In late summer I noted that the profit taking in Aim-traded shares of Middlesbrough-based Ramsdens (RFX:172p), a diversified financial services company, was overdone ('Ramsdens' profit-taking offers buying opportunity’, 14 Aug 2018). A pre-close trading update released ahead of half-year results on Wednesday 28 November 2018 has justified that call.
The directors have confirmed that trading is in line with house broker Liberum Capital’s forecasts, which point towards Ramsden delivering growth on last year’s record performance. Analysts are maintaining their full-year pre-tax profits and EPS estimates of £6.5m and 17p, respectively, for the 12 months to the end of March 2019, representing 4 per cent earnings growth. The risk to estimates is mitigated given that Ramsden has a seasonal bias (over three-quarters of profits are earned in the first half of the financial year).
A key take for me is that the company’s high-margin jewellery retail business continues to prosper. Having lifted revenues by more than a third to £8m in the 2018 financial year and hiked gross profit by a quarter to £4.1m, the division has delivered double-digit sales growth in the latest six-month trading period. This underpins expectations of near 20 per cent revenue growth from the operation for the full year, helped in part by a store expansion programme that will add 12 new units to the chain. The five stores opened in the first half are all trading ahead of expectations. The strategy of refreshing shop fronts and investing in higher-quality stock is clearly paying off as is exploiting cross-selling opportunities across Ramsdens 800,000 strong customer base.
Pawnbroking activities account for a quarter of gross profit, and are a reliable source of income. The company lends around £6.4m to its 34,000 customers, so pledges are small, which diversifies lending risk, but returns are high. Ramsdens earned interest income of £7m from its loan book last year, and in their update the directors highlighted “good performances from pawnbroking, other financial services and previous metal buying segments”. True, the hottest summer in UK since 1976 dampened demand for the company’s foreign currency business. However, the fact that Ramsdens is still on track to deliver another record profit performance shows the benefit of having multiple revenue streams and the upside from its store expansion strategy.
This is being woefully undervalued as the shares are rated on a cash-adjusted PE ratio of 7.5, offer a prospective dividend yield of 4.1 per cent, and an enterprise value of 4.8 times likely cash profits for the 12 months to the end of March 2019, or less than six times operating profit forecasts. That's value in my book. Clearly, fund managers at Downing who run the Downing Strategic Micro-Cap Investment Trust are of the same opinion, having just raised their shareholding to 15 per cent.
So, having initiated coverage at 132p post-IPO ('A jewel in the north', 12 Jun 2017), after which the share price hit a record high of 215p in January this year, I feel that a return to that high water mark is warranted. Buy.
■ Simon Thompson's new book Successful Stock Picking Strategies 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 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. Details of the content of both books can be viewed on www.ypdbooks.com.
