The trading performance in the 26-week period was mightily impressive with the retailer's underlying sales up 10 per cent, implying a step up on the 7.6 per cent sales growth reported for the first 15 weeks of the financial year. There are several factors driving this performance, but the ramp up in Moss Bros' store modernisation programme is the main one: 11 stores were spruced up in the six-month period, four were relocated to larger and better locations and five marginal stores closed. A further 14 shops are scheduled to be refurbished in the second half, which means that almost three-quarters of the 125 store estate will have been refitted by the end of January.
Combined with the successful launch last autumn of sub brands, Moss London, Moss 1851 and Moss Esquire, and a far greater online presence - internet sales surged almost 60 per cent year on year to account for 10 per cent of Moss Bros's £61m sales in the period - this is helping to change customer perception of the company as a modern, multi-channel retailer.
Importantly, with costs kept in check, and gross margins improving largely due to a 140 basis point margin gains on the retail side, profits increased markedly more than the 10 per cent revenue growth rate. In fact, both operating profit and pre-tax profit soared by 44 per cent to £2.8m, leaving the company well-placed to deliver the 24 per cent forecast rise in pre-tax profit to £5.7m as analysts predict for the 12 months to the end of January 2016. On that basis, expect EPS of 4.4p, up from 3.6p last year, and a raised dividend per share of 5.4p. These estimates are based on a 10 per cent rise in full-year revenues to £125m and assume a cash profit margin of 9.7 per cent on sales. In the first half, Moss Bros delivered cash profits of £6.3m on revenues of £61m so earned a margin of almost 10.3 per cent, well ahead of the full-year run rate.
The cash-flow performance of the business was notable, too, with net funds holding steady at £19m since the January 2015 year-end, a sum worth over 19p a share, even though Moss Bros paid out £3.5m in dividends and invested £6.7m in its stores. This highlights the ability of the company to not only recycle its robust cash generation into store refits - the business produced operating cash flow of £9m in the six-month period - but also reward shareholders with a rising payout. The half-year dividend has been raised 6 per cent to 1.8p a share, in line with the 5.4p a share full-year payout estimate. It's worth noting that Moss Bros's annual non-cash depreciation and amortisation charge is now around £7m, which subdues the IFRS pre-tax profit line, but not cash generation. This explains why the company can pay out a dividend well ahead of its IFRS net earnings.
So, offering a prospective dividend yield of 5.7 per cent, and rated on a modest six times current year cash profit estimates of £12.1m after adjusting for net cash worth a fifth of the market capitalisation, I have no hesitation in maintaining my positive stance on the shares.
Please note that I first advised buying Moss Bros's shares at 39p ('Dressed for success', 20 Feb 2012), and last updated the investment case in early summer at 110p after which the company paid out a final dividend of 3.55p ('Exploiting a valuation anomaly', 3 Jun 2015). On a bid-offer spread of 96p to 97p, and having successfully retested the bottom of their trading range, I rate Moss Bros's shares a buy.
Platforms for growth
Shares in Aim-traded GLI Finance (GLIF: 52p), a speciality finance company that invests in peer-to-peer and small- and medium-sized enterprise (SME) lending platforms in the UK, Europe and the US, are slightly down since my last update ('A triple play of small-cap value picks', 23 Jun 2015). They are also trading around the level at which I first recommended buying ('Funded for growth', 25 Feb 2014), albeit you will have picked up six quarterly dividends of 1.25p a share in the interim if you followed that advice.
In spite of the lack of share price progress, the investment case remains firmly intact. For example, last week the company successfully launched GLI Alternative Finance (GLAF: 102p), a closed-end fund that will invest in a range of loans originated principally through the investee platforms in which GLI Finance holds strategic equity investments. GLI Finance has so far invested in 19 SME finance platforms that span asset class and geography and is in the process of scaling up these platforms so that they can lend to a greater number of businesses and help the company deliver enhanced returns for its shareholders.
