014, and covered almost two times over by forecast EPS of 4.36p.
On this basis, the shares are currently being priced on 20 times cash adjusted earnings, falling to 17 times cash adjusted earnings estimates for fiscal 2016 and only 14 times in fiscal 2017, a rating I believe is fully warranted for a company set to deliver EPS growth of 20 per cent over the next two financial years. Analysts at Equity Development also predict that the payout will be increased to 2.8p a share in the 2016 fiscal year, rising to 3.4p in fiscal 2017, implying prospective dividend yields of 2.9 per cent and 3.5 per cent, respectively.
Those multiples still offer further potential for share price upside even though Tristel’s shares, offered in the market at 96p, are rapidly closing in on my long-held target price of 100p. In the circumstances, I would run your healthy profits as I suspect we could be in line for further earnings upgrades as the year unfolds to drive a move towards Equity Development’s newly raised target price of 110p, up from 100p previously. Run profits.
Cash return forecast raised
There was an interesting announcement yesterday from Aim-traded Pure Wafer (PUR: 123p), a leading global provider of high-quality silicon wafer reclaim services to some of the world's largest semiconductor makers and foundries. I updated the investment case last month when the price was 113p (‘Repeat buy signals’, 11 May 2015), and raised my fair value target price to a new range between 140p to 150p, having initiated coverage when the share price was 72.5p ('Time to chip in', 10 October 2013).
As I noted in last month’s article, the company has agreed a full cash settlement with its insurers following a major fire at its Swansea facility (‘Engineering growth’, 5 February 2015), and one that will lead to a substantial cash return to shareholders. That’s because the company has decided not to reinstate the fire-ravaged Swansea plant, due to the fact that business from a number of customers has been lost permanently to rivals, but it will continue with operations at its plant in Prescott, Arizona. The actual size of the payout from the insurance claim has not been disclosed, but the fact that the board mentioned a cash return figure as high as 125p a share was well worth noting.
Indeed, from my lens at least, a read through from yesterday’s announcement shortens the odds considerably of a cash return being at the top of the range. That’s because Pure Wafer has announced that Royal Bank of Scotland has given notice of its intention to exercise its remaining 2.2m call warrants at an exercise price of 20p per share. As a result, and as per the terms of the warrants, Pure Wafer has exercised its pre-existing right to cancel these warrants in return for paying the bank £2.15m in cash, representing the effective “in the money” value of the warrants outstanding on Tuesday 26 May, the date of exercise.
As analyst Eric Burns at brokerage W.H. Ireland rightly points out: “The obvious implication of the company electing to cancel the warrants rather than issuing new shares upon exercise is that management believes the value of the company is in excess of the prevailing share price (118p on the date of exercise). This is clearly a bullish action and has led us to reassess our estimate of Pure Wafer’s potential sum-of-the-parts valuation.”
As a result Mr Burns has “lifted his base case payout assumption to 110p per share, towards the top end of the range, driven entirely by today’s actions. In addition, we continue to believe Pure Wafer’s continuing US business to be worth a minimum of 38p per share based on applying a conservative 4 times historic cash profit multiple whilst acknowledging that, to a strategic buyer, the valuation could be very substantially higher”.
Mr Burns has increased his target price from 100p to 148p, at the top of end of my own range. That looks fully justified and with Pure Wafer’s shares priced on a bid-offer spread of 118p to 123p, and offering potentially a further 20 per cent share price upside, I reiterate my buy advice ahead of a further announcement from the company on the size of the payout.
Crystal clear path to gains
It’s taken time, but subject to Ryanair accepting International Consolidated Airlines (IAG: 564p) indicative cash offer of €2.55 a share for the budget airline’s 29.9 per cent stake in Irish carrier Aer Lingus (AER: €2.44), then the end is now in sight for this long drawn out bid battle. With the Irish government agreeing to sell its 25 per cent stake in Aer Lingus to IAG last week, and IAG confirming it will not raise the offer any higher, then it’s difficult to see Ryanair’s board turning down the opportunity to bag a €405m windfall from a stake that analysts believe has a book value of only €226m.
