Bargain Shares: another chance to bag some bargains

Importantly, you could buy shares in the top performers at close to my recommended entry points in the weeks following the portfolio’s publication: challenger bank PCF (PCF:42p); and oil exploration company Parkmead (PMG:57p). Their share prices have both risen by 49 per cent on an offer-to-bid basis. The same is true of property development and investment company U+I (UAI:227p) as it took time for investors to cotton onto the excellent value opportunity. There still is.

For good measure, I have spotted some attractive repeat buying opportunities and not just in this year’s portfolio.

Mpac board room reshuffle

I included shares in Mpac (MPAC:198p), a small-cap niche packaging engineering business, at the 156p mark in this year’s portfolio, and it was still possible to buy at 175p when I covered the full-year results in mid-March when I introduced a 250p target price (‘Bargain Shares: Beating the market’, 12 Mar 2018). There have been two major changes in the board room since my last article was published, both of which need commenting on.

In the past month, chairman Phil Moorhouse has stepped down after three years in the role and has been replaced by chartered accountant Andrew Kitchingman, who has been a non-executive director for the past few years. Mr Kitchingman’s career has embraced corporate finance roles for a number of companies,, including KPMG, Hill Samuel, Brewin Dolphin and WH Ireland. The appointment looks sensible to me.

In addition, Jim Haughey, who joined the Mpac board seven months ago as finance director, is also stepping down for personal reasons. He had previously spent seven years with engineer Bodycote, where he played an important role in the management of three significant US acquisitions. His appointment appeared a good fit especially as Mpac has a £29.4m cash pile, a sum worth 148p a share, to deploy on earning-accretive acquisitions in order to scale up its fast-growing packaging engineering business – a supplier of high-speed packaging machines to healthcare, pharmaceutical and food and beverages companies.

Reassuringly, Mr Haughey has willingly agreed to work out his six-month notice period, giving credence to the view being communicated by the board that “there is nothing untoward for shareholders to worry about”. Importantly, the boardroom changes are unlikely to have an impact on the day-today operations as Mpac has considerable strength in its in-house finance team.

The reshuffle overshadowed somewhat an operational update at the annual meeting which confirmed Mpac is trading ahead of the first quarter last year. That’s hardly surprising given that its opening order book was up 35 per cent to £34.4m year on year and accounted for a high proportion of this year’s likely revenue of £58.7m, up from £53.4m in 2017, based on forecasts from analysts Paul Hill and Hannah Crowe at Equity Development. Far more informative is news that trading is in line with internal budgets, which point to another year of strong revenue and profit growth. Equity Development is maintaining its 2018 forecasts, which suggest pre-tax profits can more than double from £1.1m to £2.6m and produce EPS of 9.9p, highlighting the potential for profits to ratchet up sharply higher on rising sales in a favourable market for packaging equipment that is growing at an annual rate of 5 per cent.

The point is that once you strip out net cash on Mpac’s balance sheet, then at the current price the shares are rated on a forward PE ratio of five for 2018. They are also trading just below book value even though the company’s cash pile accounts for 70 per cent of Mpac’s market capitalisation. That smacks of value to me, so ahead of an announcement on Mr Haughey’s successor, I would use the pullback in the share price from late April highs of 238p as a repeat buying opportunity, especially as my 250p target price is conservative. Buy.

Sylvania Platinum ramping up production

I would do the same at Aim-traded Sylvania Platinum (SLP:17.75p), a fast-growing and low-cost South African producer and developer of platinum group metals (PGMs) platinum, palladium and rhodium. I rated the shares a buy at 14.5p in early February, reiterated that advice at 16p following a bullish second-quarter earnings report (‘On the earnings beat’, 5 Mar 2018), after which the price rallied to a five-year high of 18.75p before profit taking ensued. I feel the odds favour a revisit to that high-water mark, and beyond.

To recap, the company has two lines of business: the re-treatment of PGM-rich chrome tailings material from mines in the North West Province; and the development of shallow mining operations and processing methods for low-cost PGM extraction. Its dump operations comprise seven active recovery plants that treat chrome tailings from mines across the western and eastern limbs of the Bushveld Igneous Complex.

