Analyst Andrew Watson at brokerage N+1 Singer was previously forecasting pre-tax profits up 19 per cent to £8.1m on flat revenues of £89m in the 12 months to end-December 2016, but now expects to upgrade these estimates by around 10 per cent, implying a new EPS forecast of 18.7p, or 25 per cent higher than in 2015. A material upgrade to next year's numbers is firmly on the cards, too. That's because a sustained gold price around the current level of $1,300 per ounce (oz), coupled with ongoing sterling weakness, will have a positive effect on Mr Watson's previous 2017 pre-tax profit and EPS forecasts of £9m and 19p, respectively. I would also flag up that the company's personal unsecured loan book has surged by 30 per cent to £8.2m since the end of June, outpacing the 4 per cent growth in the pledge book to £40.5m, and highlighting the ongoing development of its other profitable lending activities.
For instance, a brokerage agreement with Cash Converters and its franchisees has introduced H&T's personal loan product into 150 Cash Converters stores, and online too. This new distribution channel can only underpin analysts' expectations of further upside to their 2017 earnings estimates. A new high-end operation on Old Bond Street, in London's Mayfair, to cater for a more affluent customer base looks a smart move, as does investment in a new underwriting system to support the company's online lending platform.
So, with further upgrades highly likely, and H&T's shares priced on 15 times 2016 earnings estimates, underpinned by a near-3 per cent prospective dividend yield and on a price-to-book value ratio of 1.1 times, the rating is hardly stretched for a company with a rock solid balance sheet and strong working capital position. Having advised buying the shares at 174p in last year's Bargain Shares portfolio, since when the board has paid out total dividends of 10.1p share, and last recommended running profits at 295p ('Golden gains', 17 Aug 2016), I now rate them a buy again at 290p and have an upgraded target price of 325p. Buy.
Renew Holdings upgrade
Shares in Renew Holdings (RNWH:375p), an Aim-traded engineering services group specialising in the UK infrastructure market, got within pennies of my 420p target price at the end of last month before succumbing to profit-taking. I first recommended buying at 258p ('A small-cap breakout', 14 Aug 2014), and last reiterated that advice at 375p ('High fives', 4 Oct 2016).
The company is scheduled to release its full-year results on Tuesday 22 November 2016, and a pre-close trading update has confirmed that it's on course to deliver pre-tax profit of at least £21m and EPS north of 27p in the 12 months to end September 2016, a performance that should support a 14 per cent hike in the dividend to 8p a share, as analysts at Numis Securities and WH Ireland predict. There are decent prospects of profit growth in the new financial year, especially as the board is targeting an operating margin of 4.5 per cent, implying an increase of around 30 basis points on the year just ended. The additional margin equates to £1.7m of incremental profit based on annual revenues of around £550m, and complements organic growth being driven by a raft of infrastructure contracts in the nuclear, rail and water industries.
As I flagged up in my article a month ago, the company has now moved into a net cash position, so has the firepower to make earnings-accretive acquisitions. It hasn't wasted any time deploying its firepower, having just announced the purchase of private equity owned-St Albans-based Giffin Holdings, a specialist in mechanical, electrical and power services within the rail sector. The company employs 123 staff and has contracts with Network Rail, London Underground and a number of the train operating companies. It looks a good strategic fit as Renew will be able to offer power services in areas in which it already operates in the rail sector, and is supportive of future contracts as the CP6 bidding process for rail gets under way. Giffin is very profitable too, having just reported record revenues of £22m and pre-tax profit of £700,000 in the financial year just ended.
The £7m total consideration is being funded from Renew's existing resources, so after factoring in the funding structure and Giffin's current trading, analyst Nick Spoliar at brokerage WH Ireland has upgraded his pre-tax profit and EPS forecasts for Renew by 4 per cent to £24.9m and 31.7p, respectively, for the 12 months to end-September 2017. On this basis, the shares are rated on a forward PE ratio of 12 and offer a prospective dividend yield of 2.4 per cent based on a raised payout of 9p a share. That's a low rating for a company that's expected to generate high-teens earnings growth and I feel a revisit back towards my 420p target price is in order. Buy.
Quarto trading intact
Shares in Quarto (QRT:285p), a global illustrated book publisher and distributor, almost touched my 300p target price last month and have succumbed to a small bout of profit-taking after a third-quarter trading update. I advised buying the shares in the summer at 261p ('Small-cap value buys, 9 Aug 2016).
