Running gains

Buoyed by a £918m rise in assets under management (AUM) to £3.82bn in 2017, of which net inflows accounted for more than half the increase, Miton’s AUM had increased to £4.05bn by mid-March driven by net inflows of £190m. I expect a further hefty rise in AUM when the company issues its half-year pre-close trading update in early July, buoyed by the performance from key funds – Miton’s European Opportunities Funds, and its UK Multi-Cap income fund – and from ongoing investor demand; around 87 per cent of Miton’s funds are ranked in the first or second quartile by performance. In fact, I reckon AUM has now risen to £4.25bn based on the latest Trustnet data, having assessed all 18 funds Miton manages.

If I am right in my assumptions  this is highly supportive of analyst forecasts, which point to another year of bumper profit growth. That’s because rising AUM has an accentuated impact on profits given the operational gearing of the business (10 per cent growth in operating expenses in 2017 lagged well behind revenue growth). Ahead of the half-year results, analyst Stuart Duncan at house broker Peel Hunt forecasts current-year pre-tax profit of £7.7m and EPS of 3.8p, up from £6.8m and 3.4p in 2017, based on revenues rising from £21.8m to £25.4m and using an average AUM of £4.18bn, up from £3.36bn in 2017. So, assuming equity markets hold steady, I feel these estimates are erring on the light side, and that’s after they were upgraded in March.

The potential for earnings upgrades aside, I feel analyst expectation of Miton producing annual operating cash flow north of £6m is bang on the money. That’s worth noting because Miton already has net funds of £19.9m, a sum worth 11.5p a share, and Peel Hunt predicts this is set to rise to in excess of £24m, or 13p a share, by December 2018 to support a 20 per cent hike in the payout to 1.7p a share.

On this basis, Miton’s shares are priced on a cash-adjusted forward PE ratio of 10, up from a multiple of six when I initiated coverage three years ago, and offer a prospective dividend yield of 3.2 per cent. The combination of earnings multiple expansion on a rising income stream, ongoing operational outperformance and impressive cash build have been key to the re-rating. These are some of the traits I look out for when stockpicking, which is why I highlighted Miton as one of the 26 case studies in my new book, Successful Stock Picking Strategies.

So, although you may be tempted to bank the 144 per cent gain on this holding, with the earnings risk skewed to the upside and the valuation still attractive then I feel a valuation closer to 60p is now in order. Run profits.

Kape crusaders

It has paid to run profits on the Alternative Investment Market (Aim)-traded shares of Kape Technologies (KAPE:124p), a provider of cyber security software that has four main products: CyberGhost, Reimage PC, Driver Agent and Reimage for Mac. Formerly known as Crossrider when I included the shares, at 47.9p, in my 2017 Bargain Shares portfolio, the share price had passed through my initial 100p target price when I suggested running profits, at 108p, ahead of the next trading update (‘Riding earnings momentum’, 16 April 2018).

Bearing this in mind, chairman Don Elgie told shareholders at last week’s annual meeting that “Kape has made a strong start to 2018 and continues to make excellent progress across all its key strategic growth drivers. Our stable of business-to-consumer software applications continues to grow market share, and our focus on cross-selling our applications, together with driving greater levels of recurring income, remain a key near-term priority.” He added that the directors are “evaluating selective acquisitions to expand our product offering and broaden our reach in the growing market of security and privacy online”.

This robust trading update suggests that current-year analyst forecasts pointing to a 36 per cent rise in Kape’s pre-tax profit and EPS to $9.1m and 5.2¢ (3.85p), respectively, are well underpinned. Furthermore, with net funds of $69.5m (£51.7m) on the balance sheet equating to 30 per cent of the company’s market capitalisation of £167m, the directors have substantial firepower to make further shrewd earnings-accretive bolt-on acquisitions. Shareholders will also shortly bank a special dividend of 3.55p a share (ex-dividend: 24 May).

Trading on a cash-adjusted forward PE ratio of 22, and with earnings risk skewed heavily to the upside, I would run your 152 per cent paper profit on this holding as I anticipate that the pre-close trading update in July and/or news of acquisitions will prompt analyst upgrades. Run profits.

Faroe Petroleum gushes higher

Shares in Faroe Petroleum (FPM:150p), an independent oil and gas company primarily focused on exploration, appraisal and production opportunities in Norway and the UK, have passed through the 141p target price I highlighted six weeks ago when I last rated them a buy at 121p (‘Hitting pay dirt’, 9 April 2018). The price is also up by 57 per cent since the autumn when I suggested buying Faroe’s shares to play the resurgence in the oil price (‘Six seductive small-caps’, 11 September 2017). Longer-term holders who bought in when I initiated coverage at 75.5p have doubled their money ('A slick operator', 5 February 2015).

