Bargain shares updates

It's just as well the quartet of top performers have done so well because shares in the three laggards - leather goods maker Pittards (PTD:94p), currency manager Record (REC:29p) and stamp and coin dealerStanley Gibbons (SGI:92p) - have between them knocked 11 percentage points off this year's total return, of which Stanley Gibbons is the main culprit. The company issued its half-year results to end September 2015 at the end of last week, having warned on profits last month ('Engineering upgrades', 6 October 2015).

How Simon Thompson's Bargain shares portfolio has peformed in 2015

Stamped on, but asset rich

The key take in the interim results was the extent of the collapse in stamp sales, reflecting a sharp fall-off in high-value items sold and losses from the Asian operations. As a result, revenue from philatelic trading activities collapsed by 40 per cent from £15m to £9.1m and trading profit of £4.9m from these activities in the first half last year was shredded to £368,000. The company's top 10 clients contributed only £3m of that £9.1m revenue figure, having accounted for £7.2m of the prior period's turnover. The appetite for stamp investing in Hong Kong and Singapore has taken a major knock: sales collapsed from £1.5m to £400,000 and these offices reported a loss of £200,000, quite a turnaround from a £800,000 profit in the same six-month period in 2014.

However, it wasn't all bad news as trading profit from coin dealing and auctions was only marginally down at £1.7m on revenue of £6.2m, reflecting a buoyant market for rare coins, and Dreweatts auctions turned in trading profit of £400,000 on flat revenue of £2.5m. Furthermore, reflecting a heavy second-half weighting to auction activities, and a focus on turning stocks into cash, the board anticipates a much improved second-half trading performance. It will be very welcome in order to pay down borrowings, which have risen from £11.7m to £17m since the start of March this year, albeit balance sheet gearing still only represents 21 per cent of shareholder funds of £81.9m.

Inventories ended the period at just shy of £55m, or 28 per cent higher than Stanley Gibbons' market capitalisation of £43m, and are made up of rare coins worth £8m, other collectibles including antiques worth £8m, and around £39m of stamps. These stocks are in the books at cost, but are clearly worth more than this given the company earned a like-for-like gross margin of 51 per cent on its first-half sales. Reducing stock levels is now a priority as is better cross-selling of products across the customer base to generate profits and cash flow. In the meantime, the interim dividend has been axed and whether there will be a final payout is dependent on the second-half trading performance, and the level of debt reduction.

The cost base has been slimmed, too, following a number of senior management changes at the end of September, including the departure of the company's corporate development officer. The restructuring is expected to yield annual cost savings of £1.4m. New management teams have been put in place in the Mallett antique business, which was acquired a year ago, and also Fraser's autographs, which between them incurred trading losses of £300,000 on revenue of £6.1m in the first half.

Value in assets and acquired businesses

Whether the company will be able to deliver a 4 per cent rise in revenues to £59m to produce full-year adjusted pre-tax profits of £5m and EPS of 8.7p, down from £7.5m and 12.6p, respectively, in fiscal 2015, as analyst Charles Hall at broking house Peel Hunt believes, is open to some doubt. In the first half, the adjusted loss was £0.6m on flat revenue of £27m, albeit this included £1.1m of investment in the company's new website and marketing spend there has been reined back until web traffic and conversion rates improve. With fewer buyers around the open market value of rare high quality collectibles is not so easily realisable as the company has found out.

That said the second-half weighting in the auction programme, and the buoyant rare coin market, coupled with the relative strength in the Dreweatt business are all positives that suggest that the company can at least return to some degree of profitability in the second half. If this is achieved then the shares should not be trading on a 46 per cent discount to net asset value of 171p, and well below the book value (at cost) of stocks on the balance sheet.

In fact, Stanley Gibbons market value now is less than the £45.3m it paid two years ago to acquire Noble Investments. That acquisition was mostly in cash and was funded by a £40m placing at 295p a share. Noble comprises Baldwin's (the globally respected brand in coins, established in 1872), Dreweatts (an auctioneer of antiques and collectibles such as watches, fine wine and jewellery, established in 1759), Bloomsbury (a leading auctioneer of books, manuscripts and art) and Apex Philatelics. In effect, Noble's rare coin division generated interim trading profits of £1.7m for Stanley Gibbons in the first half of this year and Dreweatt contributed a further £400,000, profitability which is supportive of the price paid.

In other words, the current valuation of Stanley Gibbons is attributing no value whatsoever to the company’s stamp business, nor the £8.6m acquisition of antique dealer Mallett a year ago, hence the reason why its market value is well below the book value of stocks. That’s an extreme valuation and one that suggests there is no chance of a second half profit recovery whatsoever.

So even though Stanley Gibbons' share price has been pummelled from 250p to 92p since late summer, and is testing the bear market lows dating back to March 2009, I believe that a second-half profit recovery is not as inconceivable as the share price would indicate. Hold.

AB Dynamics motoring

It's clear to me that AB Dynamics (ABDP: 320p) is firmly in an earnings upgrade cycle, and one being driven primarily by the company's track testing systems division, which includes driving robots and soft crash vehicles. This part of the business accounts for almost 70 per cent of revenues.