The key point to note in the company’s third-quarter trading report is that production in March hit a record level of 6,631 ounces (oz) of PGM putting Sylvania bang on track to hit its second-half production guidance of between 37,000 to 41,000 oz, up from 33,900 oz in the first half to the end of December 2017, and achieve a fifth consecutive year of record output. True, delays at the start of January with a licence at its newly constructed Millsell tailings facility were compounded by the need to process barren waste slime on top of the dump first before migrating down into the higher-grade feed. However, the project is now generating increased ounces, and management guidance indicates Sylvania’s output will be at least 20,250 oz in the fourth quarter, or a fifth higher than in the third quarter.

Also, analysts at house broker Liberum rightly point out that Sylvania continues to benefit overly from the doubling in the rhodium price to $2,060 per oz over the past year as its rhodium share of production is between two and three times that of its peers at 14 per cent.

I am also expecting a decent performance in the 2019 financial year as the full benefits are reaped from last November’s acquisition of Phoenix Platinum Mining Proprietary (renamed Lesedi), a PGM dump operation with an operational concentrator plant and 2.4m tonnes of tailings dump resources of a similar grade and recovery potential as Sylvania’s neighbouring Mooinooi dump operation. Expect Lesedi’s production to be around 5,000 oz in the current financial year, ramping up to 8,000 oz in 2019.

It’s not only output that is ramping up as Sylvania’s cash continues to build strongly, so much so that cash in the bank at the end of March 2018 increased by 38 per cent in the three-month period to $17.4m (£12.9m), a sum worth 4.4p a share. Strip that sum from the share price, and Sylvania is effectively being valued on a PE ratio of six and on an enterprise value to cash profit multiple of 2.5 times. Ahead of the fourth-quarter production report in late July, I continue to rate Sylvania’s shares a buy and feel that Liberum’s target price of 26p is not unreasonable. Buy.

Titon offers eastern promise

Colchester-based Titon (TON:204p), a small-cap designer and maker of domestic ventilation systems, and door and window hardware, has issued the cracking set of first-half results I had anticipated when I included the shares, at 160p, in my 2018 Bargain Shares Portfolio.

Buoyed by a strong performance from its South Korean operations, Titon’s pre-tax profits rose by 13 per cent to £1.34m in the six months to the end of March 2018. Moreover, with the benefit of a lower tax charge, EPS were propelled 42 per cent higher to 8.64p. Shareholders are being rewarded with a 17 per cent hike in the dividend to 1.75p a share, highlighting the directors’ confidence, and the fact that net cash on the balance sheet is worth 25p a share.

Titon’s 51 per cent-owned South Korean subsidiary, Titon Korea, manufactures natural window ventilation products and boasts a 75 per cent share of the national market. Revenues here surged by a quarter to £5.7m, accounting for 40 per cent of Titon’s first-half turnover of £14.5m, and at a healthy margin, too. Demand for its products in South Korea has been driven by three main factors: the introduction of building regulations for ventilation which specify that new houses and apartments have to be adequately ventilated; preference for the use of natural ventilation products over mechanical ventilation by major South Korean social housing authorities; and the adoption of use of natural ventilation products by the private housebuilding sector in order to reduce construction costs.

Titon also owns a 49 per stake in an associate company, Browntech Sales, which distributes ventilation products, and generates additional revenue through residential property development activities in Seoul. Combined, the South Korean operations reported a bumper pre-tax profit of £1m in the first half. The economic and geopolitical back drop in the region is also encouraging.

Not only is the South Korean economy forecast by economists to deliver economic growth of 2.9 per cent this year and next, but chairman and 8.9 per cent shareholder Keith Ritchie rightly points out that “the geopolitical climate has taken an extraordinarily positive shift with the recent summit between South Korean president Moon Jae-in and North Korea's leader Kim Jong-un. This was unthinkable at the turn of the year and has been welcomed in Asia and around the Globe. It remains to be seen whether full denuclearisation in North Korea will follow, but this new openness, and a prospective meeting between Donald Trump and Kim Jong-un, is very good news.”

