I have always taken the view that it pays to run with a holding until which time the rational for making the original investment no longer holds. Of course, there is no harm in taking some profit along the way, which is precisely what I have done with shares in Trifast (TRI:244p), a small-cap manufacturer and distributor of industrial fastenings, with operations in 18 countries across Europe, Asia and North America.
It has proved to be a fantastic investment: having first recommended buying at 53p in my 2013 Bargain Shares Portfolio, the holding was showing a 332 per cent gain, including dividends, when I advised top-slicing at 223p earlier this year ('Hitting target prices', 2 May 2017). I last recommended running profits at 207p on the balance of your holdings ahead of this month’s half-year results (‘Engineering gains’, 2 Oct 2017). The reason for maintaining an interest was because some analysts believed the company’s trading performance was tracking ahead of their forecasts, thus opening up the possibility of upgrades when the results were released.
And that’s exactly what happened, with analyst Ben Thefaut at Arden Partners upgrading his pre-tax profit and EPS forecasts by around 3 per cent to £21.5m and 13.3p, respectively, for the year to the end of March 2018, based on revenue rising by 7.5 per cent to £200m. Those estimates could still prove conservative as Trifast’s revenue shot up 9 per cent to £98m in the first half to deliver underlying pre-tax profit of £10.9m, or more than half the full-year forecast.
Analyst Henry Carver at brokerage Peel Hunt notes the “outlook remains (as ever) cautiously optimistic and we see upside to forecasts”. He has good reason to think this way as revenue increased across all regions with double-digit top-line growth in Asia standing out in particular, largely driven by increases in Trifast’s domestic appliances businesses in Singapore and automotive wins for its Chinese, Malaysian and Taiwanese operations. The automotive sector underpinned the European trading performance, too. I would also flag up that 72 per sales are overseas, so there is a decent spread of territories to support the business, and a diverse range of markets, too.
Mr Carver and Mr Thefaut both add that there is plenty of firepower on the balance sheet, not to mention the board’s enviable track record of successfully integrating past acquisitions: in recent years Trifast acquired VIC, an Italian maker and distributor of fastening systems predominantly for the white goods industry, and Kuhlmann, a distributor of customised industrial fasteners focused mainly on the German market. With net borrowings reduced by £6.3m to £7.9m year on year, representing balance sheet gearing of 8 per cent of shareholders' funds, there could be scope to invest upwards of £40m on earnings-accretive acquisitions.
I think bolt-on deals will be needed, or perhaps yet another earnings beat, to propel Trifast’s shares towards Peel Hunt’s upgraded target price of 275p. That’s because they are now rated on 18 times forward earnings. However, there are realistic prospects of that happening on both fronts, so I would continue to run your healthy profits.
Bango turns profitable
Aim-traded Bango (BGO:240p), 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, has issued a raft of announcements since I last rated the shares a buy at 248p (‘Inflexion points’, 20 Sep 2017), having first advised buying at 93p ('Bang on the money', 26 Sep 2016).
The groundbreaking direct carrier billing agreement (DCB) with Amazon Japan, which started in June, has now been extended to Japanese customers of Amazon Prime and Amazon Student Membership programmes. The DCB arrangement 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, highlighting the potential to tap into Amazon Japan's e-commerce annual revenue of ¥999bn (£6.7bn). Half of all e-commerce transactions in Japan are currently completed by a mobile platform, and the two Japanese carriers account for three-quarters of the Japanese market, boasting a combined 123m customers. And that’s not the only news from Asia, as Bango is scaling up its presence and business development in South Korea, a country that shares many characteristics with Japan for the use of DCB.
Bango is also making headway in Africa, having just launched operator-billed payments for Google Play users with 9mobile in Nigeria, thus enabling customers to pay for games, apps and digital content in Google Play using their 9mobile 9pay wallet without the need to own a credit card or bank account. Nigeria is one of the most mobile-centric countries in the world, with around 150m subscribers, a penetration rate of over 80 per cent, and more mobile internet users than any other African country, according to analysts. In fact, three-quarters of all online traffic in Nigeria is from mobile devices, with Android smartphones accounting for over 60 per cent of the mobile market share.
Chief executive Ray Anderson rightly points out that “enabling 9mobile to launch their 9pay wallet as a payment option in Google Play is an important milestone for Bango, further increasing our footprint in Africa and enabling millions more consumers to fully participate in the digital revolution". I agree and can see both the Asian and African businesses adding scale to what is a fast-growing business with high operational leverage. The exit run-rate of end-user spend (EUS) processed through Bango’s payment platform is set to hit £452m by the end of December, up from £195m at the start of the year, growth that has now turned Bango profitable on a monthly basis, according to Mr Anderson.
