Enlightening calls

To put this into perspective, WH Ireland reported underlying operating profits of £400,000 on revenue of £28.6m in the 12 months to end-November 2017. That figure excludes £2m of one-off costs, but it was worth taking the hit because Mr Killingbeck informs me that annual cost savings of £2m are achievable in the coming year. Around £500,000 relates to margin improvement on the private wealth management side by transferring up to £150m of advisory assets under management (AUM) to higher-margin discretionary or fee-paying execution-only mandates; £500,000 relates to the absence of non-recurring charges; a further £500,000 from the absence of double counting of overheads when the business was transferring its systems onto a new platform last year; and the balance reflects savings on personnel and in compliance. Other positive profit catalysts include the company’s Isle of Man office, which now has £240m of the group’s £2.94bn AUM, and “is significantly profitable”. So, too, is WH Ireland’s corporate broking business, which has “a very positive pipeline for February and March, and is pitching for much larger business than six months ago”.

It’s worth taking the hint when Mr Killingbeck says WH Ireland is still “too small”, adding that the wealth management platform and corporate broking business have scale to do much more business. Acquisitions are being considered. With almost £13m cash in the bank after a recent placing at 120p a share, supported by two major shareholders, Oceanwood Opportunities Master Fund and Polygon Global Partners, who control a combined 45 per cent of the equity, the board has the backing to do deals. It makes sense to do so as a large chunk of a target company’s revenues would drop straight down to WH Ireland’s bottom line given its ability to integrate the operations into its own business, and take out costs.

I can see two scenarios unfolding here. Either a combination of bolt-on acquisitions, and a strong return to profitability on the private client side will drive a share price rerating, or WH Ireland will become a bid target given Equity Development's sum-of-the parts valuation is almost double the current share price, highlighting the low valuation being placed on its private wealth management business. So, having first advised buying the shares at 68p ('Broking for success', 1 August 2011), and last reiterated that advice at 152p (‘Exploiting value plays’, 25 July 2017), I feel my 175p target price is not only reasonable, but likely to prove conservative. Buy.

easyHotel building up

I also had an informative call with Marc Vieilledent, finance director of budget hotel operator easyHotel (EZH:117p) following the company’s annual meeting. The shares hit my 120p-a-share target price last autumn when I suggested running profits, and raised my target to 135p ('Hitting target prices', 18 October 2017), having first advised buying at 83p ('Check in for a profitable booking', 14 December 2015).

It’s easy to see why investors have warmed to the investment case. Like-for-like revenues at easyHotel’s owned hotels increased by 13.7 per cent in the 12 months to the end of September 2017, massively outperforming analyst forecasts, and rivals, too. The company’s franchise chain of 19 hotels, comprising 1,641 rooms, delivered underlying revenue growth of 8.6 per cent in the same period. And the estate is set to surge in size as 517 rooms will be added to the company’s 702 owned-room estate this year when hotel developments in Leeds, Barcelona, Sheffield and Ipswich open. New hotels in Lisbon, Belfast, Reading, Dubai and Germany will add more than 600 rooms to the franchise chain in 2018 too.

The latest addition is a 124-room new owned hotel development in Milton Keynes scheduled to open in mid-2019, the £8.7m cost of which completes the deployment of the £38m of funds raised in a placing at 100p a share in October 2016, and the refinancing of a £12m bank facility. Other hotels included in the 941 owned-room development pipeline are an £8m new 120-room hotel in Cardiff, and a 180-room hotel in Oxford which will be let on a 25-year lease at £1.2m a year. Both hotels will open in 2019, and look smart deals. For instance, Mr Vieilledent told me that the Oxford hotel could make £4,000 annual cash profit per room after rental costs, and the Newcastle one around £2,000 per room on the same basis. Given the Oxford hotel only requires an investment of £5,000 per room, this is a hefty return on invested capital.

So, having met its initial investment target, easyHotel’s board is looking to raise fresh funds to accelerate the growth of its owned hotel estate by targeting an additional pipeline of 1,000 owned hotels currently under negotiation. It makes sense to do so given the company is delivering a thumping 15 per cent blended unleveraged return on capital employed. With occupancy rates in excess of 85 per cent for the five hotels opened in its new brand style, two of which were new owned hotels in Birmingham and Manchester, there is clearly demand and value in easyHotel’s bright budget accommodation.

There is value in the company’s balance sheet too. That’s because property assets account for £51m of easyHotel’s net asset value of £70m, but they are valued at historical cost and the directors say their open-market value is “materially above current book value”. They have a point. For instance, analysts believe the open-market value of the company’s Old Street property in the City of London is double its book value of £13m, suggesting easyHotel’s own market value of £115m represents only a modest premium to its adjusted book value once properties are marked to their open-market value.

