Join our community of smart investors
OPINION

Profit from a profit surge

Profit from a profit surge
November 24, 2015
Profit from a profit surge

It's a company I know well, having first recommended buying the shares at 45p earlier this year ('Delivering on a plan', 12 Feb 2015), and last updated the investment case at the time of the full-year results ('A trio of small-cap buys', 14 Jul 2015). Those figures were ahead of my expectations and clearly fund managers at Miton UK Microcap Trust were impressed as they subsequently raised their stake in the company to 4.58 per cent.

I feel they are onto a winner and so could you be, too. Last week's half-year results were mightily impressive and are starting to make my valuation of £22.5m for the equity, based on a 60p target price, look conservative. That's because Walker Crips delivered a fivefold rise in half-year pre-tax profit to just shy of £600,000 on revenue up 22 per cent to £13.3m in which makes it increasingly likely that the company will surpass my profit target of £1m for the 12 months to the end of March 2016.

Importantly, fee and non-broking income now represent 60 per cent of Walker Crips' total revenue and reflects a 22 per cent year-on-year increase in total assets under management (from £3.2bn to £3.9bn) of which higher-margin discretionary and advisory funds now account for £2.1bn, up from £1.6bn in September 2014. Part of the growth in assets under management was due to the contribution from London-based Barker Poland Asset Management (BPAM), a private client wealth management business, acquired for £1.8m in cash and £200,000 of new shares in March this year. There is a £2m maximum earn-out, subject to BPAM's annual revenue averaging £1.6m or more over the next three years.

But even after factoring in the addition of £227m under management from the acquisition, Walker Crips still managed to increase its discretionary and advisory funds by £100m to £2.1bn in the latest six-month trading period, during which time the FTSE All-Share index declined by 9 per cent. In a low interest rate environment, and one where equity markets have produced minimal growth this year, structured investment products are proving very popular with Walker Crips' clients seeking a balance between equity exposure and capital preservation. An emphasis on a high-quality service offering, and an award-winning product range, have also played their part in helping the company's investment management business deliver almost £1m in trading profit in the six-month period, more than for the whole of the previous fiscal year. Clearly, if the board can achieve its medium-term target of raising assets under management to £5bn, then the company's profit growth has much further to go.

 

Progressive dividend policy

It's also worth noting that the profit growth posted is after accounting for the full annual levy for the Financial Services Compensation Scheme in the first half. This uncontrollable cost increased by £92,000 to £402,000, so the underlying profit performance was even more impressive. I would flag up too that Walker Crips' net cash position of £6.9m, up from £6.6m at the end of March 2015, was better than I had anticipated. This sum equates to 18.5p a share, or a third of net asset value of 56p a share.

Reflecting the profit performance and robust balance sheet, the board hiked the half-year payout per share by over 9 per cent to 0.58p, having raised the final dividend by in excess of 10 per cent to 1.17p. This means the shares offer a rolling 12-month dividend yield of 3.5 per cent. It's only reasonable to expect further increases, too, given that some of that bumper cash pile is set to be deployed on further bolt-on and profitable acquisitions to augment the asset management business which will clearly underpin the board's progressive dividend policy.

So, with Walker Crips reducing its reliance on more volatile transaction fees, and boosting its recurring revenue from asset and wealth management, and in particular higher-margin discretionary and advisory mandates, I feel investors are missing a trick here. In fact, if the company only repeats the second-half performance in its last fiscal year then it will still make full-year pre-tax profit of £916,000. But, clearly, there is decent momentum building in the business and a full-year outcome well north of £1m looks achievable to me.

Importantly, that outcome is not yet priced into the valuation with the company only having an enterprise value of £11.5m after you deduct net funds of £6.9m from its market capitalisation of £18.4m. Offered in the market at 49p, I rate Walker Crips' shares a buy and have a minimum target price of 60p.

Please note that I have written one other column today. For reference purposes please find enclosed a list of all the articles I have written in the past six months.

 

MORE FROM SIMON THOMPSON...

