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OPINION

Stock check

Stock check
January 5, 2016
Stock check

Flying high

It’s fair to say that investors have warmed to Aim-traded Dart (DTG: 580p), the parent company of leisure airline Jet2 and distributor Fowler Welch. Having issued its third profit beat since the summer, the company subsequently delivered a two-thirds rise in first-half underlying pre-tax profits. I covered the investment case in quite some depth when I recommended buying the shares at 465p ahead of the announcement (‘Quadruple play’, 22 October 2015), a call that has paid off given the share price rallied 29 per cent to a peak of 598p at the end of last year.

Part of the re-rating can be attributed to the incredibly benign oil price environment for airlines and the company's fuel hedging policy, which will deliver a substantial tailwind to costs in the next financial year and help offset the effect of increased industry capacity on margins. Also, holiday passenger numbers are predicted to rise from a third to more than 40 per cent of seats sold in the 2016-17 financial year to account for two-thirds of divisional revenues. That's important because package holidays are much higher margin, generating three times' as much revenue per passenger as flight-only sales.

However, taking all of this into account I now feel that crystallising the short-term gains is a sensible course of action given that the earnings upgrade cycle may have peaked and Dart shares are now rated on a far more reasonable 12 times earnings estimates. Take profits.

In the same article I also made a compelling case for a re-rating of UK's largest listed residential property owner and manager, Grainger (GRI: 243.5p). I still hold that view. If anything the investment case is even stronger now. That because the company subsequently agreed with its partner, Heitman, to sell their German joint venture for €136m (£100m). As well as representing a decent return on capital invested, the disposal simplifies the company’s business model, enabling Grainger to align and focus its resources on growing its UK private rented sector business. In addition, Grainger has just announced the sale of its UK equity release property portfolio of 3,671 residential properties, predominantly subject to home reversion plans, for £325m. The sale should add 4.6p per share (£19m) to Grainger’s triple net asset value, following adjustments for the mark-to-market on fixed-rate debt and contingent tax.

Rated on a mid-teens discount to adjusted net asset value estimates for the September 2016 financial year-end I continue to rate Grainger's shares a buy and maintain a prudent target price of 280p.

 

Crystal Amber portfolio hit

My interest in both Dart and Grainger was down to the fact that activist Aim-traded investment company Crystal Amber (CRS: 159p) holds major stakes in both companies, accounting for 50p a share of the company’s last reported net asset value of 159.75p. I recommended buying Crystal Amber as one of the constituents of my 2015 Bargain Shares portfolio when the price was 149.25p. The irony is that, although the fund has made bumper gains on Dart Group, and the investment in Grainger is above Crystal Amber’s net buy-in price, shares in Crystal Amber have drifted from 170p to 159p since my last update.

That’s largely because the company’s 14.6 per cent holding in Hurricane Energy (HUR: 10.25p), the UK-based oil and gas company focused on hydrocarbon resources in naturally fractured basement reservoirs, lost a third of its value in the fourth quarter last year and its investment in provider of student management systems provider Tribal (TRB: 24p) has crashed following profit warnings and news of a rescue rights issue. Crystal Amber more than doubled its stake in Tribal from 2.9 per cent to 6.4 per cent of the equity at the end of October 2015 when the price was around 82p. The decline in both Hurricane Energy and Tribal’s share price has, by my reckoning, knocked 5.6p a share from Crystal Amber’s net asset value in December, so even after accounting for estimated net gains of 4.8p a share on its other major holdings last month (mainly Dart Group and media group STV (STVG: 515p)), I reckon Crystal Amber’s spot net asset value is around 158.5p a share, down a penny last month and shy of the 165.5p reported at the end of October.

Clearly, this isn’t ideal, but given that I have a positive outlook on more than half the fund’s portfolio, I would hold on to Crystal Amber’s shares at 159p if you bought in on my advice.

 

Capitalising on the Volkswagen scandal

Aim-traded Burford Capital (BUR: 196.5p), the world's largest provider of investment capital and professional services for litigation cases to lawyers and clients engaged in major litigation and arbitration, is making available €30m (£22m) in financing to Hausfeld, a global claimants' law firm dedicated to competition and other complex litigation and cross-border dispute resolution.

In particular, the funds will be used to support multi-faceted global disputes pending as a result of the recent Volkswagen emissions scandal. Achieving a resolution will require expertise in complex negotiation as well as co-ordinated litigation and co-operation with regulators and governments in the US and Europe. Bearing this in mind, Hausfeld is well placed to play a leading role in this process, given the firm's recognition as one of the world's 50 leading negotiators and record of success in commercial litigation across multiple jurisdictions. Burford will provide additional financing to support Hausfeld's representation of those harmed by VW's misconduct.

