That's because the company is an awesome cash machine, generating an operating cash inflow from operating activities of £16m in the 12 months to the end of January 2017, a sum in excess of the £13.6m of cash profits reported in the same period and miles ahead of the reported pre-tax profits of £7.1m, even after recording a 20 per cent increase this time around. The £5.9m cash cost of the 5.89p-a-share declared dividend, up 6 per cent year on year, is easily covered by operating cash flow even if EPS of 5.51p, up from 4.71p a year earlier, falls a tad short.
In fact, even after investing £8.8m in the estate, mainly spent on sprucing up 11 stores and opening a further seven to take the total to 124 shops, and splashing out on dividends, the company still managed to increase its closing net funds by £2.2m to £19.5m, a sum worth around 20 per cent of the current market capitalisation. The cash flow statement explains why this is possible, as a non-cash depreciation charge of £5.9m and net amortisation charge of £600,000 depress the pre-tax profit line, so when you add these back you arrive at the cash profit figure of £13.6m. Tight working capital management also aided the cash flow performance to drive up what is already an impressive cash conversion rate.
Moreover, with 30 stores still to refit, and a short lease length of 56 months on the whole portfolio, there is scope to make savings when negotiating new leases with landlords, while at the same time either relocating stores to better locations or investing in refurbishments, which have a cash payback period of around three years. Moss Bros has been embracing the opportunities in e-commerce, too, a segment that has been growing at quite a pace and now accounts for 11 per cent of all sales. It has also benefited from the launch of sub-brands, a bespoke retail rang, and a broader hire offering, so much so that analysts at brokerage Peel Hunt now feel that "Moss Bros is in good shape against our conservative assumptions", which point to a further 8 per cent rise in EPS in the current financial year, to support a raised dividend per share of 6.2p. I wholeheartedly agree with that view.
So, trading on 13 times cash-adjusted forward earnings, rated on a modest enterprise value to cash profit multiple of six times, and offering a prospective dividend yield of 6 per cent, I believe the current valuation fails to reflect the consistent levels of sales growth and market share gains made since I first spotted the recovery potential. The shares were trading at 38p at the time ('Dressed for success', 20 February 2012), since when the board has declared dividends per share of almost 23p, including the final of 3.98p announced this week. I last advised buying at 103p ('In the ascent', 23 January 2017), and feel that a move above the 110p resistance level that has capped progress over the past couple of years is long overdue. Buy.
Plotting a return to growth
Alternative Investment Market (Aim)-traded Gama Aviation (GMAA:218p), an operator of privately owned jet aircraft, has modestly beaten analysts' earnings expectations, albeit its European air operations faced challenging market conditions due to "the absence of discretionary spend and lack of confidence", noted chief executive Marwan Khalek during our results call. The sharp decline in divisional underlying cash profits wiped out growth posted in other parts of the business, leading to a fall in Gama's adjusted pre-tax profits from $14.6m to $13.7m to deliver EPS of 30¢.
Bearing this in mind, both finance director Kevin Godley and Mr Khalek expect modest growth from the European ground services business in 2017, a view backed up by "the current pipeline and level of enquiries in areas we weren't seeing in 2016". That's good news, as is a "right sizing" of the European air business and exiting from underperforming contracts, which improved margins and boosted profits. Add to that a surge in cash profits from Gama's fast-growing US aircraft management businesses, which are being merged into a joint venture with BBA Aviation (BBA), and a return to growth this year is highly likely. Analyst John Cummins at WH Ireland and Robin Byde at Cantor Fitzgerald both expect EPS to rise by around 10 per cent to 33¢ in 2017, implying that the shares are rated on a modest eight times forward earnings, or half the support services sector average and significantly below the ratings of rivals Air Partner (AIR) and BBA.
The other key take for me was management's guidance for a "significant improvement in cash conversion". Mr Godley expects net debt to halve to $9m-$10m by the year-end, which is not only good news for a continuation of the progressive dividend policy - the payout increased modestly to 2.6p a share - but with a net debt to cash profit ratio of 1.1 times well within banking headroom of 2.5 times, the company is well funded to consider making further acquisitions. The bottom line is that, having last recommended buying at 175p ahead of the results ('In the ascent', 23 January 2017), and seen my 225p target price subsequently achieved, I feel that a return to growth this year should deliver further upside and so have upgraded my target price to 250p. Buy.
CareTech pulls off major fundraise
Aim-traded CareTech (CTH:362p), a leading provider of specialist social care services, has successfully raised £39m at 355p through an oversubscribed placing of 11m shares. The equity raising represents 14.6 per cent of its enlarged share capital and the proceeds will be used to mainly fund a pipeline of potential bolt-on acquisitions.