I have published 238 articles on the following companies in the past six months and five features on equity market strategy:

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 ('Breakout 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 breakout', 26 May 2015)

Character Group: Buy at 415p, target 525p ('Playtime', 1 Jun 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 Jun 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 Jun 2015)

Globo: Buy at 59p, target 69.5p; London & Associated Properties: Buy at 38.5p; Greenko: Hold at 44p ('Catalysts for share price moves', 4 Jun 2015)

Burford Capital: Buy at 148p, target 190p ('Legal eagles', 8 Jun 2015)

Market strategy ('Financial Market Watch', 9 Jun 2015)

Software Radio Technology: Buy at 29.5p, target 40p to 43p; Tristel: Run profits at 92p; Creston: Buy at 136p, target 150p; Sanderson: Buy at 69p, target range 80p to 85p ('Blue sky potential', 10 Jun 2015)

1pm: Buy at 67p, target 80p; Vislink: Buy at 58p, target 70p ('Small-cap growth stocks', 11 Jun 2015)

Elegant Hotels: Buy at 105p, target 135p to 140p ('Checking into an elegant investment', 15 Jun 2015)

First Property: Run profits at 45p; AB Dynamics: Run profits at 225p and target 250p; Inspired Capital: Sit tight at 20p (Bargain shares updates', 16 Jun 2015)

Trakm8: Run profits at 159p, new target 180p; Anite: Sit tight at 126.75p; Trifast: Run profits at 129p, target 140p; Record: Buy at 37p ('Small-cap wonders', 17 Jun 2015)

Inland: Run profits at 71p, target 80p; KBC Advanced Technologies: Buy at 110p, target 165p; Caretech: Buy at 237p, target 300p ('Riding an earnings upgrade cycle', 18 Jun 2015)

Ensor: Buy at 97p, minimum target 125p ('Building up for a takeover', 22 Jun 2015)

GLI Finance: Buy at 54p, target 80p; Pittards: Buy at 128p; Netplay TV: Buy at 9.5p ('A triple play of small-cap picks', 23 Jun 2015)

Bilby: Run profits at 97p; Safestyle: Run profits at 220p; Epwin: Run profits at 134p ('Soaring small-caps', 24 Jun 2015)

Faroe Petroleum: Buy at 86p, target 100p; Greenko: Hold at 65p; Communisis: Buy at 48p ('A slick investment', 25 Jun 2015)

Mountview Estates: Buy at 12,250p; Inland: Run profits at 71p, conservative price target ('Running bumper profits', 29 Jun 2015)

Redde: Run profits at 138p, target range 150p to 155p; Trakm8: Buy at 175p, target 200p; Cohort: Buy at 312p, target 365p; Burford Capital: Buy at 175p, target 190p; Flowtech Fluidpower: Buy at 135p, target 155p ('Riding earnings upgrade cycles', 7 Jul 2015)

Crystal Amber: Buy at 161p; Stanley Gibbons: Buy at 258p; Somero Enterprises: Buy at 150p, target 185p; Globo: Buy at 49p, target 69.5p ('A quartet of small-cap buys', 8 Jul 2015)

H&T: Buy at 200p; STM: Buy at 47p, target 60p; Stadium: Buy at 113p, target 140p ('Exploiting upgrades', 9 Jul 2015)

Cambria Automobiles: Buy at 57.5p, target 75p ('Driving a re-rating', 13 Jul 2015)

Walker Crips: Buy at 47p, target 60p; 600 Group: Buy at 18p, target 24p; Henry Boot: Buy at 235p, target 260p ('A trio of small-cap value plays', 14 Jul 2015)

Bilby: Buy at 90p, target 120p; 32Red: Buy at 67.5p, ('Exploiting a valuation anomaly', 20 July 2015) target 90p; Marwyn Value Investors: Buy at 244p, target 275p ('Acquisitions drive earnings upgrades', 15 Jul 2015)

Vislink: Buy at 53p, target 70p ('Awarding success', 16 Jul 2015)

SPARK Ventures: Buy at 4.5p ('Exploiting a valuation anomaly', 20 Jul 2015)

W.H. Ireland: Run profits at 120p, target 140p; Safestyle: Run profits at 235p; Charlemagne Capital: Sell at 11p ('Cash rich small-caps', 21 Jul 2015)

Amino Technologies: Buy at 150p, target 180p; Arbuthnot Banking: Buy at 1,530p; Globo|: Buy at 49p, target 69.5p ('Primed for major re-ratings', 22 Jul 2015)

SPARK Ventures: Buy at 4.5p; Entu: Buy at 115p, target 165p ('Cashed-up for gains', 23 Jul 2015)

Capital & Regional: Buy at 60.25p, target 70p ('Hot property', 27 Jul 2015)