Indeed, as the origination of loans increases within these 19 platforms, a key objective for the company is to ensure that it can still support the platforms through the provision of lending capacity. Over the 12 months to the end of June 2015, the volume of loans originated through GLI Finance's platforms more than doubled to £227m. Until recently this loan growth has largely been through lending from the company's own balance sheet, but having received regulatory approval GLI Finance can now provide lending capacity to the platforms through the funds managed by its new fund management arm, GLI Asset Management.
In turn, this is supportive of the investment case for GLI Alternative Finance, which raised aggregate gross proceeds of £52.7m under which a portfolio of loans has been transferred by GLI Finance in return for the issue of 40.2m shares in GLI Alternative Finance at 100p each. This means that around 30 per cent of GLI Finance's portfolio of £145m is invested in GLI Alternative Finance's shares.
GLI Finance will also earn management fees from GLI Alternative Finance for fund management services provided by GLI Asset Management. Furthermore, as the businesses grow, there will be further opportunities for GLI Finance to develop revenue streams to capture more of the value chain, such as the potential to manage third-party funds to invest through its family of platforms.
The company has continued to develop its own portfolio, too, and made four new investments in SME platforms in the first half worth a total of £4.7m, accounting for just over 4 per cent of the company's net asset value. These include MytripleA, a Spanish business finance platform meeting both the short-term and long-term financing needs of Spanish SMEs; Open Energy Group, a financing platform for US commercial and small utility-scale solar projects; and Funding Options, a UK online credit broker that matches lenders with borrowers and acts as a one-stop-shop for business finance.
Of course, not all the investments will work out, but with a decent spread in the portfolio, then the risk is being wisely diversified. And as the businesses scale up, and become profitable, then this offers potential for capital upside for GLI Finance's shareholders. In the meantime, there is a decent dividend which the board has committed to. It's sustainable too as long as the company can generate a return on equity (ROE) in its 10 to 15 per cent range. In the first half of the financial year, ROE was 16.3 per cent.
So with GLI Finance's shares trading at net asset value, and offering a near 10 per cent dividend yield, I remain a buyer and maintain fair value at 80p.
On sound foundations
Town Centre Securities (TCSC: 315p), the Leeds-based retail and office property investor and car park operator, has reported a 12 per cent increase in net asset value per share to 344p in its financial year to the end of June 2015, or 4 per cent ahead of the analyst estimates at broking house Liberum Capital. The growth was driven by a 7 per cent like-for-like increase in the portfolio's value, a 2.8 per cent underlying rise in the estimated rental value to £21.8m and reflects a 60 basis point contraction to 6.8 per cent in the reversionary yield used by surveyors to value the company's property assets.
Retail valuations continue to rise in the regions and chief executive Edward Ziff expects this trend to be maintained as the economic backdrop improves. True, the letting market remains competitive, but the company is still finding opportunities to increase income in all areas of its portfolio. Importantly, with almost a third of the company's £324m book invested in its flagship Merrion Centre in Leeds, a further quarter in retail and leisure, and 14 per cent in out-of-town retail, then nearly three-quarters of the portfolio by value has a retail element, the segment of the market that is set to benefit from the improving economic trends.
It's only realistic to expect investor demand to remain strong too as occupancy levels improve, and market supply of grade A space is taken up in both Town Centre's biggest regions, Leeds and Manchester, reflecting the strength of tenant demand. The company's property book has a decent spread of high-quality tenants, low vacancy rates and generates robust cash flows, so it is ideally placed to benefit from the retail property recovery. In turn, expect further yield compression to drive net asset value per share higher. The net initial yield on Town Centre's Securities investment portfolio is currently 5.8 per cent, down from 6.7 per cent in June 2015, but still well above the 5 per cent yield that marked the market peak in 2007.