Indeed, having raised EPS by 30 per cent to 15.9p just prior to the company's full-year results ('Under-promising, over delivering', 13 October 2015), analyst Sanjay Jha at house broker Panmure Gordon saw his upgraded estimates smashed last week when AB Dynamics reported a 46 per cent rise in EPS to 19.2p on turnover up 19 per cent to £16.5m. Although the company doesn't give a breakdown of the revenues from its track testing systems, sales of soft crash target vehicles designed for testing advanced driver assistance systems are believed to have increased by around 60 per cent based on comments and third-quarter results from the world's fourth largest tyre maker, Continental AG. This is higher-margin business, too, than laboratory testing, accounting for 29 per cent of AB Dynamics' revenue, albeit the 15 per cent year-on-year growth reported in suspension parameter measuring machines was also ahead of forecast.

As a result of this revenue mix, AB Dynamics' gross margins improved from 29 to 32 per cent, and with the increase in administration expenses lagging revenue growth, this helps explain why operating profits surged. It's only realistic to expect this positive trend to continue given that track testing systems, soft crash and robots, is expected to deliver revenue growth of around 13 per cent this year and next to account for almost £13m of Panmure's current year revenue estimate of £18m. This means that AB Dynamics would only have to maintain revenue from laboratory testing and its much smaller measurement and analysis unit to grow operating profit from £3.74m to £4.4m as Panmure forecasts in the 12 months to August 2016.

On this basis, and reflecting an 11 per cent post results upgrade, expect current year EPS of 20.3p. In addition, shareholders can expect a 10 per cent rise on the 2.75p a share dividend just declared given that the company's cash position remains robust: net funds increased from £4.9m to £8m, a sum worth 48p a share. Priced on 13.5 times cash adjusted EPS estimates, and offering a prospective dividend yield of 1 per cent, the valuation doesn't seem stretched for a company over delivering. I would recommend running your 82 per cent paper gains.

Fund managers buying into Pittards

Shares in Aim-traded leather goods manufacturer Pittards (PTD:94p) have been moving sideways ever since the company issued a profit warning with its half year results in September. I commented on the announcement at the time ('Cashed up for cash returns', 22 September 2015).

Having reported operating profits up by almost half to £752,000 on turnover of £15.6m in the six months to end June, reflecting improved margin performance, the economic chill from Asia, and the fall-out from the slowdown in China have led to lower demand for leathers during the summer. This news prompted analyst John Cummins at house broker WH Ireland to rein back his full-year revenue estimate from £37.5m to £31.5m and downgrade his pre-tax profit estimates by a fifth to £1.6m. This implies a flat profit performance this year overall rather than the recovery I was anticipating when I included Pittards' shares in my Bargain Shares portfolio.

But there are positives as I can see the factors underpinning the improvement in gross margins - favourable currency movements and lower hide prices (reflecting the fall in global demand) - continuing for some time yet. This should offset at least some of the revenue headwind the leather industry is currently facing. I can see value in the shares, too, which are trading on little over 8 times' current year earnings estimates of 11p and 45 per cent below net asset value of 171p. I am not the only one as I note that funds managed by Downing, including the PFS Downing UK Micro-Cap Growth Fund, have recently raised their stake from 17.5 per cent to over 19 per cent; and Artemis Investment Managers has been adding to their holdings and now controls 16.2 per cent of the share capital. Chief executive Reg Hankey purchased a token 5,000 shares at 96p and now owns 213,333 shares, or 1.5 per cent of the equity.

Trading on a bid-offer spread of 92p to 94p, down from 105p at the time of my last update in September, I continue to rate the shares a hold for recovery.

Please note that currency manager Record (REC: 29p) reports half-year results on 24 November 2015, and I will be commenting on the figures at the time.

MORE FROM SIMON THOMPSON...

I have published articles on the following companies in the past two weeks:

■ Redde: Run profits at 178.5p; Trakm8: Run profits at 250p; 32Red: Run profits at 95p; Manx Telecom: Run profits at 208p; Burford Capital: Run profits at 189p ('Five companies that keep on delivering', 3 November 2015)

■ Getech: Sell at 38p ('Getech warns', 3 November 2015)

■ Gresham House: Buy at 345p, 12-month target price 450p ('Sowing the seeds for growth', 9 November 2015)

■ Inland: Run profits at 73p, target 80p ('Tapping into hidden value', 9 November 2015)

■ K3 Business Technology: Run profits at 361p ('In the money, 9 November 2015)

■ Fairpoint: Run profits at 190p, target range 200p to 220p ('Riding a seven year high', 10 November 2015)

■ KBC Advanced Technologies: Buy at 129p, new target range 160p to 169p ('Running oily gains', 10 November 2015)

■ Epwin: Run profit at 138p ('Decked out for further gains', 10 November 2015)

■ Plethora Solutions: Speculative buy at 5p, target 7.5p; Renewable Energy Generation: Speculative buy at 49p, target 60p ('Playing the takeover game', 11 November 2015)

■ Trifast: Buy at 116p, target 140p (‘Engineering a chart break-out’, 12 November 2015)

■ Software Radio Technology: Speculative buy at 23.5p, target 40p (‘Break-even beckons’, 12 November 2015)

■ Bioquell: Buy at 137p, target range 170p to 185p ('Bug busting potential for short-term gains', 16 November 2015)

■ Communisis: Hold at 45p ('Communisis slammed for earnings miss', 16 November 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'