Aim-traded stockbroker and financial services outsourcer Jarvis Securities (JIM:458p) has reported another record set of results, following a bullish trading update in May that prompted analyst Nick Spoliar at house broker WH Ireland to upgrade his forecasts by 16 per cent at the time ('Five small-cap opportunities', 23 May 2017). I first spotted the investment potential last autumn when they the shares were languishing at 305p ('High-yielding income play with capital upside', 15 Nov 2016).
My positive stance was based on the likelihood of an improved performance from both of Jarvis’s business units: a corporate division, which provides outsourced and partnered financial administration services to a number of third-party organisations and has cash under administration in excess of £150m, all of which is placed on short-term deposit with triple-A-rated banks; and a broking operation that has more than 100,000 retail clients who use its ShareDeal-Active and X-O low-cost online share trading services.
The company has certainly delivered by posting a 38 per cent increase in first-half pre-tax profit to £2.35m on 22 per cent higher revenue of £4.8m, buoyed by buoyant trading volumes despite political uncertainty this year, and cash under administration hitting an all-time high. This means that well over half of WH Ireland’s full-year pre-tax profit estimate of £4.4m has been booked, thus de-risking the investment case and opening up the possibility of more upgrades if the momentum is maintained. That’s good news for the dividend as is the 50 per cent-plus rise in net cash reserves to £4.6m, a sum worth 40p a share, after taking into account £12.7m of cash set aside for the settlement of market transactions. WH Ireland predict a 25 per cent rise in the payout per share to 22p covered 1.45 times by EPS estimates of 31.8p.
Trading on 13 times earnings net of cash, underpinned by a healthy dividend yield of 4.8 per cent, and offering 15 per cent upside to my 525p target price, the shares are worth buying.
Lombard buying opportunity
Investors have reacted negatively to the latest trading update from Lombard Risk Management (LRM:10.5p), a provider of collateral management and regulatory reporting software products to clients including 30 of the top 50 global banks, hedge funds and asset managers. The shares were marked down 16 per cent to 11p, so retracing more than half the gains made after I advised buying at 9p ('Banking on regulation', 13 Mar 2017) and have dropped well below the 13.75p level at which I maintained a positive stance at the full-year results ('Five growth opportunities', 30 May 2017).
I think this is a massive overreaction and one that was partly driven by news that “revenues will be weighted to the second half of this year”. However, this has always been the case: in the past three financial years, the revenue split has been 45:55 between the first and second half. More important is confirmation that the landscape for the company’s products remains “positive and largely unchanged since the full-year results in May”. Although not mentioned in the update, I can confirm that the directors are optimistic of hitting the unchanged forecasts of analysts Paul Hill and Hannah Crowe at Equity Development. These suggest the company will grow revenue from £34.3m to £40m in the 12 months to the end of March 2018, hitting cash profit break-even after research and development costs, and achieving cash-flow break-even to maintain net funds at £6.8m.
I also feel that investors are losing sight of the fact that “the board is encouraged by the pipeline of new business being pursued by the company through its direct sales force and channel partners”, and the backdrop remains favourable given the need for financial services clients to make cost savings while fully complying with existing and a raft of new legislation. Lombard is hardly being overvalued, either, as its current enterprise value of £35.2m equates to just 0.9 times forecast annual sales, a 75 per cent discount to the sector average.
Admittedly, Equity Development has “prudently” reined back its target price to 20p, bringing it back in line with mine. However, this is still almost double the current share price and I would certainly use the current weakness as a buying opportunity.
Accrol hits guidance
Aim-traded Accrol (ACRL:151p), the Blackburn-based maker of toilet rolls, kitchen rolls and facial tissues, has delivered a 14 per cent rise in revenue to £135m in the year to the end of April 2017, buoyed by a slew of contract wins in the discount sector, including one worth more than £10m a year with Lidl. In turn, this produced the 58 per cent rise in underlying pre-tax profit to £13m and better-than-expected adjusted EPS of 12.4p. The board declared a full-year payout of 6p a share, in line with guidance I was given when I initiated coverage around the 100p level when Accrol floated its shares on Aim last summer ('Clean up with Accrol', 6 Jun 2016).
However, analyst Mike Allen at joint house broker Zeus Capital reduced his current year-full diluted EPS forecast by 4.5 per cent to 12.8p, reflecting a more prudent gross margin assumption to reflect delays in pushing through retail price increases in key brands, and the impact of US dollar appreciation on input costs following the EU referendum. Private-label shelf prices for soft tissue remain at pre-Brexit levels, but Accrol’s chairman Peter Cheung says: “there are positive signs that this is changing, albeit slower than expected, and we expect the industry as a whole to pass on the effects of the weaker pound as currency [hedging] contracts unwind.” Moreover, with the UK inflation rate stubbornly well above annual wage growth, this is likely to drive more consumers to discounters’ own-label products, the fastest-growing segment of the market and one where Accrol has a market share of 50 per cent.
