I initiated coverage on Bilby's shares at 75p six months ago ('Buy-to-build' growth play, 18 May 2015), and subsequently upgraded my target price from 100p to 120p in the summer (‘Acquisitions drive earnings upgrades’, 17 July 2015) when the company announced the earnings accretive acquisition of Waltham Abbey-based privately-owned property services business Purdy Holdings.
The forthcoming results will likely highlight a successful integration process, or at least that’s what investors are clearly banking on. It looks a sound acquisition to me as it expands Bilby's services and geographical scope from its core gas maintenance installation and building maintenance services speciality, primarily catering the needs of housing associations within southeast London, into new areas of heating, building and complementary electrical services in neighbouring boroughs in northeast London, as well as Essex, Hertfordshire and Suffolk. Local authority and housing association clients include Homes for Haringey, the London Borough of Enfield, Central Bedfordshire Council and Hyde Housing.
Purdy had also just won two new contracts at the time of the acquisition. The first involves annual electrical testing, servicing and reactive works to all properties owned by Peabody Housing. The second is a pilot project with the London Borough of Barking and Dagenham to install kitchens and bathrooms and to undertake associated mechanical and electrical works. Upon completion of the pilot project Purdy anticipated being awarded a new four-year contract, so look out for confirmation of this in the forthcoming results.
I will also want to see how the enlarged group is benefiting from its increased scale, improved purchasing power and ability to tender for larger contracts which it had previously been precluded from due to minimum pre-qualification annual revenue requirements. It will be interesting to find out the extent of additional cross selling opportunities for electrical services across the enlarged customer base too, as these were not factored into analysts’ profit estimates.
When analyst Andy Smith at house broker Charles Stanley assessed the deal back in the summer he expected Purdy to contribute £15.6m of revenue in the nine months to the end of March 2016, reflecting the aforementioned two material contract wins, to produce operating profit of £1.3m. If this level of profitability is achieved this more than justifies the £8.07m acquisition price. On this basis, Mr Smith expects Bilby’s revenues to more than double from £14.9m to £32.6m in the 12 months to end March 2016 to lift pre-tax profits by 80 per cent to £3.6m and increase EPS by almost 40 per cent to 8.5p. Please note EPS lags profit growth due to the extra shares in issue following a placing to fund £4.15m of the cash consideration of £6.57m and also due to the issue of £1m of new shares to Purdy’s owners.
This means that Bilby’s shares are now rated on 15.5 times current year earnings estimates, falling to 14 times EPS forecasts of 9.5p for fiscal 2017 (March year-end). That’s a fair valuation in my view and to warrant further share price upside from here Bilby will need to generate synergy and cross selling benefits from the acquisitions, and continue to deliver organic revenue growth in its existing businesses. On both counts I would not bet against the company over delivering, so if you followed my previous advice, I would run profits especially as the forthcoming results will make for a very good read. Run profits.
Please note I have published two columns today, and five so far this week, details of which are in the list of my articles below.
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)
■ AB Dynamics: Run profits at 320p; Stanley Gibbons: Hold at 90p; Pittards: Hold at 94p ('Bargain shares updates', 17 November 2015)
■ Bilby: Run profits at 133p ('Bilby's share price sparked alight', 18 November 2015)
■ GLI Finance: Buy at 45.25p ('High yield P2P play', 18 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'
