Trading plays

The 10 small-cap stock picks in my 2017 Bargain Shares Portfolio have done even better, producing an average return of 24.6 per cent on an offer-to-bid basis since publication in early February. To put that performance into some perspective, an FTSE All-Share tracker fund has produced a total return of 8.1 per cent in the same period, and even the trailblazing FTSE Aim index lags 10 percentage points behind my portfolio.

Clearly, the good times will not last forever, which is why I have top-sliced some holdings in the portfolio and also across my watchlist, or banked profits entirely if risk-adjusted upside potential no longer warrants maintaining an interest. For good measure, I have also unearthed a raft of undervalued and under-researched special situations to invest your gains into.

IPOs: a profitable hunting ground

As part of this screening process, I have spent a considerable amount of time researching Aim initial public offerings (IPOs). That’s because the new issues market has proved a profitable hunting ground for me over the years, with the odd exception.

For example, the Aim-traded shares in diversified financial services group Ramsden (RFX:177p) are now up a third since I advised buying post flotation ('A jewel in the north', 12 Jun 2017), and are making decent headway towards my 190p target price ('Riding earnings momentum', 6 Sep 2017); superyacht refit group GYG (GYG:147p) has enjoyed a benign passage since listing (‘Floating a profitable passage’, 4 Jul 2017), and looks set fair to make waves towards my 170p target (‘Plain sailing’, 27 Sep 2017); and Strix (KETL:142p), a maker and designer of kettle safety controls, has proved just the element for investors who continue to warm to the investment case (‘Engineering gains’ 2 Oct 2017).

However, new listings are not a one-way bet, as the case of Blackburn-based tissue maker Accrol (ACRL:134p) highlights. The company has just warned on profits for the financial year to end-April 2018 only weeks after issuing an in-line trading update when I advised running profits (‘A trio of small-cap plays’, 18 Sep 2017), having initiated coverage when shares floated at 100p ('Clean up with Accrol', 6 Jun 2016).

Profits have been hit by input cost pressures resulting from a further rise in parent reel prices; slower-than-anticipated product price increases, which is squeezing Accrol’s margins; higher costs in relation to operational changes; and the likelihood of a more significant fine being imposed by the Health and Safety Executive (HSE) than was previously expected in relation to an incident that occurred prior to the IPO. Based on advice received by its legal advisers, any fine may have “a material impact on the company's cash position”.

So, while full-year revenues are likely to be in line with market forecasts of £155m, after factoring in 15 per cent growth, pre-tax profits will be materially below previous expectations of £14.6m. Moreover, net debt of £19m at the April 2017 year-end – representing a modest 1.2 times historic cash profits – is set to rise given the profit shortfall and likely HSE fine, casting doubt on the sustainability of last year’s dividend per share of 6p. The board applied for suspension of trading in its shares on Thursday, 5 October pending clarification of its financial circumstances, a sensible course of action in my view. That's because it enables the banks and large shareholders to come to an arrangement, and all investors will be better informed when the company issues a full update when the shares re-list. 

True, it's still a grim situation, but as I noted this is an exception. In fact, given the high financial returns on offer by backing the right IPO – shares in software robot company Blue Prism (PRSM:1,136p) are up 10-fold since I highlighted their potential (‘Robotic growth’, 19 June 2016) – I will continue to scour the new issue market for further investment opportunities for you to exploit.

Exploiting short-term buying opportunities

Another one of the strategies I adopt is to target companies where I know the news is going to be positive on results day, thus avoiding potential for an earnings miss. Aim-traded finance house Private & Commercial Finance (PCF:28.5p), which issued a major earnings beat in a pre-close trading update (‘Engineering gains’, 2 Oct 2017), prompting analysts to upgrade EPS estimates by 16 per cent, is a prime example. I flagged up the anomalous valuation well before the trading statement ('On the money', 7 Jun 2017).

Shares in cash-rich insurance sector investment company BP Marsh & Partners (BPM: 238p) look very undervalued, too, ahead of what I expect to be a cracking set of results on Tuesday 17 October, as I highlighted recently (‘Exploiting hidden value’,25 Sep 2017). The same is true of Urban&Civic (UANC: 261p), a listed property group specialising in strategic residential land developments. I last advised running profits slightly above the current share price ('Running property gains', 19 Jun 2017), but now feel this is an opportune time to buy in before the full-year results on Tuesday 28 November.

That’s because the company’s EPRA net asset value (NAV), which rose by 8 per cent to 293p a share in the 12 months to the end of March 2017, should post some hefty gains in the financial year to the end of September 2017. I have good reason to think this way because unserviced residential EPRA values at Urban&Civic’s 1,432 acre site at Alconbury Weald, incorporating Cambridgeshire's Enterprise Zone with permission for 5,000 homes, are in the books at just £25,300 per plot, but recent land parcels have been sold for more than double that valuation.