I would also flag up that Accrol outsources the supply of paper reels in order to benefit from the lower cost advantages of overseas manufacturers, and to take advantage of the global oversupply of both pulp and industrial paper reels. This input cost is in US dollars, a currency that has appreciated by 15 per cent against sterling since last summer, and sensibly Accrol has currency hedges in places until 2018.
So, having seen Accrol’s shares come back off a high of 165p after I last advised buying at 151p ('Hitting target prices', 2 May 2017), I feel that even after taking into account the issues highlighted above, a forward rating of less than 12 times current year earnings, falling to 10 times Zeus’ 2018-19 EPS forecasts, offers scope for upside. Run profits.
Banking on retail deposit funded growth
Aim-traded finance house PCF (PCF:25p) has justified my ongoing positive stance ('On the money', 7 Jun 2017) by announcing trading slightly ahead of previous guidance. New business originations in the latest quarter were up 20 per cent, supporting chief executive Scott Maybury's claims that “the consumer market for used vehicles and the SME market for vehicles, plant and equipment remain robust”. This is a pivotal moment for PCF as it has met all the regulatory requirements to become a fully fledged bank and is now open for business.
It’s a real game changer as access to retail deposits enables PCF to offer an even wider and more competitive range of rates through its broker network, expands the addressable market, and improves the quality of the customer base. The plan is to almost treble its portfolio of loans and receivables to £350m by the summer of 2020 with funding coming from £250m of retail deposits and existing bank loans. Targeting a return on equity of 12.5 per cent and a net interest margin of 8 per cent, analysts at Stockdale Securities forecast that pre-tax profit could rise from £4.5m (after adding back £1.5m of banking costs) in the 12 months to the end of September 2017, to £5.2m next year (after expensing all banking costs), surging to £8.5m in the 2019 financial year. On this basis, PCF’s shares are rated on 12.5 times fully diluted EPS estimates of 2p for next year, falling to less than eight times 2019 EPS forecasts.
Admittedly, PCF’s share price has been lacklustre this year and is only slightly above the price at which I initiated coverage ('A small-cap gem', 18 Apr 2016), a performance I feel is down to a misconception over its exposure to the used car lending market. However, the company only offers a hire purchase product as a ‘risk for rate’ lender on car purchases, and has absolutely no exposure to the personal contract purchase (PCP) loans market where residual values could be impacted by the sharp increase in supply in the used car parc. This misconception has led to a mispricing which I fully expect to reverse now its banking licence is fully mobilised. Offering 40 per cent upside to my 35p target price, I rate the shares a buy.
A northern powerhouse
Leeds-based property investment and development company Town Centre Securities (TOWN:295p) has reported a 2.3 per cent rise in like-for-like rents in the 12 months to the end of June 2017, well ahead of Liberum Capital’s 0.4 per cent forecast, and a three percentage point rise in occupancy rates to leave voids at just 1 per cent.
The company’s flagship retail asset, the Merrion Centre in Leeds, continues to trade strongly and the same is true of its two new hotels in the city, a Premier Inn at Whitehall Road and the Ibis Style Merrion Hotel, located opposite the 13,000 capacity Leeds First Direct Arena. These hotels are now expected to generate annual recurring income of £1.5m, around 15 per cent ahead of Liberum’s forecasts. The £41m redevelopment of Merrion House in Leeds, encompassing a refurbishment of 120,000 sq ft of offices and the addition of 50,000 sq ft new office space, is also set to make a decent contribution to profits when it completes early next year. Around £29m of the project cost was funded by joint-venture partner Leeds City Council, and the initial rent of £1.65m a year on the scheme should add £900,000 to Town Centre’s forecast net income of £20.2m for the year just ended, supporting expectations of a 6 per cent rise in net income to £21.5m in the new financial year.
Interestingly, Town Centre signalled a move into the private rented sector by retaining ownership of the residential development at Piccadilly Basin, Manchester, where it is on site with a 91-unit development, and has been giving planning permission for a further 126 units as part of a framework agreement that could see 850 units worth £250m being developed. A series of asset swaps and capital recycling supports the funding. For example, the disposal of a commercial property in Glasgow’s main thorough fare, Sauchiehall Street, realised £17.5m, a premium to book value, and Liberum expects further disposals in Scotland in the coming year. They also anticipate a 28 per cent rise in net income to £5.5m from the growing car park business.
True, Town Centre's shares have drifted since I advised running profits at 320p ('Delivering results', 15 Sep 2016), albeit you will have booked 11.15p of dividends. The board has paid out total dividends of 45.5p a share since I first advised buying at 198p ('A high-yield play in the north', 18 Feb 2013), and analysts forecast an annual payout of 11.5p, covered 1.2 times by EPS, rising to 12.1p in the new financial year. They also expect net asset value (NAV) to resume an upward trajectory as developments come on stream, pencilling in NAV per share of 370p by June 2018, up from 351p in the year just ended.
On a 20 per cent discount to forward NAV, against a sector average discount of 11 per cent, and offering a prospective dividend yield of 4.1 per cent, I rate the shares a buy.