Moreover, with annual operating costs stable at around £5.4m, this means that a high percentage of incremental fees earned from processing payment transactions will drop straight down to the bottom line from this point onwards, which is why analyst forecasts suggest Bango is on course to generate cash profit of £3m on a total EUS of £591m in 2018. And with industry experts estimating that the DCB market could generate transactional value in excess of $25bn (£18.4bn) by 2020, then if Bango continues its heady pace of growth it’s not unrealistic to expect the company to capture $2bn of this market within three years to earn gross profits of around $20m, and make net profits north of £10m. Importantly, the fast growing DCB market is large enough to accommodate other rivals including Boku (BOKU:82p) which listed its shares on AIM last week. Offering a further 25 per cent upside to my target price of 300p, valuing the equity at £200m, I continue to rate Bango's shares a buy.
Seeking alpha
It’s a massive vote of confidence in the management of a company when shareholders are offered the chance to tender their shares, and the vast majority decline in favour of holding onto their investments. This is exactly what has happened at Alpha Real Trust (ARTL:123p), an investor in high-yielding property and asset-backed debt and equity investments in western Europe.
I know the business well, having initiated coverage when the shares were priced at 80p ('High-yield property play', 10 Feb 2016), and banking seven quarterly dividends of 0.6p a share since then. I last rated the shares a buy at 135p when the company announced a tender offer to buy back 10m of the 69.2m shares in issue (‘Six seductive small caps’, 11 Sep 2017). Having made £50m of disposals in the year to date, including £37m realised from the sale of a 70 per cent stake in its wholly-owned H2O shopping centre in Madrid to CBRE European Co-Investment Fund, net cash accounted for almost a fifth of the £114m investment portfolio at the end of September, prompting the tender offer at 123.1p a share, albeit at a discount to end-June net asset value per share of 162.4p.
Holders of only 821,000 shares tendered their shares, the vast majority preferring instead to reap the capital upside from the company’s property investments. That’s a wise decision as Alpha’s latest results reveal that its net asset value per share has risen further to 167.3p, up from 123.5p when I initiated coverage in February 2016. This trend is likely to continue as the company reaps the upside from its build-to-rent investments, which account for 13 per cent of the portfolio.
In Germany, Alpha is investing £13.4m building a five-storey data centre in Frankfurt encompassing almost 450,000 sq ft, having agreed to buy a former industrial site for £11.3m. The plan is to secure a tenant pre-let now that it has planning consent and electricity supply commitments in place and fund the balance of the development cost from debt. Active marketing of the data centre is already under way.
The company has also secured planning consent on both its UK residential private rented sector development sites. In Leeds, Alpha’s Monks Bridge project has been granted detailed planning consent for 300 residential units plus 140,000 sq ft of commercial development with a gross development value of £55m. Alpha has secured outline planning consent for a further 300 residential units on the site, too. The second scheme is located in central Birmingham where Alpha owns Unity and Armouries, a development with planning consent for 162 residential apartments with ground floor commercial areas, and which has a gross development value of £33m. The combined carrying value of both sites is £12.1m, suggesting a decent development profit once complete and a high capital return on the company’s £23.7m planned equity investment in the schemes, with the balance of the build costs funded by debt.
Alpha is building up a portfolio of mezzanine loans, too, typically lending on a two-year term with a maximum loan-to-value ratio of 75 per cent. In the first half, the company invested £3.5m in three loans producing an annual coupon of 14 per cent, the first of which has since been repaid, yielding an annualised rate of return in excess of 17 per cent on Alpha’s investment. Since the half-year end, Alpha has committed almost £5m to new mezzanine loans.
The investment portfolio also includes a 27.6 per cent stake worth £5.8m in Active UK Real Estate, a company listed on the Channel Islands stock exchange (www.cisx.com). Alpha upped its shareholding earlier this year to increase its exposure to the high-yielding UK industrial real estate sector. The fund is ranked in the top 3 per cent of funds by performance, posting a year-to-date return of 8.9 per cent compared with the IPD benchmark return of 4.6 per cent.
I would also flag up that ground rent investments held through a freehold income authorised fund (FIAF) account for £27.4m, or almost a quarter of Alpha’s net asset value of £114m. These rock-solid investments consist of a diversified portfolio of UK residential property freehold ground rents, which are held with a view to achieving steady and predictable returns, a consistent income stream and prospects for growth. The FIAF is ungeared, has an unbroken 24-year track record of positive inflation-beating returns, and generated a total annual return of 9 per cent in the 12 months to the end of September 2017. There are reasons to expect this record to be maintained, given that 85 per cent of the freeholds owned have a form of inflation protection through periodic uplifts linked to the retail prices index), property values or fixed uplifts.
The bottom line is that Alpha’s shares should not be trading at a 26 per cent discount to the last reported net asset value of 167p, given that the £16m equity stake in the H2O shopping centre, £21m cash on the balance sheet and £27.4m-worth of ground rent investments account for more than three-quarters of its £84m market capitalisation alone, and the risk to the build to rent schemes is clearly skewed heavily to the upside. Buy.
