While I was on annual leave last week no fewer than 18 companies on my watchlist released trading statements, almost all of which have been positive I hasten to add. A raft of updates is clearly in order and I will endeavour to publish these as promptly as possible.
Aim-traded UK and eastern European property fund manager and investor First Property (FPO:56p) has established a major new fund, Fprop Offices LP, with eight institutional investors to invest in office blocks and business parks across England. The £182m equity raised at first close equates to £260m of buying power based on the new fund’s maximum 30 per cent gearing level, a considerable sum in relation to First Property’s current third party assets under management (AUM) of £323m. In effect, after taking into account other mandates won, this means the company’s third party AUM could almost double. Interestingly, instead of earning an annual management fee, First Property has agreed to a profit share, the impact of which analyst Chris Thomas, head of research at brokerage Arden Partners, believes has significant profit potential.
He estimates that based on an initial yield of 6.2 per cent on purchase, and after taking into account debt funding allowed, the new fund would generate a 7.5 per cent return on equity and produce a profit share of £1.36m for First Property plus an additional £200,000 on the company’s £3m co-investment. After factoring in bonus allocations, then this would produce a £1.1m contribution at the pre-tax level. Moreover, if the new fund generates an annual internal rate of return of between 7.5 per cent to 15 per cent then the financial returns ratchet up for First Property; the company is entitled to 25 per cent of the total profits in this scenario, thus highlighting the potential for additional profit upside if investment returns are boosted by capital gains. It’s only fair to point out that if capital losses exceed income in any one year, then there would be a claw back on income paid in prior years, a sensible arrangement in my view.
The point being that as Fprop Offices LP’s capital is deployed on acquisitions, expect major earnings upgrades. That’s because Arden’s current year pre-tax profit estimate of £9.1m, up from £8.6m in the 12 months to end March 2017, doesn’t take into account any contribution from the new fund and is solely based on First Property reporting annual revenues of £25.1m, almost all of which are recurring. It’s also worth flagging up that the proportion of First Property’s profits earned from fund management activities is set to more than double to 18 per cent. In turn, this offers potential for investors to attribute a higher multiple to this fast growing profit stream, and with good reason as fund management profit largely drops through to cash and should enable the company to pay a higher proportion of its earnings as dividends. In other words, there is scope for earnings multiple expansion and upgrades from the Fprop Offices LP fund to drive the share price.
In addition, there is potential for upgrades if First Property deploys some of the £13m free cash on its balance sheet on further debt-funded and earnings accretive purchases of high-yielding commercial property in Eastern Europe, or if sterling remains weak against the euro. That’s because Mr Thomas has conservatively factored in an average exchange rate of £1:€1.189, well above the current rate of £1:€1.14, on the profits First Property earns from its 10 wholly owned overseas investment properties.
The bottom line is that rated on 9.5 times prospective earnings, offering a 2.9 per cent forward dividend yield and priced on 1.2 times book value, the risk:reward ratio remains skewed to the upside. So, having first recommended buying First Property's shares at 18.5p in my 2011 Bargain Shares Portfolio, booked dividends of 7.265p a share excluding the final payout of 1.1p which goes ex-dividend on 31 August 2017, and last advised running profits at 53p ('Small-cap gems', 13 Jun 2017), given the obvious potential for earnings upgrades, I now rate them a buy at 56p and have a new target price of 65p. Buy.
Miton on a roll
First Property is not the only fund manager on my watchlist on the upgrade. The same is true of Aim-traded asset manager Miton Group (MGR:43p).
When I last rated the shares a buy at 40p, and raised my target to 50p ('Going for growth', 20 Mar 2017), the company had posted a major earnings beat for 2016, and announced that assets under management (AUM) had increased by £192m to almost £3.1bn in the 10 weeks since the December 2016 year-end, thus supporting expectations of another robust year of earnings growth. The momentum shows no sign of flagging as AUM have subsequently surged to £3.45bn, buoyed by net inflows of £195m and £254m of positive market movements so far this year. That’s well ahead of the year-end AUM forecast of £3.3bn which analyst Stuart Duncan at broking house Peel Hunt had based his forecasts on, prompting him to raise his AUM estimate again to £3.5bn. And this feeds through to profits as Mr Duncan now expects a near 10 per cent hike in Miton’s pre-tax profit to £5.6m this year to deliver EPS of 2.5p and a 10 per cent hike in the payout to 1.1p a share.
Importantly, 12 of the 15 funds managed by Miton are ranked in the first or second quartile over the manager’s tenure, with the inflows broad based and consistent over the period, thus diversifying the revenue mix and reducing dependency on any one fund. The cash generation of the business stands out too as net funds have risen from £17.4m to £18.2m in the 12 months to end June 2017 even though the board spent £2.6m on an earnings accretive share buy-back programme, and paid out £1.7m in dividends, having raised last year’s payout by half to 1p a share.
