Shareholders in GYG (GYG:135p), the global leader in new-build and refit superyacht painting, have enjoyed a benign passage since the company listed its shares, at 100p, on the Alternative Investment Market (Aim) in early July. If maiden results this week are anything to go by, then expect the share price to make waves beyond the 150p target price I outlined at the IPO (‘Floating a profitable passage’, 4 Jul 2017).
Boasting a 17 per cent market share, GYG completed 167 refit projects in 2016 with an average contract value of just over €200,000 (£175,000), a sum the owners can easily recoup by chartering out their prized status symbols. Clients include half of the largest superyacht owners in the world and, with a retention rate of 86 per cent for repeat business, GYG clearly has strong customer relationships. Importantly, the number of billionaires, who are the only people who can afford to build and maintain superyachts, shows no sign of waning, rising fivefold to 1,826 between 1995 and 2015, and is predicted to hit 2,500 by 2020.
This market growth is feeding through to GYG’s bid pipeline for refit and new-build projects, which now stands at €385m, and rising, offering scope for the company to exceed the 7 per cent revenue growth rate posted over the past three financial years. In fact, buoyed by the acquisition of south of France-based rival, ACA Marine, GYG’s revenues increased by 19 per cent to €33.9m in the six months to end-June, accounting for half of house broker Zeus Capital’s full-year estimate, and in line with guidance of full-year adjusted pre-tax profits rising from €5.1m to €7m to produce EPS of 10.4¢.
A historical conversion rate of 32 per cent of the bid pipeline into firm orders and news that the closing half-year-end order book had surged from €41.8m to €56.7m by the end of August, including €10.5m for the 2018 financial year, are supportive of Zeus Capital’s forecasts of 12 per cent revenue growth in 2018. In fact, chief executive Remy Millott told me during our results call that GYG’s pipeline is developing so well that he has had to take on more staff because “we couldn’t keep up with the level of bid requests”. Moreover, with €2m of cost savings being targeted, a higher proportion of incremental revenues are dropping straight down to the bottom line. Analyst Mike Allen at Zeus Capital predicts that pre-tax profits should rise to €8.6m next year on revenues of €74m to lift EPS by a quarter to 12.9 cents, a forecast finance director Gloria Fernandez is comfortable with. On this basis, GYG’s shares are trading on a modest 12 times prospective earnings.
There is an attractive dividend, too, as GYG’s board is committed to paying a dividend of 3.2p this year, doubling to 6.4p in 2018, reflecting the benefit of a lowly geared balance sheet, a high conversion rate of operating profits into cash flow, and an asset-light model whereby GYG operates as a preferred supplier to the shipyards who enter into separate contracts with the superyacht owner, so effectively it has access to the vessels but without incurring fixed lease costs or associated overheads.
So, having taken into account the improving revenue visibility and de-risking of next year’s earnings estimates, I am raising my target price to 170p, valuing the equity at £79m, or 15 times next year’s earnings estimates and supported by a prospective dividend yield of 3.8 per cent. Buy.
On the upgrade
Building on a major earnings beat for the 2016 financial year, Miton Group’s (MGR:41p) assets under management (AUM) continue to build strongly in a benign environment for equities, so much so that analyst Stuart Duncan at house broker Peel Hunt has upgraded his numbers yet again.
At the time of the pre-close trading update in mid-July, Miton revealed that AUM had surged by 15 per cent to £3.35bn in the first half, buoyed by net inflows of £195m and £254m of positive market movements, an outcome well ahead of Mr Duncan’s year-end target of £3.3bn, prompting an upgrade to £3.5bn. However, that target was achieved by the end of August, so with a higher exit run-rate of management fee income Mr Duncan has raised his numbers again, predicting a near-10 per cent rise in revenues to support a 14 per cent hike in pre-tax profit to £5.8m. On this basis, expect full-year EPS of 2.6p and a 10 per cent boost in the dividend per share to 1.1p. But even these new forecasts could prove conservative.
That’s because Miton produced interim pre-tax profits of £2.9m, well ahead of Peel Hunt’s £2.6m forecast, thus skewing the earnings risk to the upside if the positive flows into its funds continues, a realistic possibility given that 80 per cent of Miton’s 15 funds are ranked in the first or second quartile by performance. Indeed, Miton posted net fund flows for all bar two weeks in the first half, and continues to diversify its offering – CF Miton Global Infrastructure Income Fund launched in March.
The company’s robust cash generation is worth noting. Even though Miton spent £2.6m repurchasing 6.6m of the 177.5m shares in an earnings-enhancing share buy-back programme and paid out a £1.7m final dividend for the 2016 financial year, net cash still increased by almost 5 per cent to £18.2m, a sum worth 10.6p a share.
The appointment of Jim Pettigrew as non-executive chairman is also worth flagging up as he has over 30 years' experience in business and finance, principally within the financial sector, having formerly been the chief executive at spread betting and financial derivatives firm CMC Markets (CMCX:152p), chief operating officer at Ashmore (ASHM) and finance director at money broker ICAP.
