Trading opportunities

The question is whether the company’s half-year results are strong enough to warrant another rally towards the 185p resistance level. The headline numbers speak volumes. Revenues shot up by 15 per cent to £72m in the six-month trading period, buoyed by a 33 per cent increase in children’s trade, a segment that accounts for 44 per cent of overall book sales. The performance was driven by several key titles including the Harry Potter Box Set, the new House Editions of Harry Potter and the Philosopher's Stone, and A Court of Wings and Ruin by Sarah J Maas who is contracted to deliver another seven titles. Expect a raft of bestsellers in the second half as the list of releases includes the Illustrated Edition of Harry Potter and the Prisoner of Azkaban, and two colour titles to accompany the British Library's Harry Potter exhibition. Other key titles being published include A Baker's Life by Paul Hollywood, Lose Weight for Good by Tom Kerridge and River Cottage Much More Veg by Hugh Fearnley-Whittingstall.

Bloomsbury’s non-consumer division is proving no slouch either, delivering an 8 per cent rise in revenues to £27.4m, of which academic and professional titles accounted for over 60 per cent. The double-digit growth in digital publishing, albeit from a low base, is reassuring given that a key strategic initiative, Bloomsbury 2020, aims to accelerate growth of digital revenues and reposition the business from primarily being a consumer publisher to a digital B2B publisher in the academic and professional information market. The board reiterated guidance of generating revenues of £15m from digital resource publishing by the 2021-22 financial year and delivering profits of £5m.

As always there is a second-half weighting to the full-year numbers. That’s because October is a key selling month for academic books, Christmas sales are all important for consumer titles, and rights and services income is dependent on securing a number of new contracts close to the year-end. That said, the 74 per cent rise in Bloomsbury’s first-half adjusted pre-tax profits to £2.5m is supportive of expectations of full-year profits edging up to £12.2m as analyst Malcolm Morgan at Peel Hunt predicts, implying the shares are rated on 11 times earnings net of cash, worth 22p a share, on the balance sheet. The 5 per cent hike in the half-year dividend is in line with forecasts of a 7p-a-share payout, implying a prospective dividend yield of 4.2 per cent.

So, with Bloomsbury making a good start to the financial year, and underpinned by a robust list for the second half, I feel that there is a decent chance of the share price running up once again to 185p. Trading buy.

Record on track for growth

Currency manager Record (REC:43p) has issued a second-quarter trading update that revealed a $1.3bn increase in its assets under management equivalent (AUMe) to a record high of $61.2bn (£46.3bn). This performance reflected $2.2bn of positive equity market and exchange rate movements, which offset $1bn of net client outflows as persistent sterling weakness led to Record’s remaining UK-based dynamic hedging clients converting their mandates to either passive hedging, or terminating them completely. Passive hedging mandates now account for $51.7bn of AUM, or 11 times more than the higher-margin dynamic hedging mandates, but more importantly revenues from these stickier passive mandates cover all of Record’s annual overheads of £11.7m, excluding variable remuneration.

The comments of chief executive James Wood Collins are worth noting as he expects a continuation of “volatility in currency markets linked to political and economic uncertainty, and the consequent uncertainty provides opportunities for engagement with both existing and potential clients”. Record has recently opened an office in Zurich to increase its presence in the Swiss market and to enhance its relationship with existing clients. It makes sense as Swiss clients account for half of passive hedging AUMe. Also, the directors “remain confident of making further progress in the second half of the financial year".

Admittedly, after taking into account the changing business mix and extra investment in staff, new forecasts from analyst Rae Maile at house broker Cenkos Securities point towards a modest rise in Record’s pre-tax profit from £7.9m to £8.1m in the 12 months to the end of March 2018. However, this is only based on revenue increasing from £23.6m to £24.8m, conservative assumptions as it doesn’t factor in any new business wins. On this basis, Cenkos’ full-year EPS still rises by almost 7 per cent from 2.9p to 3.1p, which is good news for the dividend. That’s because Record retains a cash surplus of £13.1m on its balance sheet, a sum worth 6.5p a share, after setting aside £8.9m of its cash for regulatory capital, so the board is able to return all of its net profits to shareholders. Cenkos’ total payout forecast of 3.1p a share, up from 2.91p in the 2017 financial year, implies a 7.2 per cent prospective dividend yield. The cash-adjusted PE ratio is below 12.

Having included Record’s shares, at 34.3p, in my 2015 Bargain Shares portfolio, and banked dividends of 5.45p a share, the share price subsequently hit a seven-year high of 52p after my last article before profit-taking set in (‘Repeat buying opportunities’, 29 August 2017). However, underpinned by a chunky dividend and with the outlook positive, I feel at 43p the shares are worth buying again ahead of the interim results on 17 November 2017. Trading buy.

Lombard’s record pipeline points to robust second half

Disappointing first-half results from Lombard Risk Management (LRM:7p), 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, led to a 30 per cent markdown in its share price, taking it well below the 10.5p level at which I last advised buying (‘A five-timer of small-cap plays’, 24 July 2017), and also my original 9p entry point  ('Banking on regulation', 13 March 2017).