The company sells books across 45 countries and in 35 languages through a variety of traditional and non-traditional channels. Around 60 per cent of turnover is generated from a backlist of more than 9,000 titles, so providing the company with a stable revenue stream. The board under the leadership of chief executive Marcus Lever, who joined the company just under four years ago, has been augmenting its income by acquiring smaller niche operators at attractive multiples (between four and five times cash profit) and then leveraging the distribution and purchasing base of a larger business. I understand that the integration of the most recent acquisition, the publishing assets of becker & mayer, is going well and has strengthened Quarto's offering in North America - US revenue now accounts for 45 per cent of total revenues - and increased revenues from children's publishing to 30 per cent of the mix.
True, weakness in Quarto's Books & Gifts Direct subsidiary, and a fall-off in demand for adult colouring products, a passing fad in any case, led to a lacklustre third-quarter performance, but the outcome for the full year remains intact. Analyst Malcolm Morgan at brokerage Peel Hunt is maintaining his pre-tax profit estimate at $15.2m on revenues of $194m for the 12 months to end December 2016, implying a 5 per cent rise in EPS to 52.4¢ (about 42.2p at current exchange rates) to support a full-year dividend of 15.3¢ (about 12.3p).
He also expects a rise in revenues to around $210m next year after factoring in the full benefits of this year's acquisitions. On this basis, expect Quarto to deliver pre-tax profits of $17.1m, EPS of 58.2¢ and a payout of 17.1¢, implying the shares are rated on less than six times forward earnings and offer a 4.8 per cent prospective dividend yield. Add to that potential for further debt-funded earnings-accretive acquisitions and my 300p target price is starting to look conservative. Buy.
Bilby misses targets
The share price of Aim-traded Bilby (BILB:70p), a provider of gas heating appliance installation and maintenance services to residential and commercial properties, has fallen sharply since the end of September. The company listed its shares on London's junior market last year with the intention expanding the business through acquisition and complementing the organic growth in its existing operations. This 'buy-to-build' strategy and the dynamics underpinning demand in the social housing market are the primary reasons why I initiated coverage on the shares at 75p ('Buy-to-build' growth play, 18 May 2015), and also why investors subsequently pushed them up to an all-time high of 175p in January.
I last rated the shares a buy at 125p in late July ('Four small-caps with upside potential', 26 Jul 2016) after Bilby reported a two-thirds rise in underlying pre-tax profits to £3m on revenues of £31.5m in the 12 months to end March 2016, a performance reflecting a combination of organic growth and the contribution from the earnings-enhancing acquisition of Waltham Abbey-based property services business Purdy. That deal expanded Bilby's services and geographical scope from its core gas maintenance installation and building maintenance services speciality into new areas of heating, building and complementary electrical services in neighbouring boroughs in north-east London.
I had good reason to maintain a positive stance at the time as analyst Michael Donnelly at brokerage Panmure Gordon had just upgraded his forecasts. These pointed to Bilby's revenues more than doubling to £69m in the 12 months to end March 2017 to deliver a 90 per cent increase in pre-tax profits to £5.7m and boost EPS from 7.4p to 12.1p. Contributions from two complementary acquisitions underpinned a chunk of the anticipated growth: DCB, a provider of building, refurbishment and maintenance services to housing associations and local authorities; and Spokemead, a specialist in electrical installation, repairs and maintenance services to local authority housing stock. These two acquisitions were announced just before Bilby's March 2016 year-end and Mr Donnelly's models suggested they would contribute pre-tax profits of £2m and revenues of £26m in the 2017 financial year. Other investors bought into the investment case as Bilby raised £5m in a placing at 118p a share to acquire DCB and Spokemead. Moreover, Bilby's management says the two companies are delivering healthy returns, so the rationale for making the acquisitions still holds.
The bad news is that a major public sector customer has taken some of its previously outsourced work back in-house, and delayed other work under contract to Bilby, which has forced the board to cut revenue and cash profit estimates by 10 per cent and 25 per cent, respectively, for the current financial year. The company changed its house broker from Panmure to Cenkos just over a month ago, and analysts at Cenkos have yet to produce research, but the downgrade implies the board is guiding towards underlying pre-tax profits of £4.2m and EPS of 9p in the 12 months to end-March 2017.
It's only fair to say that some investors were concerned before the profit warning was announced, hence the descent in Bilby's share price last month. Sentiment has not been helped either by a slower than expected ramp-up in a gas support contract for the South East Consortium (SEC), a group of housing associations responsible for more than 140,000 homes in the region, which Bilby announced last autumn.
However, after the derating Bilby's shares are being rated on around eight times earnings estimates based on the downgraded guidance, and offer a historic dividend yield of 3.3 per cent. If the contract loss is indeed a one-off, and I would point out that the board's confidence in the opportunities for Bilby in social housing in London and south-east England is underpinned by "newly awarded contracts throughout the group", then the derating has gone too far. Indeed, more than 90 per cent of Bilby's contracts are with customers who have employed the company in the previous 12 months, so there is a high level of repeat business. Hold for recovery.