It’s also good news for Aim-traded Crystal Amber (CRS: 153p), the activist investment company I included as one of my 10 Bargain shares for 2015. The company predominantly buys into small- and mid-cap UK equities where it sees opportunities to enhance long-term shareholder value through active engagement with companies. Crystal Amber also identified a great value opportunity in the shares of Aer Lingus well before the company became a takeover target.
It’s proved a smart move as the company’s 2.8 per cent shareholding in the Irish carrier is worth around 30.4p a share to Crystal Amber’s shareholders, the company’s largest investment by quite some way, assuming of course Aer Lingus is taken out at €2.55 a share as now seems likely. To put that figure into some perspective, Crystal Amber had a net asset value of 155.7p at the end of April 2015, a rise of around 5 per cent over the course of the month, including cash of 5.3p a share and a valuation of 27.4p at the time on the Aer Lingus stake. In other words, we can realistically expect a further 3p a share increase in Crystal Amber’s book value per share from its holding in Aer Lingus, to give the company around 36p a share of cash to deploy on new investments.
Importantly, the company has been making some decent progress on new investments, having snapped up just over 2m shares at 375p each in iconic film studio Pinewood (PINE: 455p) in a share placing at the end of March. That investment is showing a paper profit of 20 per cent already. The £30m raised by Pinewood in that placing is earmarked for the first stage of a three phase project to ultimately double the existing capacity of Pinewood Studios through the addition of a total of 100,000 sq metres of new facilities, comprising stages, workshops and production offices. Completion of the first phase is due in the first quarter next year and will significantly expand Pinewood's capacity to accommodate major feature films, television programmes, commercials and other screen-based productions. It will also enhance Pinewood's position as a leading facility for the global screen-based industries. Crystal Amber also has a 6.6 per cent stake in Scottish media company STV (STVG: 412p), shares of which we have a buy rating on.
So with Crystal Amber set to get a cash boost, and the company deploying its cash wisely, I feel that the shares are worth buying on a bid-offer spread of 151p to 153p. There is also the prospect of a 5p a share dividend this year. Buy.
MORE FROM SIMON THOMPSON...
At the end of April, I published an article with all the share recommendations I have made this year. Since then I have published articles on the following 27 companies:
■ Marwyn Value Investors: Buy at 220p, target price 260p ('Exploiting a value play', 5 May 2015)
■ Pure Wafer: Buy at 113p, target 140p to 150p; Paragon: Run profits at 440p, but buy on a confirmed breakout above the 445p and new target of 500p; 600 Group: Buy at 16.5p, target 24p; Fairpoint: Buy at 127p, target 190p; AB Dynamics: Buy at 207p, target 230p ('Repeat buy signals', 11 May 2015)
■ Globo: Buy at 56p, target 69.5p; Greenko: Hold at 70p; Pittards: Buy at 128p ('Break-out looms for mobile wonder', 12 May 2015)
■ Macau Property Opportunities: Buy at 214p; Dragon-Ukrainian Properties & Development: Hold at 28p; Raven Russia: Hold at 53p ('Overseas property plays', 13 May 2015)
■ Trakm8: Run profits at 135p; Redde: Buy at 120.75p, target 140p; STM: Run profits at 45p, but conditional buy on close of 48p and new target of 60p ('Smashing target prices', 14 May 2015)
■ Bilby: Buy at 75p, target 100p ('Buy to build' growth play, 18 May 2015)
■ Bioquell: Buy at 148p, target 170p to 185p; Somero Enterprises: Buy at 140p, target 185p; KBC Advanced Technologies: Buy at 109.5p, target 165p; Inspired Capital: Hold at 14.25p ('Three value plays', 19 May 2015)
■ Renew Holdings: Buy at 315p, target range 350p to 375p; Manx Telecom: Buy at 198p, target 210p ('Renewing old acquaintances', 20 May 2015)
■ Marwyn Value Investors: Buy at 228p, target 260p; Charlemagne Capital: Hold at 13.5p; Bloomsbury Publishing: Hold at 178p ('Lights, camera, action', 21 May 2015)
■ Anite: Buy at 91.5p, target 110p ('Testing a break-out', 26 May 2015)
■ Character Group: Buy at 415p, target 525p ('Playtime', 1 June 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'