It's not the first time CareTech has tapped the market in recent years, having raised £21m two years ago for exactly the same purpose, subsequently deploying the funds on two major earnings-accretive acquisitions. At the time, I noted the value opportunity on offer and advised buying at 230p ('Time to take care', 16 March 2015), a recommendation that has paid off, with CareTech's share price now 60 per cent higher. I subsequently upgraded my target price to a range between 412p and 450p ('Value opportunities', 30 January 2017).
Clearly, I am not the only one who sees value in the shares, which are still only rated on an undemanding 10.7 times current-year EPS estimates of 34.1p, after factoring in a 12 per cent rise in pre-tax profits to £29.3m and dilution from the placing, but ignoring scope to deploy the new funds on earnings-enhancing acquisitions. That's not a punchy rating for a company that has delivered EPS compound annual growth rate of 25 per cent since joining London's junior market, and one rewarding shareholders with a progressive dividend policy: analysts at WH Ireland and FinnCap predict a full-year payout per share of 9.6p, suggesting a healthy prospective dividend yield of 2.6 per cent.
An enterprise value to cash profit multiple of 10 times is below the pricing achieved in recent bid activity across the sector, and a price-to-book value ratio of 1.2 times after marking property to market value is hardly stretched either. Buy.
Watkin Jones buying opportunity
CareTech is not the only company on my active buy list that has conducted a major fundraising. The same is true of Watkin Jones (WJG:145.5p), a construction company specialising in purpose-built student accommodation.
It's a company I know well, having advised buying the shares around the 103p mark at the time it joined Aim last year ('A profitable education', 3 April 2016). I last rated the shares a buy at 134.5p a couple of months ago ('In the ascent', 23 January 2017) and my upgraded target of 155p was surpassed earlier this month when the price hit an all-time high of 162p.
However, last week's placing of 49.25m shares at 140p by a family trust in which chief executive Mark Watkin Jones is a beneficiary, and the sale of 1m shares by finance director Philip Byrom, has led to a sharp pullback in the share price. It looks overdone, though, as Mr Watkin Jones still has an interest in over 29 per cent of the share capital, and Mr Byrom only sold less than a quarter of his holding, while liquidity in the shares has improved as new investors have come on board, including fund manager Woodford Investment Management, which snapped up 10.2 per cent of the shares in issue.
Indeed, I feel that when the dust settles investors will focus once again on the sound fundamentals of the business, which has driven the share price higher since listing. Namely, the company has 21 developments with 6,800 beds slated for delivery during 2017 and 2018 and the pipeline beyond 2018 is robust - future earnings have been de-risked through forward sales of schemes to institutional investors, including all 10 projects due to be delivered this year and the profits and hefty cash generation realised from these schemes supports a highly progressive dividend policy.
In my view, it now looks a rock solid bet that Watkin Jones will grow EPS by around 10 per cent to 13.7p in the 12 months to 30 September 2017. So, with profits rolling in, and net funds of £32.2m on the company's balance sheet worth 12.6p a share, a 50 per cent-plus hike in the dividend per share to north of 6p looks on the cards. This implies the shares are trading on around 10.5 times likely earnings and offer a prospective dividend yield in excess of 4 per cent. In my book, that represents value and offers ample upside to my new price target of 165p to 170p, so I continue to rate the shares a buy.
Marwyn value opportunity
I think investors are being overly harsh in their valuation of Marwyn Value Investors (MVI:135p), a closed-end investment company listed on the Specialist Fund Market of the London Stock Exchange. The shares have been heading south since the company raised £50m of new equity at 220p a share at the end of 2015 to invest in new quoted portfolio companies targeted by Marwyn Value Investors LP, an open-ended Master Fund domiciled in the Cayman Islands, which is backed by more than 60 leading institutions and funds including Marwyn Value Investors.
A lacklustre investment performance has clearly not helped - net asset value (NAV) of 210p per share has barely budged since the start of 2016. However, there is a potential share price catalyst on the horizon as Zegona Communications (ZEG:132p), a small-cap company that acquired Telecable de Asturias, the leading quad play telecommunications operator in north-west Spain, is in talks with Spanish telecoms group Euskaltel to sell Telecable. Marwyn's 25.8 per cent stake in Zegona accounts for over a third of its own NAV.
Bearing this in mind, analysts at Liberum Capital inform me that Euskaltel is rated on a multiple of 9.6 times trailing cash profits to enterprise value, a significant premium to Zegona, which is currently rated on eight times, even though Telecable has performed well since its acquisition 18 months ago. In turn, this highlights the potential for a decent bid premium in the event of an offer being made, and one that would undoubtedly prompt a re-rating in Marwyn's shares, which are shy of the 143p level at which I last recommended buying ('Small-cap trading updates', 1 November 2016). Buy.
MORE FROM SIMON THOMPSON...
A comprehensive list of all the investment columns I have written in 2017 is available here.
The archive of all the share recommendations I made in 2016 is available here
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com for £14.99, 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 stock picking