Admittedly, investors are starting to cotton onto the bullish momentum as Miton’s share price has just taken out a three-year high around 42p and there is no overhead resistance until the 50p price level which capped progress a few years ago. That target looks a distinct possibility to me and one that would value Miton’s equity on reasonable 14 times this year’s likely post tax profit net of cash on the balance sheet, and underpinned by a 2.2 per cent prospective dividend yield.
So, having first spotted the earnings recovery potential a couple of years ago when the price was 23p ('Poised for a profitable recovery', 4 Apr 2015), and banked 1.67p a share of dividends since then, offering 16 per cent of upside potential to my 50p target, I continue to rate Miton’s shares a decent buy.
STM upgrades
Aim-traded shares in STM (STM:52p), a company specialising in the administration of assets for international clients in relation to retirement, estate and succession planning, and wealth structuring, have rallied sharply since I last advised buying at 40p ('Five growth opportunities', 30 May 2017), and are about 50 per cent up since I initiated coverage ('Tapping into a pensions payday', 27 Apr 2015).
The re-rating is fully justified too as the board’s newly upgraded guidance suggests full-year revenues being £300,000 ahead of the £19.5m previous estimate of analyst Jermey Grime at house brokerage finnCap, prompting a 10 per cent pre-tax profit and EPS upgrade to £3.2m and 4.4p, respectively. The drivers behind this outperformance have been the launch of an international Sipp business in April which resulted in a very healthy take-up with new applications running at three times the rate of STM’s UK SIPP offering; a solid outcome from the company’s legacy qualifying recognised overseas pension schemes (QROPS) business, an offshore pension scheme approved by HMRC and used by expatriates and mobile employees whose tax domicile can change as a consequence of employment; and an equally strong performance from STM’s Life business which offers an insurance wrapper product.
In my last article, I noted that Mr Grime had not factored into his forecasts any new international Sipp business, nor any cost reductions in the QROPS operations following the UK government's decision to introduce a 25 per cent tax on transfers into QROPS for residents located outside the EU, thus offering scope for outperformance. I also felt that STM was well placed to act as a consolidator in the QROPS market. Indeed, whereas STM has a high-margin and annuity style recurring income generated from existing QROPS plans, other smaller players lack the critical mass so are rich pickings for a company with a cash pile of £8.6m, a sum worth 14.5p a share. I can now reveal that the change in tax legislation “is starting to generate opportunities to potentially acquire other books of QROPS business.” But even without factoring any earnings enhancing ‘run-off’ acquisitions of QROPS books, Mr Grime feels that current trading trends point towards STM’s revenues rising to £20.1m in 2018 to boost pre-tax profits to £3.4m and lift EPS to 4.8p, representing a 17 per cent upgrade, and warrants lifting their target price from 48p to 60p.
On this basis, finnCap is forecasting a 20 per cent dividend hike to 1.8p a share this year, rising to 2p a share in 2018, implying STM’s shares are rated on less than eight times 2018 earnings estimates net of cash on the balance sheet, and offer a prospective dividend yield of 3.8 per cent. That’s still a harsh rating and a return to the share price highs around 70p, dating back to the autumn of 2015, will be in order if the current momentum can be maintained. Buy.
Bango outperforms
Aim-traded shares in Bango (BGO:191p), a provider of a state-of-the-art mobile payment platform that enables smartphone users to charge purchases made in app stores straight to their mobile phone account, rallied strongly after I last advised buying at 143p and hit my 200p target price earlier this month ('On the money', 7 Jun 2017). They have more than doubled since I first advised buying the shares at 93p ('Bang on the money', 26 Sep 2016).
However, this is not the time to bank profits. A pre-close trading update released ahead of interim results due out on Tuesday, 19 September 2017 revealed that the exit run rate of end user spend (EUS) processed through Bango’s payment platform hit £300m at the end of June, up from £195m at the start of the year and massively outperforming the £242m forecast of analyst Ian McInally at house broker Cenkos Securities. This gives Mr McInally “a high level of confidence in our year-end exit run rate of £352m and expectations that Bango can achieve run-rate break-even in the fourth quarter.” He adds that “should the acceleration of EUS over the first half be maintained then an upwards revision to our EUS expectations should be necessary.”
I would go one stage further. With Bango’s payments platform tested to process transaction levels in excess of £5bn, and costs in check, then cash profits could ramp up very sharply from this point onwards especially as the company has just gone live with a groundbreaking direct carrier billing (DCB) payment route for online giant Amazon in Japan, and one that enables customers with a KDDI or NTT DOCOMO mobile phone account to pay for goods purchased from Amazon.co.jp by charging the cost of them to their mobile phone account. These two carriers account for three quarters of the Japanese market, so is potentially a transformational deal for the company. Bango has potential to generate eye-catching growth in other countries too, having recently launched new store billing routes in Indonesia, Hong Kong, USA and Europe, and also migrated two Google Play routes onto its platform from other suppliers.
Bearing recent developments in mind, my original 200p target price assumed a rating of 13 times Bango’s potential net profit in 2020 based on my financial models. However, that was before the Amazon deal which, frankly, could easily raise my fair valuation by half again. Buy.
