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Catalysts for share price moves

Catalysts for share price moves
June 4, 2015
Catalysts for share price moves

The fundamental case for investing is certainly positive. In yesterday’s first quarter trading update, the company revealed a very strong start to the new financial year. Revenues and cash profits surged by a third to €23.7m (£17m) and €13.4m, respectively, buoyed by a doubling of turnover from Globo’s Go!Enterprise enterprise mobility management (EMM) division which benefited from the renewal of 50,000 GO!Enterprise EMM licences and an incremental purchase order from a US Fortune 100 company, worth US$1.2m (£750,000). This business unit offers customers products that enable employees to securely access their corporate intranet and any other internal web application through the secure mobile browser of GO!Enterprise Office, and access enterprise information such as email, files, contacts, and notes from any mobile device.

It’s reasonable to expect further similar contract wins as Globo’s management are specifically targeting expansion in the US market, and chief executive Costis Papadimitrakopoulos is confident that this “early success will continue through the remainder of the year”. The company has just listed its shares as ADRs on OTCQX International in response to growing US institutional interest, so could be attracting interest overseas too.

Cash rich and cash generative

Another take for me was the first quarter cash flow performance in what is usually a seasonally weak period for cash generation. Globo generated free cash flow of €1.8m in the three month period which compares with a €7.4m outflow in the same period in 2014. The company’s net cash position improved to €41.2m, up €800,000 since the start of the year, a sum worth around 8p a share.

Importantly, the first quarter trading performance is clearly positive for the company achieving the double digit earnings growth expectations of analysts this year. At the top of the range, analysts predict Globo's EPS could hit 8.7p a share in 2015, up from 6.7p in 2014. This means the shares are rated on a prospective PE ratio of 6.8. That’s hardly a punchy rating for a tech company with a growing US bias and one looking to use its strong balance sheet and cash generation to make additional complimentary acquisitions stateside.

So having issued a conditional buy recommendation on the shares at 47p aiming for an initial target price of 60p ('Going global', 2 February 2015), and reiterated my advice three weeks ago (‘Break-out looms for mobile wonder’, 12 May 2015), I strongly feel that another break-out is on the cards. I rate Globo’s shares a buy on a bid offer spread of 58.5p to 59p and have a short-term target price of 69.5p. Buy.

Priced for recovery

Shares in regional shopping centre owner London & Associated Properties (LAS: 38p) have drifted slightly since I updated the investment case when the price was 41p (‘Funded for acquisitive growth’, 21 August 2014). I originally recommended buying around the 44p level (‘Undervalued and under researched’, 17 February 2014), and the price subsequently achieved the middle of my fair value target range of between 60p to 65p.

The company has just released its fiscal 2014 results and there were enough positives in the accompanying trading update to indicate that an uptick in the asset values of its regional shopping centres could be forthcoming to underpin a share price recovery. Moreover, with the company’s shares rated on a deep 25 per cent discount to book value, and the board confident enough to raise the payout by a quarter to 0.156p a share, then I think the investment risk is to the upside too.

Indeed, chief executive John Heller points to “strong investor demand for shopping centre and retail property following a recovery in occupational demand. Rental levels for shops found a floor during 2014 and, in many locations, are now showing growth”. He also notes that “tightening yields has meant investors have looked outside London with more enthusiasm and provincial locations are in greater demand than for some time. In this environment of low interest rates and attractive risk premia, the value of properties in our portfolio should remain firm”.

Lettings underpin values

He has a point as following the letting of the former Republic store in the company’s Orchard Square shopping centre in Sheffield, generating rental income of £600,000 after rent free periods have expired, and the signing of a new lease with River Island, the centre is now in effect fully let.

London & Associated Properties’ two indoor markets in Brixton, south London, have nil voids either and continue to attract significant interest from retailers. And with two nearby redevelopments compromising hundreds of new homes being promoted by Lambeth Council, then this should have a positive effect on rental values at these thriving London markets. That can only be good for valuations too.

True, trading was more challenging at Kings Square in West Bromwich where two tenants were enticed away to rival shopping centres. But the company has acted decisively by commencing lease negotiations with a number of anchor tenants and has placed two units with national retailers. The centre is being re-branded this year and the feeling is “there has been a positive shift in momentum”.

The joint venture with Oaktree Capital is also progressing well. For instance, the company reports a number of important lettings at the Kingsgate Shopping Centre, Dunfermline, including ones with retailers DW Sports and Top Shop. A number of units are currently under offer at this previously underinvested centre which the joint venture partners acquired for its turnaround potential. The same is true of The Rushes Centre in Loughborough.