It’s an interesting development and one that has not gone unnoticed; shares in Burford are now at an all-time high, having risen by 35 per cent since I recommended buying at 146p ('Legal eagles', 8 June 2015). I last updated when the share price was closing in on my target price of 190p (‘Five companies that keep on delivering’, 3 November 2015). Still, there could be further gains to come as, based on forecasts from analyst Trevor Griffiths at broking house N+1 Singer, we can expect EPS of 26.3 cents (18p) in 2016, up from consensus of 23.7 cents in 2015, implying Burford’s shares are rated on a modest 11 times prospective earnings, a deep discount to the speciality finance sector average. They are also attractively priced on 1.4 times book value, and a conservatively calculated one at that, and offer a forward dividend yield of just shy of 3 per cent. Interestingly, the shares have a beta of zero, reinforcing the point that the returns derived from successfully backing commercial litigation cases is uncorrelated with the economic backdrop and general stock market moves. Run profits.

 

Redde’s earnings beat

Redde (REDD: 203.5p), a company that works predominantly with insurance companies, brokers and fleet organisations to provide a range of accident management and legal services, has revealed that trading profits for the six months to end December 2015 are ahead of market expectations. Last summer’s earnings-enhancing acquisition of fleet management services provider FMG, a deal I analysed at the time ('Running bumper profits', 27 August 2015), has integrated well too. For good measure the half-year dividend will be raised by at least 10 per cent to 4.4p a share when the company releases results at the end of February. The positive update not only sent the shares to a five-year high of 214.5p, up from 108p when I initiated coverage in the spring ('In the fast lane', 23 March 2015), but also prompted modest analyst upgrades.

Analyst Andrew Watson at N+1 Singer now expects Redde’s pre-tax profits to rise by 22 per cent to £27.6m in the 12 months to end June 2016 to deliver EPS of 9p, up from 7.9p a year earlier. And given the company remains highly cash generative, expect a full-year payout of 8.8p a share. True, the dividend yield of 4.4 per cent remains attractive, and the company has paid out total dividends of 5.25p since I initiated coverage, but on 21 times consensus EPS estimates of 9.6p for the 2017 financial year, I feel that the good news is factored in and I am crystallising the 93 per cent paper gain. Take profits.

 

Renew Holdings hits 23-year high

Shares in Renew Holdings (RNWH: 404p), an Aim-traded engineering services group specialising in the UK infrastructure market, have now hit my target price range of 390p-400p. I first recommended buying at 258p ('A small-cap breakout', 14 August 2014), since when the company has paid out 5.75p a share in dividends.

I last advised buying at 362p after the company issued a bumper set of results (‘Running small-cap winners’, 25 November 2015), and one that prompted analyst Nick Spoliar at brokerage WH Ireland to raise his EPS estimate by 10 per cent to 27.5p for the 12 months to end September 2016. Mr Spoliar also expects the dividend per share to be hiked a further 12 per cent to 8p. On this basis, Renew shares are rated on 14.5 times earnings forecasts and offer a 2 per cent prospective dividend yield. However, the board is on the lookout for earnings enhancing acquisitions, which is likely to be positive for sentiment, and I would also expect the company to pick up some decent rail contracts to repair the storm damage that has wreaked havoc across the UK. The company is the national leader in engineering skills for works on rail tunnels and bridges. Run profits.

 

Plethora bid arouses attention

As expected Aim-traded Plethora Solutions (PLE: 4.5p), a UK-based speciality pharmaceutical company dedicated to the development and marketing of products for the treatment and management of urological disorders, has received a formal bid from Hong Kong-listed Regent Pacific (Hong Kong Stock Code: 575), the investment vehicle of Jim Mellon. I covered this bid situation in some detail a few months ago (‘The takeover game’, 11 November 2015).

Regent Pacific and its concert parties together hold 29.88 per cent of Plethora's issued ordinary share capital and have received letters of intent to accept the offer from shareholders controlling a further 11.6 per cent of the equity. Their recommended offer of 15.7076 new Regent Pacific shares for each Plethora share places a value of 11.9p on Plethora’s shares based on Regent Pacific’s current share price of HK$0.087, and using a sterling to Hong Kong dollar exchange rate of £1:HK$11.44.

It’s worth noting though that there is no cash element and Regent Pacific only has a market value of £26.5m, almost a third less than Plethora, which explains why there is a huge difference between the implied offer price and Plethora’s current share price of 4.5p. Also, assuming the bid completes then Plethora’s existing shareholders will control almost two-thirds of the enlarged equity of Regent Pacific.

That said, one of the reasons Plethora’s shares were so depressed was because the company is cash strapped, so there is an element of financial distress embedded in the share price. And of course some UK shareholders will be selling in the London market because they are unwilling or unable to hold Regent Pacific shares. Still, my instinct is that Regent Pacific shares are highly unlikely to fall by 62 per cent once the deal completes, as Plethora’s lowly share price would imply, and there is still a realistic chance of reaping a 60 per cent gain by buying Plethora shares in the London market and subsequently selling your newly listed Regent Pacific shares in Hong Kong. Speculative buy.

 

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■ 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'