LMS Capital: Vote against proposals at EGM; Marwyn Value Investors: Buy at 238p, target 275p to 280p ('Game changers, 28 Jul 2015)

Stadium Group: Buy at 130p and take up open offer, new target range 155p to 160p; 1pm: Buy at 68p and take up open offer at 60p, new target 90p ('Powered up for gains', 29 Jul 2015)

CareTech: Buy at 245p, target 300p; Burford Capital: Buy at 170p, target 190p; K3 Business Technology: Run profits at 275p; Trakm8: Buy at 178p, target 200p ('Hitting the right numbers', 30 Jul 2015)

Non-Standard Finance: Buy at 107.5p; Software Radio Technology: Buy at 27.5p, target 40p; Character Group: Run profits at 500p; Communisis: Hold at 50p ('Value judgements', 3 Aug 2015)

Fairpoint: Buy at 138p, target 190p; Creston: Run profits at 155p; Sanderson: Buy at 71p, target 80p to 85p; Renew Holdings: Buy at 340p, target 375p ('Break-outs looming', 4 Aug 2015)

Globo: Buy at 42.75p, target 69p; Cambria Automobiles: Run profits ('Short sellers in for shock treatment', 5 Aug 2015)

Cohort: Run profits at 357p, target 375p; Cineworld: Run profits at 530p; Paragon: Buy at 412p ('Acquisitive growth drives re-ratings', 6 Aug 2015)

PROACTIS: Buy at 93p, target 117p ('Procuring growth', 10 Aug 2015)

Town Centre Securities: Buy at 310p, target 350p ('Equity market watch', 11 Aug 2015)

Equity market strategy ('Equity market watch', 11 Aug 2015)

KBC Advanced Technologies: Buy at 122p, target 165p; Getech: Buy at 59p, target 80p ('Fuelled for strong growth', 12 Aug 2015)

Pure Wafer: Run profits at 162p, target 178p; Inland: Run profits at 71.5p, next target 80p; Macau Property Opportunities: Take profits at 189p ('Bumper cash returns', 13 Aug 2015)

Inspired Capital: Accept cash offer of 21.5p; Record: Buy at 40p; Pittards: Buy at 128p; Netplay TV: Buy at 9.5p ('Bargain shares updates', 17 Aug 2015)

Equity market strategy ('Stay calm', 25 Aug 2015)

Capital & Regional: Run profits at 67p; Redde: Run profits at 152.5p; Cineworld: Run profits at 578p; Cohort: Run profits at 375p; H&T: Buy at 195p; Record: Buy at 33.5p; Bioquell: Buy at 137p, target range 170p to 185p ('Running bumper profits', 27 Aug 2015)

Equity market strategy ('A sense of perspective', 1 Sep 2015).

LMS Capital: Buy at 73p ahead of tender offer; STM: Buy at 53p, target 60p; Entu: Hold at 65p ('Shareholder activism works', 2 Sep 2015).

Henry Boot: Buy at 235p, target 260p; Amino Technologies: Run profits at 162p, target 180p; PV Crystalox Solar: Hold at 9.5p ('Planning for success', 3 Sep 2015).

Vertu Motors: Buy at 66p, target range 80p to 85p; Cambria Automobiles: Run profits at 68p ('Poised for a strong rally', 7 Sep 2015).

Avation: Buy at 127p, target 200p; Fairpoint: Run profits at 177p, target 190p, Redde: Run profits at 158p ('Get ready for take-off', 8 Sep 2015).

Stadium: Buy at 132p, target 155p to 160p; Somero Enterprises: Buy at 145p, target 185p; Flowtech Fluidpower: Run profits at 151p ('Switch on for gains', 9 Sep 2015).

Tristel: Run profits at 95p, target return to 110p; BP Marsh & Partners: Buy at 145p, target 180p; Character: Run profits at 505p; Greenko: Hold at 80p ('Small caps priced for gains', 10 Sep 2015)

Crystal Amber: Buy at 162p ('Crystallising gains', 14 Sep 2015)

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)

Moss Bros: Buy at 97p, target 120p; GLI Finance: Buy at 52p, target 80p; Town Centre Securities: Buy at 315p, target 350p; Globo: Buy at 39p, target 69p ('Platforms for success', 30 Sep 2015)

Safestyle: Run profits at 255p; Epwin: Run profits at 138p; Manx Telecom: Buy at 188p, target 210p ('Income plays with capital upside', 1 October 2015)