So, having initiated coverage at 23p ('Poised for a profitable recovery', 4 Apr 2015), I continue to see upside to my 50p target price as I feel the earnings upgrade cycle has yet to run its course (‘On the upgrade’, 18 Jul 2017). Priced on less than 12 times earnings forecasts net of cash, and offering a 2.7 per cent prospective dividend yield, Miton’s shares rate a buy.
A first-class performance
I had an informative results call with the directors of Aim-traded Cambridge Cognition (COG:137p), a company that has developed a suite of computer-based cognitive assessments to improve the understanding, diagnosis and treatment of neurological and psychological diseases. The pipeline of sales opportunities is not just at record levels, up 65 per cent year on year, but chief executive Stephen Powell says it represents a “multiple of the company’s annualised turnover”. The quality is improving too, vindicating the board’s decision to use funds raised 18 months ago to expand sales teams in the US and Europe. The full benefits of this investment will start to be seen later this year when finance director Nick Walters says “a number of large contracts are expected to land”.
This explains why the board is comfortable with house broker FinnCap’s forecast that full-year underlying pre-tax profits will quadruple to £500,000 on revenues up from £6.9m to £8.2m despite a small first-half loss which reflected the increased investment in sales in those territories. It’s a high-margin business too, as gross margins shot up by almost eight percentage points to 90 per cent in the first half, reflecting the sharp rise in high-quality repeatable service revenues, which now account for half the total. Drivers include an increasing number of clients embracing wearable technology, such as the Apple iWatch, to enable remote and constant monitoring; the company conducting more value-added services within clinical studies; and clients now commissioning it for standalone pieces of scientific consultancy. Given the solid pipeline of business, and the fact that revenues are rising faster than operating costs, FinnCap predicts that pre-tax profits can double again to £1m next year on revenues of £9.5m.
Of course, investors have been cottoning on to the financial upside from Cambridge Cognition’s suite of smart patient-centric technology – the shares have surged 57 per cent to 137p since I highlighted the investment potential in April ('Positive thinking', 19 Apr 2017), and have kicked on since I advised running profits, at 120p, a few months later ('Small-cap gems', 13 Jun 2017). Noteworthy developments attracting their attention include a product using artificial intelligence and automatic speech recognition to make language-based verbal cognitive assessments that are scalable, automated and consistent. This has obvious benefits in assessing psychiatric and neurological conditions, including Alzheimer's disease, depression and schizophrenia. The company is also making its technologies available in other formats in response to market demand.
For instance, CANTAB Prime, which utilises modular software to enable the collection, analysis and reporting of cognitive measures, is being offered as a 'white-label' solution to customers who want to incorporate the company’s products and knowledge into their own systems for collecting and analysing data specifically in non-clinical trials. This opens up new opportunities for users who were not previously willing to adopt a product that stood outside their core systems. Moreover, it will enable Cambridge Cognition to work with technology companies outside of its existing core pharmaceutical market to address broader healthcare opportunities. Mr Powell notes that these contracts can be for five years plus, thus creating a valuable longer-term source of revenue.
True, the shares are no longer in bargain territory on a forward multiple of 26 times 2018 EPS estimates net of cash, but the rating is warranted for the growth story unfolding here. Run profits.
Minds + Machines on course for profitability
Minds + Machines (MMX:11p), a service provider in the domain name industry focused on the new top-level domain (TLD) space, has provided multiple buying opportunities since I included the shares, at 8p, in my 2016 Bargain Shares portfolio. I feel another one has presented itself.
The price has come off since I last rated the shares a buy at 12.5p (‘Bargain Shares opportunities', 1 Aug 2017), perhaps because some investors are becoming impatient with progress made on the strategic review that’s being carried out by a US investment firm with a view to maximising value for shareholders, including a possible acquisition by a sale or merger. Chief executive Toby Hall expects a conclusion of talks by the year-end at the latest, but just as important is news that $6m-worth of sales have been achieved in the third quarter alone and that “the business is on course to deliver its first year of profitability”.
The potential for a major corporate transaction and a move into profit are not mutually exclusive. That’s because Minds + Machines has hit an inflexion point whereby its renewal billings, which almost trebled to $3.1m in the first half, exceed its fixed overheads of $2.6m. This is an important milestone as it de-risks the business model and means that a greater proportion of incremental sales drop straight down to profits.
Mr Hall also says this is not just a China fuelled growth story after the huge success enjoyed by the company with its .vip domain, which is enjoying a high level of first year renewals. Minds + Machines’ domains under management surged by a third to 1.1m in the first half, but this excludes a further 200,000 committed registrations from outside China which are not reflected in first-half billings. Factors driving this growth include the increasing awareness of SMEs in Europe of the alternatives to standard country code and .com addresses, and the investment potential to trade TLDs. The company has sold contracts on over $1m-worth of .london premium inventory since July, which “hardly scratches the surface”, and next month launches its .boston TLD, highlighting the potential to create a valuable recurring revenue stream across the portfolio.
Analyst Harold Evans at FinnCap predicts full-year reported pre-tax profits of $3.7m on revenues of $11.4m, implying a cash-adjusted forward PE ratio of 25, not a high rating for an operationally geared company moving into profit. Valuing the entire portfolio at £51 per domain, and using a renewal price of $8 per domain, are the key metrics behind his target price of 15.2p a share. Buy.
■ 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
