Under the stewardship of chief executive Steve McQuillan, finance director Stephen King and chairman Roger McDowell, the board is building up a decent track record of acquiring assets, restructuring them to improve efficiency, and then selling them on to reap substantial profit for shareholders. A cash pile of £27.8m, worth 145p a share, resulting from a major disposal provides substantial firepower to do so.
The small acquisition of Abingdon-based Scientific Magnetics, announced alongside last week's half-year results, is a good start as it brings in expertise in superconducting magnets and cryogenics, and broadens the capability in the supply of vacuum vessels and cryostats for Big Science, space and astronomy projects. For example, Scientific Magnetics has recently developed a number of technologies, including a helium-free magnet system for pre-clinical MRI and ultra-high vacuum applications. Bearing this in mind, Mr McQuillan believes that the acquisition offers "genuinely exciting opportunities across a number of key markets", adding that "the business had previously been constrained by a lack of investment". Including debt to be repaid on completion, the £815,000 purchase price seems fair for a business that made an operating profit of £55,000 last year. I understand that there are several other potential acquisitions being considered at the moment, albeit these are at an early stage.
Importantly, the company is bang on track to deliver on analysts' expectations that suggest a small pre-tax profit of £200,000 on revenue of £24.3m in the 12 months to the end of May 2017, implying a profit of £0.5m on revenue of £14.7m in the second half. Furthermore, contracts already in place account for the vast majority of the 33 per cent ramp-up in revenue to £32.8m forecast for the following financial year. The 10-year contract at Sellafield to provide waste storage containers for the Cumbrian nuclear power station is expected to account for half of the revenue increase, with significant contributions also being made from other major contracts wins including a 10-year agreement worth £9m to produce high integrity cryostat components for nuclear magnetic resonance systems (NMR) for a customer in China; and a three-year contract worth £3.5m to provide composite components for airport scanners with a leading security screening provider in California.
The point being that these contracts fully support a near trebling of Avingtrans' cash profit to £2.2m in the 2017-18 financial year to deliver pre-tax profit of £1.3m. This means that, net of cash on the balance sheet, the business is effectively being valued on a miserly six times cash profit estimates. Analyst Jo Reedman at house broker N+1 Singer has an intrinsic valuation of 247p a share, but notes that if the company can successfully deploy £15m of the cash pile in a buy-and-build growth scenario, then a valuation nearer 292p a share is more appropriate. I wholeheartedly agree.
So, having included Avingtrans' shares at 190p in this year's portfolio, I believe they warrant a decent premium to book value of 235p a share, with newsflow on the acquisition front set to drive the re-rating. A progressive dividend policy only adds to the attraction, with the prospective dividend yield currently around 1.6 per cent. Buy.
Trifast for more share price gains
Trifast (TRI:204p), a small-cap manufacturer and distributor of industrial fastenings, which has operations in 17 countries across Europe, Asia and North America, and generates around 70 per cent of its operating profit outside the UK, has issued an upbeat third-quarter trading update and one that has prompted analyst EPS upgrades of between 5 and 6 per cent.
The combination of better-than-expected organic growth and the benefits of sterling's depreciation have been contributing factors. At the half-year stage the directors noted that sterling's 15 per cent year-on-year decline against a basket of currencies had provided a £1m tailwind to profit, and with the currency still under pressure they now expect further translational benefits on overseas earnings. The currency tailwind is also benefiting exports from Trifast's UK operations, including to international original equipment manufacturers (OEMs) supplying the automotive industry, a key business segment.
Trifast's tendency to post earnings beats is hardly new, which is one reason why the shares have almost quadrupled since I first recommended buying at 53p in my 2013 Bargain Shares portfolio. A progressive dividend policy has also helped as the board has paid out 6.7p a share of dividends since I initiated coverage, and analysts are pencilling in a 10 per cent hike to 3.1p a share in the 12 months to the end of March 2017, a payout covered almost four times by upgraded EPS expectations of 12p, up from 10p in the previous financial year. These predictions are based on the company's pre-tax profit rising by a fifth to £19.5m on revenue up 15 per cent to £186m, according to the latest numbers from analyst Ben Thefaut at broker Arden Partners.
Moreover, expectations of EPS rising modestly to 12.7p in the 2017-18 financial year are starting to look way too conservative to me given ongoing strong demand being seen from the automotive industry, the increased competitiveness in Trifast's UK manufacturing base, and the potential for earnings-accretive bolt-on acquisitions. But even on this conservative basis, the shares are still only rated on 16 times earnings estimates, a 24 per cent ratings discount to larger rivals Diploma (DPLM:1,075p) and Electrocomponents (ECM:474p).
I would also flag up that Trifast has a lowly geared balance sheet: analysts believe that net borrowings will have been cut from £16m to £10m in the 12 months to the end of March 2017, a performance reflecting ongoing strong cash generation and the relentless earnings momentum. An increasing revenue stream from more profitable manufacturing operations, accounting for 35 per cent of total sales, is also helping margins, so the quality of the business mix is improving, too. Balance sheet gearing of around 10 per cent is modest and gives the board ample firepower to make further well-timed acquisitions, having shrewdly acquired VIC, an Italian maker and distributor of fastening systems predominantly for the white goods industry, a few years ago, and more recently Kuhlmann, a distributor of predominantly customised industrial fasteners. This business is focused mainly on the domestic German market and is giving Trifast exposure to the country's automotive sector.