LXB Retail Properties: Buy at 86p, target 99p ('Bag a retail property bargain', 5 Oct 2015)

Creston: Run profits at 162p, target 171p; Fairpoint: Run profits at 184p, new target range 200p to 220p; Trifast: Buy at 114p, target 140p; 600 Group: Buy at 16p, target 24p; Renew Holdings: Buy at 315p, target range 350p to 375p; Stanley Gibbons: Hold at 105p ('Engineering ratings upgrades', 6 Oct 2015)

STM Group: Buy at 71p, target 80p ('Riding small cap winners', 7 Oct 2015)

First Property Group: Buy at 39.5p, target 49p ('In pole position for re-rating', 7 Oct 2015)

Tristel: Run profits at 99p, target 110p ('Cleaning up with superbug buster', 7 Oct 2015)

Equity market strategy ('Bull market pointers', 8 Oct 2015)

Gresham House: Buy at 320p, target 450p ('A mandate for strong growth', 12 Oct 2015)

Tristel: Run profits at 123p, new target 130p to 135p ('Cleaning up', 13 Oct 2015)

AB Dynamics: Run profits at 267p ('Under-promising, over delivering', 13 Oct 2015)

Trakm8: Run profits at 245p ('Motoring ahead', 13 Oct 2015)

PROACTIS: Buy at 102p, new target 130p ('Secured growth for re-rating', 13 Oct 2015)

Avation: Buy at 148p, target 200p ('Flying higher', 14 Oct 2015)

Cohort: Run profits at 400p ('Cohort on a roll', 14 Oct 2015)

Vertu Motors: Buy at 68p, target 80p to 85p ('The virtue of Vertu', 15 Oct 2015)

Urban&Civic: Buy at 274p, target 325p ('Plotting a break-out', 15 Oct 2015)

MS International: Buy at 180p, initial target price 240p ('Making waves', 19 Oct 2015)

Pure Wafer: Buy at 175p, new target 200p ('Valuation anomaly worth exploiting', 20 Oct 2015)

Greenko: Hold at 87p, new target 100p ('Greenko's cash return', 20 Oct 2015)

Elegant Hotels: Buy at 108p, target range 130p to 135p ('An elegant investment', 20 Oct 2015)

BP Marsh & Partners: Buy at 157p, target 180p ('Cash-rich value play', 21 Oct 2015)

Crystal Amber: Buy at 170p; Dart Group: three month trading buy at 468p; Grainger: three month trading buy at 247p; Leaf Clean Energy: await news on Invenergy asset sale ('A quadruple play', 22 Oct 2015)

UTV Media: Buy at 184.5p, target 215p ('On the right wavelength', 26 Oct 2015)

Globo: shares suspended at 28p ('Globo bombshells', 26 Oct 2015), ('The truth about Globo', 29 Oct 2015)

Getech: sell at 38p ('Getech warns', 3 Nov 2015)

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 Nov 2015)

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

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

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

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

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

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

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

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

Trifast: Buy at 116p, target 140p ('Engineering a chart break-out', 12 Nov 2015)

Software Radio Technology: Speculative buy at 23.5p, target 40p ('Break-even beckons', 12 Nov 2015)

Bioquell: Buy at 137p, target range 170p to 185p; Tristel: Run profits at 125p, targte range 130p to 135p ('Bug busting potential for short-term gains', 16 Nov 2015)

Communisis: Hold at 45p ('Communisis slammed for earnings miss', 16 Nov 2015)

AB Dynamics: Run profits at 320p; Stanley Gibbons: Hold at 90p; Pittards: Hold at 94p ('Bargain shares updates', 17 Nov 2015)

Bilby: Run profits at 133p ('Bilby's share price sparked alight', 18 Nov 2015)

GLI Finance: Buy at 45.25p ('High yield P2P play', 18 Nov 2015)

LMS Capital: Buy at 72p; Cenkos Securities: Buy at 180p ('Capitalising on tender offers', 19 Nov 2015)

Ensor: Buy at 99p, target 125p ('Bid watch', 23 Nov 2015)

Marwyn Value Investors: Buy at 216p ('Cashing in on a top performer', 23 Nov 2015)

Trakm8: Run profits at 262p ('On track for record earnings', 24 Nov 2015)

Walker Crips Group: Buy at 49p, targte 60p ('Profit from a profit surge', 24 Nov 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'