One catalyst for the re-rating is the potential for corporate activity. DNO ASA (DNO:ASA), the Norwegian oil and gas operator that has interests in 19 exploration licences offshore Norway and the UK, has built up a 28.7 per cent long-term strategic stake in Faroe. DNO is pursuing strategic investments and partnerships with established North Sea players, and has undoubtedly been attracted by a combination of Faroe’s daily production, which averaged 14,300 barrels of oil equivalent (boe) last year, and the value of its stated 2P reserves of 97.7m boe and 2C resources of 78.6m boe.

Faroe’s share price has also been buoyed by several other factors, including: significant discoveries in both the Hades and Iris prospects in licence PL 644 B, located in the Norwegian Sea (Faroe 20 per cent interest); better-than-expected initial flow rates from the two infill wells at the Tambar field in Norway (Faroe 45 per cent interest), which has had an average daily flow rate of 18,507 boe in the first 14 days; and Faroe hitting record net production of 19,275 boepd.

Also, Faroe’s share price is highly correlated with the oil price, which is now at its highest level since the end of 2014. Black gold has been buoyed by improving supply and demand equilibrium in the industry, output cuts led by Opec and Russia, pipeline constraints that have held back growth in US shale exports, and expectations of tighter supply driven by both macroeconomic and geopolitical factors including: potential sanctions over Iran exports; plummeting exports from Venezuela, the country with the largest oil reserves in the world; and political tension in the Middle East, with Russia and the US backing opposing sides in Syria.

So, I feel it’s worth running your gains as the oil price rally looks far from over, and there is added potential for exploration upside on drilling at the Rungne (Faroe-operated), Cassidy and Pabow wells later this year. Run profits.

Parkmead on a tear

Sentiment towards Parkmead Group (PMG:63p), a small-cap oil and gas exploration and development company led by 19 per cent shareholder Tom Cross, the founder and former chief executive of Dana Petroleum, has improved dramatically this year. I included the shares, at 37p, in my 2018 Bargain Shares portfolio, and it was still possible to buy in at 41p when I made a pretty compelling case to invest in early April (‘Hitting pay dirt’, 9 April 2018). The 70 per cent share price rally reflects several factors, not least of which is the fact that investors have reappraised the value embedded in the company’s exploration assets, and potential for corporate and operational activity to deliver significant value to shareholders.

To put this into perspective, when I included the company in my portfolio in early February, it had a market cap of just £36.6m, well below end-2017 net asset value (NAV) of £65.2m even though net cash (currently £24.4m) and its stake in Faroe Petroleum (now worth £5.5m) backed up 85 per cent of the company’s market cap at the time. This meant that Parkmead’s oil and gas interests, spanning 26 exploration and production blocks in the North Sea, were in the price for only £5m, a massive discount to their latest carrying value of £29.3m even though the company now has total proved and probable (2P) reserves of 46.3m boe. DNO ASA’s keen interest in Faroe has brought into focus the value of Parkmead’s assets as Faroe has invested in seven of the eight licences the company has established in the UK Central North Sea following a series of licensing round successes and strategic acquisitions.

Moreover, as I noted in my previous article, the Perth and Dolphin fields in the Moray Firth area contain very large oil fields, including Piper, Claymore and Tartan, and account for 60 per cent of Panmure Gordon’s valuation of all the fields in Parkmead’s portfolio. I would flag up too that Parkmead’s current share price is still 27 per cent shy of Panmure Gordon’s risked tangible NAV estimate of 86p a share. The broker has an unrisked tangible NAV of 380p a share.

The bottom line is that with Brent Crude rallying to $80 a barrel, the highest level since the autumn of 2014, the commercial viability of Parkmead’s projects and potential for corporate activity has increased markedly too. Buy.

WH Ireland’s buying opportunity

Aim-traded shares in WH Ireland (WHI:115p), a small-cap broking house and private client wealth manager, have been on a rollercoaster ride since I first advised buying at 68p ('Broking for success', 1 August 2011). I last rated them a buy at 128p (‘Enlightening calls’, 5 February 2018), and the price subsequently hit a high of 155p.

The price had been coming off prior to last week's pre-close trading update, and dipped further on news that costs in the company’s wealth management arm were higher than anticipated in the last four months of the financial year to end-March 2018 due to the resolution of legacy issues. However, the restructuring is now delivering tangible rewards: over 70 per cent of assets under management (AUM) are fee-paying; recurring revenue accounts for over 60 per cent of divisional revenues; and the wealth planning team has grown fees by 50 per cent. Furthermore, the company is targeting £2m-worth of cost savings in the 2018-19 financial year including margin improvement on the private wealth management side by transferring £150m of AUM to higher-margin discretionary or fee-paying execution-only mandates.

True, corporate brokers have seen reduced transactions in 2018 due to the turbulent market conditions. However, WH Ireland's directors state that “the pipeline of new business remains solid”, a point worth noting given that equity markets are bouncing back strongly, thus offering scope to earn fees from the deferred equity-raises for clients.

So, with net funds equating to 38 per cent of WH Ireland’s market value of £33.5m, and the board looking to make bolt-on acquisitions to scale up the private client side, I feel my 175p target price is not unreasonable, assuming of course the company returns to profit in the new financial year. Buy.

■ 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.