Post the end of September period end the company won a "significant framework" tender process for gas support work for the South East Consortium (SEC), a group of housing associations responsible for over 140,000 homes in the region. Bilby was ranked first amongst the 52 contractors tendering for the work which starts in 2016 and could potentially run for up to seven years. Analyst Michael Donnelly at brokerage Panmure Gordon predicts the SEC contract will contribute £7m of his £49m revenue estimate in Bilby's financial year to the end of March 2017, and will earn a "margin significantly in excess of the low teens' margins that investors have seen historically".
Bilby's founder and deputy chairman, Phil Copolo, points out that his company now has visible revenue of £180m-plus over the next seven years. He also notes that more than 90 per cent of the work undertaken is from customers who have contracted work with Bilby in the prior year, so there is a high level of repeat business. This improves the quality of revenue, too.
In addition, this summer's earnings accretive acquisition of Waltham Abbey-based privately-owned property services business Purdy is working out well. It has not only expanded 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, but has given the company greater scale to tender for work it was previously excluded from due to minimum revenue requirements. There are also cross-selling opportunities across the two businesses. Purdy is winning new contracts, too, including one with the London Borough of Hackney, and was named as the second supplier of choice for electrical work in the aforementioned SEC electrical framework.
Sharply rising profits
And this raft of contract wins and the contribution from the Purdy acquisition is feeding through to sharp increases in revenue and profit. For the financial year to the end of March 2016, Panmure predict revenue will rise from £14.9m to £32.9m to drive up Bilby's pre-tax profit by more than half to £3.1m. On that basis, expect EPS to increase by 18 per cent to 7.2p and a dividend per share of 2.8p. The board have just declared a maiden half-year dividend of 0.75p a share in yesterday's results. For the following financial year, Mr Donnelly at Panmure predicts pre-tax profit will rise by more than half again to £4.9m based on revenue rising to £49.4m, implying a pre-tax profit margin of 10 per cent. On that basis, expect EPS of 11.3p and a dividend of 3p.
I would point out that although current year estimates are below those forecast by analyst Andy Smith at Charles Stanley Securities at the time of my last update, this only reflects the fact that the start date of another major contract, with the Royal Borough of Greenwich, was delayed by three months ('Bilby's share price sparked alight', 18 Nov 2015). It has now started. Moreover, the forecasts for the 12 months to 31 March 2017 are significantly above Mr Smith's estimates due to the contribution from SEC framework agreement.
In other words, the year-on-year earnings growth in the 2017 financial year is now expected to be much higher than I had first envisaged. Furthermore, with the shares trading on under 12 times EPS estimates for that 12-month trading period, and offering a 2.3 per cent forward dividend yield, I feel the good news is yet to be fully factored into the valuation.
So, having initiated coverage on Bilby's shares at 75p ('Buy-to-build' growth play, 18 May 2015), upgraded my target price from 100p to 120p in the summer ('Acquisitions drive earnings upgrades', 17 Jul 2015), and advised running profits ahead of yesterday's half-year results ('Bilby's share price sparked alight', 18 Nov 2015), I now feel that fair value is in a range between 150p and 160p a share. Buy.
Please note that for a limited period of time, my book Stock Picking for Profit is being offered for sale at a promotional price of £11.99 plus postage, subject to availability, full details enclosed below.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies since the start of last week:
■ First Property: Run profits at 47.5p ('Investing for bumper gains', 30 Nov 2015)
■ Paragon: Run profits at 384p; Redde: Run profits at 174p; Fairpoint: Run profits at 175p ('Capitalising on investor overreactions', 1 Dec 2015)
■ LMS Capital: Tender your pro-rata allocation ('LMS tender on the money', 1 Dec 2015)
■ Vertu Motors: Buy at 78p, new target range of 85p to 90p ('In the fast lane', 2 Dec 2015)
■ MS International: Run profits at 210p, target bull market high of 240p ('Engineered recovery', 2 Dec 2015)
■ Mountview Estates: Buy at 11,500p ('Mountview's accounts reveal hidden value', 2 Dec 2015)
■ Character: Buy at 485p, new target 600p ('Playtime for a popular Character', 2 Dec 2015)
■ UK housebuilding sector: Buy and hold until end March 2016 ('Time to start building once more', 7 Dec 2015)
■ GLI Finance: Recovery buy at 35p ('Refinancing for GLI Finance', 9 Dec 2015)
■ Ensor: Hold at 90p and await news of disposals; Renewable Energy Generation: Await capital payout of 60p a share in January 2016 ('M&A updates', 9 Dec 2015)
■ Non-Standard Finance: Buy at 89p and take up open offer; Arbuthnot Banking: Buy at 1,530p, break-up value 2,200p ('Speciality finance plays', 9 Dec 2015)
■ Bilby: Buy at 132p, new target range of 150p to 160p ('Bilby set for new highs', 10 Dec 2015)
■ 600 Group: Hold at 13p, medium-term fair value target of 24p ('European markets hit 600 Group', 10 Dec 2015)
■ Vislink: Hold at 28p ('Vislink's sales fall short', 10 Dec 2015)
■ For a limited period and strictly subject to stock availability, Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com at a special promotional price of £11.99, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
