The fact that chief executive Stephen Crossley has just invested £132,000 of his own money buying 100,000 shares at a 32 per cent premium to the float price tells a story about Accrol’s trading prospects. Higher consumer demand for private-label products is helping drive ongoing strong sales growth from discount retailers, a segment where the company has a 35 per cent market share, as is management’s ability to cross sell multiple products to new clients. Maiden results have done nothing to alter my earlier positive stance: like-for-like sales rose by 17 per cent to £118m in the year to end April 2016, and analyst Mike Allen at house broker Zeus Capital expects Accrol to maintain this heady growth rate in the current financial year, pencilling in revenue of £138m.
On this basis, expect cash profits to rise by around 10 per cent to £16.4m to produce pre-tax profits of £13.4m and EPS of 11.5p in the 12 months to end April 2017. This means Accrol’s shares are being valued on a forward PE ratio of 12, a rating that fails to acknowledge its potential to continue to grow earnings at a double digit rate for years to come. Indeed, for the following year to end April 2018, Mr Allen believes that Accrol can lift revenues to £156m, increase both cash profits and pre-tax profits by £2.2m, and deliver EPS of 13.4p to reduce the forward PE ratio to 10.5. I am comfortable with those estimates.
The current rating also fails to fully reflect the company’s cash generation. Indeed, net debt is expected to fall to £16m by end April 2017, a sum equivalent to one times cash profits and less than 30 per cent of shareholders funds. So, with profits growing strongly, and the balance sheet modestly geared, the board can recycle cashflow into a progressive dividend. Guidance is for a 6p a share payout in the current year, implying the shares offer a 4.4 per cent prospective dividend yield, rising to around 6.25p a share the year after.
In the circumstances, it’s hardly surprising my 130p target price has proved too conservative and I now feel that a rating of 12 times EPS estimates of 13.4p for the 12 months to end April 2018 is a more realistic valuation. This implies a new target price of 160p, and one that more accurately takes into account Accrol’s low balance sheet gearing, and prospects of delivering double digit earnings growth. Buy.
1pm maintains momentum
Having posted forecast busting full-year results last month (‘On the upgrade, 7 Sep 2016), Bath-based 1pm (OPM:70p), a specialist provider of finance to small- and medium-sized enterprises (SMEs) and a constituent of my 2014 Bargain Shares portfolio, has issued an upbeat first quarter trading outlook at its annual meeting.
The key point to note is that trading in the three months to end August 2016, a period which covers the EU Referendum, has been bang in line with previous guidance and there has been no adverse impact on business activity from the Brexit vote. Recently appointed house broker Cenkos Securities expects revenues to rise by a third to £16.5m in the 12 months to end May 2017 to deliver a 16 per cent hike in pre-tax profit from £3.7m to £4.3m and produce EPS of 6p.
Ongoing organic growth will play its part – strip out acquisitions and 1pm increased revenues by 45 per cent to £8m and delivered a 35 per cent boost to adjusted pre-tax profits to £2.2m in its last financial year – but so too will contributions from acquisitions made including: Bradgate Business Finance, a leading independent specialist provider of 'hard' asset finance to clients buying business equipment within the construction, recycling and haulage sectors; and Academy Leasing, a provider of equipment finance and an equipment and vehicles broker to the SME market. Bearing this in mind, 1pm’s receivables of £66.5m at the end of May 2016 included £14.6m of deferred interest which underpins a chunk of those profit estimates. Cenkos forecasts are based on receivables rising to £76m by next May which looks achievable given the run rate of new business originations.
Moreover, 1pm’s loan book is well funded as only two thirds of its credit facilities of £62m are drawn down, offering headroom on existing credit lines to finance growth without recourse to tapping shareholders for fresh capital. Rated on a modest 1.5 times book value, 11.6 times earnings estimates, and offering a one per cent prospective dividend yield, I see 20 per cent share price upside to my target price of 85p. Buy.
Engineering an uptrend
I noted with interest this week’s pre-close trading update from Renew Holdings (RNWH:375p), an Aim-traded engineering services group specialising in the UK infrastructure market. I first recommended buying the shares at 258p ('A small-cap breakout', 14 Aug 2014), and last reiterated that advice at 349p, pencilling in a new target price of 420p (‘Renewing an uptrend’, 21 Jun 2016).
The company is scheduled to release its full-year results on Tuesday 22 November 2016, so this is a good time to review its trading prospects. Analysts at Numis Securities and WH Ireland both predict the company will deliver pre-tax profit of at least £21m and EPS north of 27p in the 12 months to end September 2016 to underpin a 14 per cent hike in the dividend to 8p a share. On this basis, the shares are rated on 13.7 times earnings and offer a 2.2 per cent dividend yield. That's a modest rating for a company targeting an operating margin target of 4.5 per cent in the 12 months to end September 2017, implying a 30 basis point improvement on the year just ended.