So, ahead of the fourth-quarter trading update in late April, and having last advised running profits at 180p ('Exploiting earnings potential, 14 Nov 2016), I feel it's worth running your hefty 298 per cent return on this holding as analyst target prices in the range of 230p to 250p may yet come into play. Run profits.
Profit from currency hedging
High-yielding shares in currency manager Record (REC:40p) have done well since I last rated them a buy at 32.5p ('Currency winners', 28 Nov 2016), and are well ahead of the 34.3p level at which I included them in my 2015 Bargain Shares Portfolio. The company has paid out total dividends of 3.37p a share, too.
The recent performance looks wholly justified as a trading update revealed a $1.6m rise in assets under management to $56.5m in the final three months of 2016, and importantly the company's three main hedging strategies all posted positive returns for the third consecutive quarter. Market volatility, or the potential for sharp currency moves, is the key to attracting and retaining clients, so it was hardly surprising the company prospered in a period that encompassed uncertainty surrounding the US presidential election, and divergence of monetary policy being adopted by the major global central banks. Indeed, while the US Federal Reserve continues to pursue a policy of tightening interest rates, the Bank of England moved in the opposite direction and the European Central Bank extended its quantitative easing programme.
Moreover, general elections in the Netherlands and France in the coming months have the potential to cause heightened volatility in foreign exchange markets, and even if currency investors navigate through that period there is still uncertainty over the outcome of the German election later in the year. This is good news for Record, which is expected to post a modest 4 per cent rise in EPS to 2.64p in the financial year ending 31 March 2017, rising to 2.97p the year after, according to analysts at Edison Investment Research.
This not only guarantees a maintained normal dividend of 1.65p a share being declared, but with the company debt-free and sitting on cash and money market instruments worth £36.2m on its balance sheet, a sum worth 16.3p a share, then there is a real prospect of a much higher payout. The board has indicated that it "will give consideration to returning at least part of any excess of current year earnings per share over this payout to shareholders, potentially in the form of special dividends". Analysts at Edison believe the total dividend for the 2017 financial year could be 2.55p a share, including the half-year payout of 0.825p already paid, implying an attractive prospective dividend yield of 6.4 per cent. The potential for a special dividend is an obvious attraction, as is a cash-adjusted forward PE ratio of eight for the new financial year. Buy.
Profit upgrades for First Property
The news keeps on getting better from Aim-traded property fund manager and investor First Property (FPO:48p).
The company has just announced the purchase of a prime office building in Krakow, Poland, in conjunction with a club of investors. The acquisition is being funded by a bank loan of €15.9m (£13.6m) and cash of €7.5m, which has been committed by two family offices, a Cambridge college, and clients of the company. First Property is co-investing €1.5m with other investors.
The annual net operating income from the property is around €1.9m, equating to a healthy net initial yield on purchase of 8.3 per cent, and the investment is forecast to earn an annual pre-tax profit of €1.16m, of which First Property's share will be €230,000 a year. This equates to a pre-tax rate of return on equity invested of 15.5 per cent per year, highlighting the potential to gear up high-yielding commercial property in certain parts of eastern Europe with relatively low-cost bank borrowing. In addition, First Property is set to rake in ongoing annual management fees of €220,000 and will also earn a one-off arrangement fee of €220,000.
The purchase is expected to complete at the end of the second quarter this year, prompting analyst Chris Thomas at broker Arden Partners to raise his pre-tax profit estimate by £300,000 to £9.7m for the 12 months to 31 March 2018 to produce EPS of 6.3p, up from 5.6p forecast for the financial year just ending. There is potential upside to these numbers, too. That's because the company also owns a portfolio of 11 high-yielding commercial properties in Poland and Romania worth £170m and yielding around 9.8 per cent, the recurring profit from which accounts for a large chunk of Mr Thomas's forecast. Bearing this in mind, Mr Thomas has conservatively factored in a sterling:euro exchange rate of £1:€1.217 when converting these overseas earnings, well above the current spot rate. The company also has cash available to fund more earnings-accretive debt-funded property purchases, which would support further upside to forecasts.
So, having first recommended buying First Property's Aim-traded shares at 18.5p in my 2011 Bargain Shares portfolio, since when the board has paid out dividends of 7.265p a share, and last reiterated that advice at 47p ('A mandate for gains', 1 Feb 2017) after the company established a new property fund to invest in high-yielding UK commercial property, I remain bullish on the investment case. Trading marginally above book value of 45.9p a share, rated on a forward PE ratio 7.5, and offering a 3.2 per cent prospective dividend yield, my 56p target price is looking increasingly conservative. Buy.
MORE FROM SIMON THOMPSON...
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The archive of all the share recommendations I made in 2016 is available here
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