I am not the only one thinking this way as analysts at Liberum upgraded their net asset value per share forecast by around 5 per cent to 364p and 412p for the June 2016 and June 2017 fiscal year-ends, respectively. This means that the shares are priced on a 13 per cent discount to net asset value forecasts and offer a decent 3.3 per cent dividend yield. That's decent value in my book. The maintained final payout of 7.34p goes ex-dividend on 2 December and is paid in early January.
So, having first advised buying the shares at 198p ('A high-yield play in the north', 18 Feb 2013), and reiterated that advice at 310p in the summer ('Equity market watch', 11 Aug 2015), I remain positive on the investment case. It's worth noting too the relative strength of the shares in a falling market.
On a bid-offer spread of 311p to 315p, I rate Town Centre's shares a buy and my year-end target price is 350p.
Investors starting to warm to Globo
Shares in Aim-traded Greek mobile software provider Globo (GBO: 38p) have rallied strongly since I reiterated my buy advice at 33p last week ('Cashed up for cash returns', 22 Sep 2015), albeit they are still adrift of the 47p level I recommended buying at earlier this year ('Going global', 2 Feb 2015) and the 42.5p level when I interviewed the company's chief executive Costis Papadimitrakopoulos ('Short sellers in for shock treatment', 4 Aug 2015).
However, a bumper set of first-half results, and a strong cash-flow performance, will have allayed some of the fears that have dogged the share price. In the six-month trading period, net cash generated from operations rose by more than a quarter to €21m to produce free cash flow of €7.2m and resulted in net funds rising by $7m to €47.4m. That sum alone is worth 12.6¢, or 9.3p a share.
News of an earning-accretive acquisition of a mobility security provider in Europe, announced shortly before the half-year results and due to complete in October, is also a positive as it highlights the type of deal Globo is targeting to fulfil its ambition of becoming a leading pure-play operator in the enterprise mobility management (EMM) and Mobile Application Development Platform (MADP) business segments.
The company will pay €6.5m in cash upfront from its existing resources with the €7.5m balance of the consideration subject to earn-outs based on profit targets over the next two years. The deferred element is payable in cash and new shares in Globo in order to incentivise the successful integration and performance of the acquired company. The upfront payment equates to seven times projected cash profits of the target for 2015.
Importantly, the target has a successful track record with customers in the banking, finance and public sectors, and has built a strong reseller network including telecoms companies, IT solutions providers and mobile technology players. The strategic value to Globo is to enhance its GO!Enterprise portfolio with certain aspects of security that are not covered in its platform, and provide access to additional regulated financial markets.
Of course, the main drag on Globo's share price has been the delay in getting a high-yield bond issue off the ground, a point I discussed in my previous articles. I understand discussions with investors are ongoing and the company still expects a successful conclusion of the fundraising process to enable Globo to execute further bolt-on acquisitions. Bond investors will now have the opportunity to run their rules over the latest upbeat trading figures.
So with Globo well on course to lift EPS by 30 per cent to 8.7p in 2015, and cash-flow positive, I continue to feel that the shares are being very harshly valued on less than five times earnings estimates. Offering 80 per cent potential upside to my fair value target of 69p, I remain a buyer.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies since the start of last week:
■ Trakm8: Run profits at 195p, target 220p; Character Group: Run profits at 518p, target 575p; Marwyn Value Investors: Buy at 220p; Global Energy Development: Speculative buy at 30p; Software Radio Technology: Buy at 27p, target range 40p to 43p; Globo: Buy at 33p, target 69p; Pittards: Hold at 105p ('Cashed up for cash returns, 22 Sep 2015).
■ KBC Advanced Technologies: Buy at 112p, initial target 142p; K3 Business Technology: Run profits at 298p; Cenkos Securities: Buy at 177p; Netplay TV: Buy at 10p ('Small cap value plays', 23 Sep 2015).
■ Miton: Buy at 26.5p, target 35p; 32Red: Buy at 73.75p, target 90p; Stanley Gibbons: Buy at 138p; Vislink: Buy at 40p, target 70p ('Building momentum', 29 Sep 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'