The UK business has proved no slouch, either. Operating as a leading supplier of background ventilators in a market where air tightness standards for buildings is supported by changes in UK building regulations, Titon offers low-energy mechanical ventilation systems, and a comprehensive design service to its customers. Divisional first-half pre-tax profits increased by a third on an underlying basis to almost £0.5m, albeit this was a reflection of margin rather than revenue growth.

Admittedly, export sales in Europe and the US were subdued, but the strength of Titon’s UK and Korean operations means that the company is trading in line with profit forecasts from analyst Tony Williams at Hardman & Co, who predicts pre-tax profits will rise by 13 per cent to £2.8m in the 12 months to the end of September 2018 to deliver EPS of 17.7p and support a 17 per cent hike in the annual dividend to 4.8p a share. On this basis, Titon’s shares are priced on a forward PE ratio of 10 net of cash on the balance sheet and offer a 2.3 per cent prospective dividend yield. That’s hardly expensive for a company set to post record results for the fifth year in succession, and with a decent chance of delivering over £3m of pre-tax profits next financial year, too.

So, having seen the Titon’s share price pullback from a 24-year high of 222p on modest profit-taking, I feel that a move above the September 1993 high-water mark of 240p is achievable. Buy.

Conygar’s valuation anomaly

The laggard in my 2018 Bargain Shares Portfolio is Aim-traded property vulture fund Conygar (CIC:155p) even though there is cracking value on offer with the shares priced on an eye-catching 26 per cent share price discount to house broker Liberum Capital’s end-September 2018 forecast net asset value (NAV) estimate of 210p.

The directors have sensibly taken advantage of the deep share price discount by using some of the debt-free company’s £37m cash pile, a sum worth 57p a share, to make NAV accretive share purchases of 2.5m shares at prices between 150p and 163p since last autumn, representing 3.7 per cent of the issued share capital. Fund manager Miton (MGR:54.5p) clearly sees value in the shares, too, having just upped its stake from 14.3 to 15.1 per cent.

The share price discount to NAV is even more anomalous when you consider that Conygar holds 26.2m shares in Regional Reit (RGL:100p), a property company that owns a £737m portfolio of UK commercial property, predominantly office and industrial units in regional centres outside the M25 motorway. The stake is worth £26.3m and accounts for a fifth of Conygar’s last reported NAV of £136m. After accounting for deal flow and share buybacks, I reckon cash on the balance sheet and the shareholding in Regional Reit account for two-thirds of Conygar’s market value of £96m, implying other assets worth £73m are in the price for just £33m. Furthermore, Conygar receives annual dividend income of almost £2m on the Regional Reit stake, thus covering 75 per cent of its own administration costs.

It’s not as if the portfolio doesn’t have potential. It includes a 37-acre site in Nottingham which Conygar acquired last year for £13.5m and has plans for a 2m sq ft development encompassing a mixture of office, residential, student accommodation and leisure facilities, subject to gaining planning approval. Other sites include a 106,000 sq ft retail development at Cross Hands, South West Wales, which should be fully let this year, suggesting upside to its £8.1m carrying value.

The directors have also been scouring for new investment opportunities and have acquired a 50,000 sq ft industrial property in Birmingham for £3.47m. Located in a predominantly residential area, and fully let out to a NHS Foundation Trust and Revolution Gymnastics, the site offers redevelopment potential and a healthy 6.2 per cent net initial yield.

The bottom line is that Conygar’s forthcoming half-year results should bring into focus the valuation anomaly on offer. I rate the shares a buy and have a 190p target price. Buy.

Finally, the second part of this article will be published online at 12pm on Wednesday this week and includes analysis on five more companies. I am also looking at a further 20 companies on my watchlist, all of which have reported results recently.

■ Simon Thompson's new book Successful Stock Picking Strategies was published on 15 March and can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source and is priced at £16.95 plus £2.95 postage and packaging. 

Simon's second book Stock Picking for Profit has now been reprinted and is available to purchase online at www.ypdbooks.com for £16.95, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order, reduced to £14.99 for all orders placed before 15 May.