That margin expansion is worth flagging up because the margin gain on £550m of revenue for the 2017 financial year accounts for the majority of the £2.7m operating profit growth that WH Ireland and Numis have factored into their forecasts. So, if Renew increases revenues by 5 per cent as analysts suggest it will, and boosts margins to the 4.5 per cent target, then pre-tax profits and EPS could surge by 14 per cent to £24m and 31.1p, respectively, in the 12 months to end September 2017. The combination of 15 per cent EPS growth and a forward PE ratio below 12 offers an attractive PEG ratio of well below one. A forward dividend yield of 2.5 per cent will appeal to income investors based on the payout per share rising by a further 12 per cent to 9p.
Furthermore, with the benefit of a strong seasonal working capital cash inflow in the second half just ended, Renew could have a year-end net cash position of around £6m, reversing a £4.8m net debt position a year earlier, thus increasing the possibility of selective earnings accretive bolt-on acquisitions. Not that the existing business is short of organic growth as a £500m plus order book highlights Renew’s status as a quality, UK business focused on infrastructure (nuclear, rail, water) with robust characteristics.
Interestingly, analysts at Numis believe that Renew is a likely beneficiary of an acceleration of work in the rail sector if the UK government targets this area for infrastructure spending in the coming months. Chancellor Phillip Hammond delivers his maiden Autumn Statement the day after Renew’s full-year results, and I would want to be long of the shares well before then. I maintain my conservative target price of 420p. Buy.
Another Avingtrans contract win
Avingtrans (AVG:200p) , a designer, maker and supplier of critical components, modules and services to the energy, medical and industrial sectors, has signed a ten year agreement worth £9m to produce high integrity cryostat components for Nuclear Magnetic Resonance systems (NMR) with Wuhan Zhongke Niujin Magnetic Resonance Technology Co. in Wuhan, China.
Component production will initially take place in the UK before moving to the company’s own established facility in Chengdu, China. NMR spectroscopy complements other structural and analytical techniques, such as X-ray, crystallography and mass spectrometry and can be used alongside MRI related technology, to provide multidimensional images and spatially resolved information.
I initiated coverage on the shares at 170p during the summer (‘Engineering a profitable free ride’, 30 Jun 2016), and covered the half year results in an online column last week (‘Bumper cash returns’, 28 Sep 2016). As expected the company has announced a £28m tender offer to buy back half its share capital at 200p a share. This means that net asset value post the tender process will be £36.75m, or 261p a share, including net funds of £17.5m, or 125p a share after accounting for transactions costs on the disposal of its aerospace division and working capital movements. Clearly, some investors will tender their shares and if you followed my original advice this will have the effect of reducing your carrying cost to 140p a share.
However, I still see decent upside as the company is trading profitably, picking up numerous contracts, and has a large war chest to deploy on earnings accretive acquisitions. On a cash-adjusted basis the shares are priced on 10 times EPS estimates of 7.6p for the 12 months to May 2018 post the tender offer, with the earnings risk skewed to the upside as these forecasts only factor in contracts already in place. I maintain my target price of 230p. Buy.
First Property major contract win
Avingtrans wasn’t the only company on my watchlist to announce a major contract win this week, the same is true of Eastern European property fund manager First Property (FPO:46p).
I recommended buying the shares at 18.5p in my 2011 Bargain Shares Portfolio since when the board has paid out dividends of 6.865p a share. I last rated them a buy at 43p in an online column last week (‘Anomalously priced fund managers’, 27 Sep 2016) after the company announced an 11 per cent rise in its funds under management to £393m since the end of March 2016, a performance that mainly reflects additional property purchases in the UK for the Shipbuilding Industries Pension Scheme (SIPS) fund, and currency gains on directly held overseas properties.
Moreover, having drawn down £112m of the initial commitment of £125m under the SIPS mandate which runs to January 2025, the client has just increased its commitment from £125m to £170m. Analyst Chris Thomas at house broker Arden Partners estimates that this could add £200,000 to profits in a full year once fully invested, but given likely investment rates it will not have a material impact in the current year. However, Mr Thomas notes that his current pre-tax profit and EPS forecast of £7.2m and 4.6p, respectively, are based on a £/€ rate of 1.33. In the 2016 annual report and accounts, the company noted that a 5 per cent rise in the euro would have a £310,000 positive profit impact. He will review his full year forecasts in the light of the interim results in November, but “if current foreign exchange rates are sustained there is significant upside potential.”
In fact, I believe that with the £/€ rate now below 1.15, a profit upgrade over £1m is in order. Add to that a solid forward dividend yield of 3.4 per cent, and the shares are being harshly valued trading inline with spot net asset value. My target price is 56p. Buy.