Longer lead times for deals to be concluded for Lombard’s AGILREPORTER regulatory reporting product, which is being sold in partnership with Oracle, and an over-reliance on North America, which has since been addressed, were compounded by some slippage on clients committing to major software investments ahead of the introduction of the new Markets in Financial Instruments Directive (Mifid II) regulations in early January. This resulted in first-half revenues contracting by 16 per cent to £13.7m. And because the company had increased its cost base, reflecting investment in sales staff and a new facility in Birmingham, then given the scale of the revenue shortfall for what is a highly operationally geared business, this meant that cash profits of £1.5m in the first half last year reversed into a £3.5m cash loss. In turn, Lombard’s net cash position declined from £7m to £400,000, albeit it has £4.5m of untapped debt facilities in place. It’s understandable that investors reacted negatively.

However, broking house FinnCap didn’t downgrade its full-year expectations, which point to revenues rising 16 per cent to £40m in the 12 months to the end of March 2018 to produce cash profits of £6.6m, implying a 42 per cent increase in second-half revenues to £27.3m. According to chief executive Alastair Brown and finance director Nigel Gurney, the order pipeline of more than 120 opportunities is well in excess of £40m, a record level and up 44 per cent since March 2017, Lombard started the second half with an order backlog of £9.2m, and recurring revenue of £6.4m is due to be delivered in the second half.

The two insiders also said that two contracts for Lombard’s compliance software product COLLINE, worth a total of £5m in licence fees alone, are expected to be signed in the coming months. Lombard is the sole vendor in contention on the larger of these contracts, worth £3.25m, and the client on the other is targeting “implementation in January”. The cash flow from these contracts would boost Lombard’s cash position no end – analysts at Equity Development are forecasting net funds of £5.5m at the March 2018 year-end – and de-risk full-year profit estimates too. Although analysts at Equity Development and N+1 Singer clipped their full-year revenue by £2m, this still points towards full-year cash profits rising by 88 per cent-plus to £4.5m and £4.9m, respectively, implying Lombard’s market value of £28m represents less than six times forecast cash profits.

The other key take for me was that Lombard closed its first contract with an Australian client in advance of the new Prudential Regulatory Authority regulations coming into force in the country. Given the similarity in the regulatory framework between the UK and Australia, this offers a huge opportunity for it to win more contracts.

So although the seasonal second-half bias to forecasts has increased markedly, the directors remain confident of delivering on their record pipeline, the successful execution and accompanying cash flow from which should support a reversal of last week’s hefty losses. I would flag up too that the shares are massively oversold, with the 14-day Relative Strength Index (RSI) on the floor. Trading buy.

STM buying opportunity

Aim-traded shares in STM (STM:55p), which administers assets for international clients in relation to retirement, estate and succession planning, and wealth structuring, were marked down 6 per cent after news emerged of the arrest, and subsequent bailing, of chief executive Alan Kentish by the Royal Gibraltar Police (RGP).

The matter relates to a tax dispute between Spain and Switzerland over the tax owing by a high-net-worth Swiss client of STM, who has been a client for 15 years, in the period 2008 to 2013. Mr Kentish was a director in a professional capacity of the client’s Gibraltar holding company as is normal practice as the custodian of funds. Until it was clear that the issue was a tax dispute, Mr Kentish followed compliance procedures by filing reports with STM’s Money Laundering Reporting Officer, which were then externalised to the Gibraltar Financial Intelligence Unit (GFIU).

Under current legislation, the GFIU must respond within 14 days to direct any action to be taken. STM received no response whatsoever and continued business as normal. However, the RGP arrested Mr Kentish earlier this month on the allegation of failure to disclose under the Proceeds of Crime Act 2015. Both the board of STM and Mr Kentish whom I interviewed at length this week along with the company’s finance director, Therese Neish, believe the allegations have no merit and that the RGP, which hasn’t charged Mr Kentish, will drop the investigation in the near future.

Ultimately, one has to ascertain whether Mr Kentish has acted honestly and in accordance with company law. On both counts I believe he has as the RGP’s questioning related to 10 transactions made by the client’s Gibraltar holding company, all of which were normal business transactions, including dividends and bonuses paid. Clearly, it’s unfortunate that he has become embroiled in an external client tax dispute over respective taxing rights between two countries resulting from the former wife of the high-net-worth client, who pays all his tax in Switzerland, now living in Spain and the Spanish tax authorities seeking to take a cut of the tax the client already pays the Swiss authorities on his income.

The bottom line is that I would expect STM’s share price to reverse as and when the investigation is dropped. So, having first spotted the investment opportunity when the shares were 35p ('Tapping into a pensions payday', 27 April 2015), and last rated them a buy at 61p when I interviewed the directors at the time of the half-year results (‘Profiting from cyber crime’, 13 September 2017), I would be buying the dip. Rated on 6.5 times full-year EPS estimates net of 19p a share of cash on the balance sheet, offering a prospective dividend yield of 3.4 per cent, and priced just above book value, I rate STM’s shares a buy and maintain my 70p target price. 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