STM between a rock and a resolution
News that the Gibraltar Financial Services Commission (GFSC) has issued a notice for the appointment of inspectors at Aim-traded STM (STM:40p), a company which administers assets for international clients in relation to retirement, estate and succession planning, has sent the shares down by 27 per cent since my last buy advice (‘Trading opportunities’, 30 Oct 2017). The regulator has the right to appoint an inspector if it appears that a firm is not meeting its regulatory and/or prudential requirements or it is necessary to protect the interests of customers, prospective customers or the public, in Gibraltar or elsewhere.
By way of background, after carrying out a number of site visits to the premises of STM’s subsidiaries last autumn, and having given final feedback in June this year, the GFSC has raised some concerns regarding certain aspects of “Compliance, Governance and Controls and the provision of Professional and Trustee Services.” The board of STM have taken legal advice as to whether the GFSC has sufficient grounds to make the appointments and have been advised that there are strong grounds to appeal against them. It is also in ongoing dialogue with the GFSC in relation to establishing a collaborative route forward and believes a resolution can be reached through this route.
For their part, the GFSC have agreed a Voluntary Stay until the appeal against the appointments is heard by the Gibraltar Supreme Court. The Stay means that the Inspectors will not commence any work in relation to the appointments and STM’s subsidiaries will not suffer the potential costs of the Inspectors pending the outcome of the appeal set for 22 January. I would stress that this does not impact the ability of STM to trade as normal.
The GFSC intervention concerns STM’s Gibraltar qualifying recognised overseas pension schemes (QROPS) business, an offshore scheme approved by HMRC and used by expatriates and mobile employees whose tax domicile can change as a consequence of employment. Around three quarters of STM’s 11,000 QROPS plans are administered from its Malta office, so are completely unaffected by the dispute in Gibraltar. In terms of the revenue affected, analyst Jeremy Grime at broking house finnCap estimates that the Gibraltar QROPS revenue is around £2m, with the Malta QROPS business accounting for around £6.4m of revenue. He doesn't envisage any effect on STM’s existing QROPS business, as this is a very sticky business, and is estimating that 600 new QROPS are sold in 2017 and 240 in 2018 at an average fee of £750 per annum. The caveat being that if the Gibraltar Supreme Court appeal fails then “reputational damage could impact this.”
Mr Grime also adds that “it is conceivable that the international distribution network may sell less international SIPPs as a result of the reputational impact, although we suspect this is unlikely.” STM’s international SIPP product was launched in April this year, and finnCap estimate that 700 will be sold in the current year, rising to 1,400 in 2018 with an average set up fee of £300 and an annual fee of £500.
Needless to say investors have been spooked by this news which is why STM’s share price has retreated from 55p to 40p since I suggested buying at the end of October, marginally above the 35p level at which I first advised buying them ('Tapping into a pensions payday', 27 April 2015). At this level net cash accounts for almost half the company’s market capitalisation of £23.5m. It also means that based on STM delivering an increase in pre-tax profits from £2.8m to £3.8m in the 12 months to end December 2017 on revenues up from £17.4m to £20.5m, then net of £11.4m cash on its balance sheet at the end of June, a sum worth 19p a share, the shares are rated on 3.5 times EPS forecasts of 5.3p. The prospective dividend yield is 4.5 per cent based on a pay-out of 1.8p a share.
The important point being that if a resolution can be reached between STM and the GFSC, and preferably before the matter goes to the Gibraltar Supreme Court appeal on 22 January 2018, then the distress risk embedded in STM’s battered share price will unwind sharply. That is not a forlorn hope. It’s also worth noting that the embedded book of STM’s business provides 75 per cent recurring revenues, which in turn provides some resilience for investors too. Also, at the current valuation, the company could easily be a takeover target to a competitor.
So, ahead of the outcome of the appeal, I would hold onto your shares if you have been following my advice. Hold.
PV Crystalox wins court award
The International Court of Arbitration of the International Chamber of Commerce has ruled in favour of solar wafer maker PV Crystalox Solar (PVCS:22.5p) in a long running dispute between the company and one of its customers, a leading photovoltaic company who failed to purchase wafers in line with its obligations under a sales contract. The award requires the customer, who has failed to purchase wafers in line with its contractual obligations, to pay the amount of around €34m including interest to the company, and the obligation to pay is not conditioned upon the delivery of 22.9mn wafers, outstanding under the contract, although the customer's right to seek such delivery is not precluded by the award.
To put the award into some perspective, based on 160.4m shares in issue, and using the latest sterling euro exchange rate of £1:€1.123, its worth 19p a share. In addition, the company had net funds of 15.5p a share on its balance sheet at the end of June 2017, and stock valued at 4p a share at their market value. True, PV Crystalox will have incurred an operating loss in the second half, but even so the shares are trading at a deep discount to the underlying value of its assets assuming the award can be recovered in full.
So, having advised holding the shares at 25p ahead of ICC ruling (‘A trio of small cap plays’, 18 Sep 2017), having included the shares at 19p in my 2014 Bargain Shares Portfolio, I would continue to hold onto them and await a further update from the company. Hold.
Finally, this will be my final column this year as I am now on sabbatical until Tuesday 2 January.
■ 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