Of course, there is execution risk in easyHotel’s accelerated roll-out programme, but there is also scope for accelerated profit growth given the high operational gearing of the business. Even before taking into account the additional 1,000-bedroom development pipeline, which realistically will need at least £60m of investment, revenues are expected to rise from £8.4m to £11.1m this financial year, increasing to £19.8m in 2018-19, and £27.2m in 2019-20, based on Investec’s forecasts. If these targets can be achieved then easyHotel’s cash profits are forecast to rise from £2.3m to £10.5m by 2020 to deliver pre-tax profits of £6.4m and EPS of 5p. Ahead of an announcement on the fundraising I would definitely run profits.

End game nears for Minds + Machines

Aim-traded Minds + Machines (MMX:9p), 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. Indeed, I suggested tendering 13 per cent of your holdings back to the company at 13p a share in September 2016, and later recommended using the cash proceeds to buy the shares back at a much lower price in the market. I feel another buying opportunity has presented itself ahead of the full-year results in April.

Firstly, the company reached the inflexion point last year whereby for the first time recurring income exceeded its fixed operating costs of $5.5m. This meant that with billings of $10m generated in the second half of last year, up from $5.6m in the first half, the company achieved its first year of profitability as an operating company. Cash profits are likely to be slightly ahead of house broker FinnCap’s $2.8m estimate, suggesting pre-tax profit of $2.7m and EPS of 0.4¢. Furthermore, with a higher proportion of recurring revenues now in the sales mix, analysts predict an 11 per cent rise in revenues to $12.5m in 2018 should deliver a 29 per cent hike in cash profit of $3.6m and produce EPS of 0.5¢.

A debt-free balance sheet – net funds of $15.9m equate to 1.6p a share – is a further attraction. So too is news that the ongoing strategic review could be brought to a successful conclusion by the time the final results are released. Admittedly, it has been a protracted affair since the company appointed a US investment firm last May to maximise value for shareholders, including a possible acquisition by a sale or merger. However, with Minds + Machines’ domains under management surging by two-thirds to 1.32m in 2017, thus generating an annuity-style income stream, and predicted by analysts to grow to 2.4m by 2020 as more domains are released from the company’s valuable portfolio I feel investors are undervaluing the potential for a corporate transaction to release significant value for shareholders. The portfolio includes valuable domains .london, .miami, .boston, and .vip; the latter is proving a huge hit in China.

Indeed, I maintain my view that any deal will place a value on the equity in excess of the 13p a share that Goldstream Capital Management, a company owned by Hony Capital, a leading Chinese private equity company, paid for its 6 per cent stake in 2016. So, having last rated the shares a buy at 11p at the time of the interim results (‘Plain sailing’, 27 September 2017), I maintain my positive stance ahead of a possible successful conclusion to the strategic review, and full-year results that will make for a good read. Buy.

In the ascent

Aim-traded Satellite Solutions Worldwide (SAT:8.4p) a satellite internet service provider offering an alternative high-speed broadband service, has issued a bullish trading update for the financial year to end-November 2017, vindicating my buy call at 7.25p last summer when the company raised £8.1m in a placing at 7p a share for bolt-on acquisitions (‘Repeat buying opportunities’, 29 August 2017). I first advised buying at 5.5p ('Blue-sky tech play', 21 March 2016), after which the price hit a high around 10p in March 2017 before profit-taking set in.

Since that fundraise completed, the company has made four earnings-accretive acquisitions, which have added around £600,000 of annual cash profits and £4m of revenues. The acquisition spree brought in 8,700 new customers and meant that Satellite Solutions achieved its target of 100,000 customers ahead of schedule, making it the fourth-largest independent provider of broadband services in the world, providing services in 31 countries. It’s generating decent organic growth from existing businesses too as like-for-like revenue increased by 12 per cent in the 12-month trading period, so this is not just an acquisitive story. It’s also reassuring to know that recurring revenue more than doubled to £40m in the period, accounting for over 90 per cent of total revenues, driving cash profits up from £1.2m to above £4.5m, in line with analyst estimates.

Moreover, with the full contribution from acquisitions still to come, analyst Kevin Fogarty at house broker Numis Securities expects Satellite Solutions’ cash profits to increase to £6.4m on revenue of £53.9m this year to produce pre-tax profit of £1.7m and EPS of 0.2p. The operational gearing of the business model means that an £11m revenue increase in the 2018-19 financial year is forecast by Mr Fogarty to generate almost £3m incremental cash profits, an outcome that points to pre-tax profit of £4.2m and EPS of almost 0.5p. Net debt of £12.8m equates to a comfortable two times current-year cash profit estimates.

Trading on a modest 7.5 times forecast cash profits of £9.3m for the financial year to end-November 2019 to enterprise value of £70m, and with Satellite Solutions’ management team led by chief executive Andrew Walwyn “now targeting further organic growth of 50 per cent by 2020 as demand for alternative super-fast broadband services increases around the world”, I feel a target enterprise value to cash profit multiple of 9.5 times for the 2018-19 financial year is reasonable, suggesting a further 30 per cent share price upside. Buy.

Finally, my standing dish first quarter housebuilder trade is under water, but I am holding my nerve ahead of results season as the 10 per cent sector sell-off looks overdone, and is out of sync with the fundamental case I made at the start of the year. 

■ 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