Indeed, following management initiatives, the centre will shortly be fully let following successful lettings to Poundworld and 108 World Buffet, a Midlands-based restaurant chain, and the completion of one final unit which is under offer to a national chain of restaurants. These lettings are ahead of estimated rental value at the time of acquisition and complement the existing tenant line-up which includes Tesco, Marks & Spencer, Next, TK Maxx and Argos. Interestingly, the company reports “strong institutional demand for shopping centres with this quality of tenants”, so given the limited scope for further active management, the property is set to be sold during the course of the year.

Finances in cleaner shape

It’s worth pointing out too that having refinanced its borrowings last summer by signing a £45m five-year bank financing with Santander and Europa Capital Mezzanine at a blended interest cost of 4.79 per cent, the company has a far cleaner balance sheet. True, it has £13.75m of more expensive debentures secured on property, the longest date is due to mature in 2022, but even factoring this in the company’s recurring rental income of around £6.5m is well ahead of its total borrowing costs. Without tapping existing borrowing facilities, the company has over £6m cash available for investment.

The key though for a sharp share price recovery is the potential for compression in the yields used to value the company’s shopping centres. That’s because with gearing around 111 per cent, small changes in the yield applied by commercial surveyors when valuing London & Associated’s properties will have an accentuated impact on net asset value per share. I am willing to bank on the possibility that investor demand will suppress yields in previously unfavourable regional retail property and rate the shares a medium-term buy at 38.5p.

Greenko share price slide

I published a detailed analysis of the issues facing Greenko (GKO: 44p), the Indian developer, owner and operator of clean energy projects, only three weeks ago but given the share price slide since then another update is warranted.

To recap, I initiated coverage on the shares when they were 138p ('Buy signal flashing green', 18 March 2013), the price subsequently hit a high of 190p and I then downgraded my advice to hold at 104p post the fiscal 2014 results announcement ('Small cap updates', 31 March 2015).

There has been no corporate newsflow since my last article (‘Break-out looms for mobile wonder’, 12 May 2015), but clearly some investors have bailed out, hence the share price drop from 70p to 44p in the past three weeks. This has resulted in Greenko now being valued at £68m, or almost £100m less than its equity shareholder funds, and reflects the potential for a dilutive share issue on the conversion (into ordinary shares) of the minority interests in Greenko Mauritius held by the Government of Singapore (GIC) (whose investment has a value of £140m), and Global Environment Emerging Markets (investment has a value of £75m).

I raised this specific issue in both my March and May articles, noting that GIC has the right to exchange its 17.38 per cent interest in Greenko Mauritius into Greenko ordinary shares anytime between 1 July 2015 and 30 June 2017. True, the number of shares that can be issued to GIC is capped to prevent it from owning more than 29.9 per cent of Greenko's enlarged ordinary share capital. But with Greenko’s share price now so depressed, then if GIC takes up its conversion rights next month then it will not only be issued with a chunk of new equity in Greenko, but will also end up owning a minority interest in Greenko Mauritius as well. The same applies to Global Environment Emerging Markets (GEF) which has the right to exchange its 14.09 per cent interest in Greenko Mauritius into Greenko ordinary shares anytime between 1 July 2015 and 30 June 2017.

Clearly, there needs to be discussions between GIC and GEF and the board of Greenko to resolve the conversion issue as a matter of urgency. It would be negligent for the board of directors not to protect the interests of their own shareholders. Furthermore, it makes sense for all parties to come to some sort of compromise agreement as soon as possible, and preferably before the first exercise date on 1 July 2015, in order to reverse the steep fall in Greenko’s share price which has so undermined investor confidence even though the business has been making strong progress operationally.

From a technical perspective, I would point out that Greenko’s share price is as oversold as it ever has been: the monthly RSI is below the level at the March 2009 bear market low, and the weekly and daily readings are in extreme oversold territory. At the intraday low of 40p yesterday, the price was also close to testing the support level at those March 2009 lows. From my lens at least, this technical set up is such that any positive news regarding a resolution to the conversion issue should lead to a very sharp bounce in Greenko’s share price given the massively oversold technical conditions. In the circumstances, my advice is to hold on.

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 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)

Tristel: Run profits at 96p; Pure Wafer: Buy at 123p, target range 140p to 150p; Crystal Amber: Buy at 153p (‘Hitting target prices’, 2 June 2015)

B.P. Marsh &Partners: Buy at 150p, target range 170p to 180p; Moss Bros: Buy at 110p, target range 120p to 130p; SeaEnergy: Sell at 15p (‘Exploiting a valuation anomaly’, 3 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'