In addition, plots at the company’s 1,170-acre site in Rugby, which has been granted planning permission for 6,200 new homes, are valued in the accounts at £16,500 each, based on an average house price of £260 per sq ft, a modest valuation even after factoring in the 10 per cent valuation uplift in the first half. Even the insiders admit that the valuations are conservative, noting that the “difference between the current retail valuation [of land] and the wholesale figures included in our EPRA calculations now amounts to £103m, or the equivalent of 71p a share”.

The investment case is well underpinned by solid fundamentals supporting Urban&Civic’s development programme, too. Namely, a chronic housing shortage in the south of England, robust financial strength of the listed housebuilders, and availability of mortgage funding at ultra low interest rates. Even if the Bank of England raises rates next month as economists anticipate, and not before time as I have making the case for a hike for some time, the rate tightening cycle is going to be slow, so I don’t expect any major shifts in the yield curve on which swap rates are based and determine the pricing of fixed mortgage rates.

So, with Urban&Civic’s balance sheet conservatively geared – net debt of £41m at the end of March equates to only 11 per cent of shareholders' funds – and its land conservatively valued in the accounts, I fully expect some of the ‘hidden’ balance sheet value to reveal itself in next month’s results. Buy.

Building earnings momentum

Another trading play in the property sector is Aim-traded UK and eastern European property fund manager and investor First Property (FPO:53p). I last advised buying the shares at 56p (‘On the upgrade’, 18 Jul 2017), having first recommended buying at 18.5p in my 2011 Bargain Shares Portfolio. Including dividends of 8.375p a share, the holding has produced a total return of 231 per cent, or a healthy annualised return of 19.5 per cent. The company reports half-year results on Thursday 23 November, and I expect another upbeat announcement.

At last month’s annual meeting, chairman Alasdair Locke revealed that First Property’s assets under management (AUM) have risen from £477m to £564m since the end of March, of which £387m is managed on behalf of third-party clients, representing an increase of 24 per cent in the six-month period. The majority of this growth reflects £51m of new investments made on behalf of Fprop Offices LP, a new fund that was established in July to invest in office blocks and business parks across England. It has the backing of eight institutional investors who invested £182m at first close, although with gearing the fund could have total buying power of £260m. First Property is taking a profit share, rather than a management fee, which, according to analyst Chris Thomas at house broker Arden Partners, is likely to be over £1m once the fund is fully invested.

Mr Thomas has not included any contribution from Fprop Offices LP in his forecasts for the financial year to the end of March 2018, which point to pre-tax profits rising from £8.6m to £9.1m on revenues up almost 6 per cent to £25.1m to produce EPS of 5.9p and support a raised dividend per share of 1.6p. These forecasts also exclude a £400,000 gain on a recent asset sale after Fprop Romanian Supermarkets sold three of the nine Lidl supermarkets it acquired in December 2015 for a total of €5.8m (£5.3m). First Properties invested €1m (£0.9m) for a 24 per cent shareholding in that fund in January 2016, so it has reaped a hefty profit already.

Interestingly, Mr Thomas has conservatively factored in an average exchange rate of £1:€1.189 in his forecasts, well above the average of £1:€1.138 in the first half to the end of September 2017, on the profits First Property earns from its 10 wholly-owned overseas investment properties, thus skewing the earnings risk to the upside. Also, the half-year-end closing exchange rate was £1:€1.134, implying that First Properties pro forma NAV is at least 49.1p a share, or 7 per cent higher than 12 months ago, and likely even higher still after factoring in net profits earned since the company’s March 2017 financial year-end.

Rated on nine times prospective earnings, offering a 3 per cent forward dividend yield, priced in line with book value, and offering 22 per cent upside to my 65p target price, First Property’s shares are worth buying.

Hitting target prices

I last rated shares in Watkin Jones (WJG:223p), a construction company specialising in purpose-built student and private rented sector (PRS) accommodation, a trading buy at 204p, suggesting a target price of 225p (‘Targeting a breakout’, 21 Aug 2017). I first recommended buying around the 103p mark in April 2016 when the company floated its shares on Aim ('A profitable education', 3 Apr 2016).

A key bull point is the de0risking of its development pipeline. The company has forward sold all of its developments scheduled for completion by September 2018, thus supporting expectations that it can lift EPS from 13.6p for the year just ended, to 15.1p in 2018. Watkin Jones has also just sold a 618 student bed development in Aberdeen, which is due for completion in the summer of 2019, for £51.1m net of client funding costs. This means that it has forward sold 2,599 of the 3,545 beds planned to be delivered in the 2019 financial year ahead of the 2019-20 academic year, giving substance to forecasts of EPS rising to 15.9p in the 2019 financial year. Furthermore, with cash rising sharply as developments complete – investment bank Jefferies expects the company to have net funds of £75m by September 2018, rising to £89m a year later, a sum worth 35p a share –  then forecasts of this year’s likely dividend per share of 6.6p, increasing to 7.3p in 2018, rising again to 8p in 2019, are well underpinned.

So, with earnings estimates being de-risked, I feel that Jefferies' 250p target could come into play. Trading on 12.5 times cash-adjusted forward earnings, and underpinned by a 3.3 per cent prospective dividend yield, run profits ahead of next month’s pre-close trading update.

■ 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