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A bargain basement value opportunity

This diversified financial services company is on course to report record pre-tax profits this year, and has solid organic growth prospects
November 28, 2018

I had a very informative results call with the directors of Aim-traded Middlesbrough-based Ramsdens (RFX:155p), a diversified financial services company whose main activities encompass foreign currency exchange, retail jewellery, pawnbroking and a precious metals buying and selling service.

It’s a company I know well, 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. I last advised buying the shares, at 172p, ahead of the half-year results ('Ramsdens' on track for record profits’, 5 Oct 2018). The drift in the share price since then is not only unwarranted, but represents a cracking buying opportunity in my view for the raft of reasons I highlight below.

Ramsdens listed its shares on London’s junior market with the intention of expanding its store format through organic expansion. The directors are delivering on this commitment. Four new stores were opened in the second half of the 2017-18 financial year, another four in the six months to the end of September 2018, four more since the half-year end, and three stores are in the pipeline to open before the end of March 2019. All the new stores are trading ahead of management’s expectations. Moreover, based on a 30-month targeted payback of capital, it makes sense to continue this organic rollout programme by recycling its strong operating cash flow.

Indeed, net cash of £12.4m, a sum worth 40p a share, was little changed on the closing level at the end of March 2018 even though the company spent £1.2m purchasing property and equipment, and £1.36m paying out the final dividend of 4.4p in the six-month period. The progressive dividend policy is a key bull point. In fact, the board has paid out 7.9p a share since June 2017 and that excludes the forthcoming half-year dividend of 2.4p, up 9 per cent year on year. Liberum Capital’s forecast payout of 7.1p a share for the 12 months to the end of March 2019 is covered more than two times by record EPS estimates of 17p based on full-year pre-tax profits of £6.54m, of which £5.1m was booked in the first half.

The fact that Ramsden’s first-half profits were slightly down on the prior year, but the directors have reiterated guidance for another annual profit result despite earning lower profits from foreign exchange due to the UK’s record-breaking hot summer, shows the benefit of having a diversified product offering. For example, cross-selling its retail jewellery to a growing customer base, investing in new stock, and improving display, branding and product mix, were all drivers behind the 27 per cent rise in first-half jewellery sales to £4.5m, on which Ramsdens earned a 50 per cent plus gross profit margin. Both pawnbroking and precious metals buying also posted growth to boost Ramsdens’ overall gross profits by £600,000 to £16.7m in the half year on revenue of £23.9m.

It’s worth flagging up that as new stores move towards profitability in their second year investors can expect an unwinding of the initial drag on profits – administration costs rose by £750,000 in the latest six-month reporting period, of which half was a result of the new store openings. Also, even the most optimistic staycation UK holidaymaker wouldn’t bank on another record summer heatwave in 2019, thus offering scope for a boost next year to profits from Ramsden’s market-leading foreign currency exchange, which earned a 2.3 per cent gross margin providing £315m of currency to over 500,000 customers in the first half.

These factors help explain why analysts at Liberum predict Ramsden can achieve another record result in the 2019-20 financial year, when they forecast a pre-tax profit of £6.94m on revenues of £49m to produce EPS of 18p and support a dividend of 7.8p. On this basis, net of 40p a share of net cash on the balance sheet, Ramsdens’ shares are priced on a bargain basement forward PE ratio of six, and offer a prospective dividend yield of 5 per cent. They are also priced on less than 1.6 times book value even though the company is generating a post-tax return on equity north of 17 per cent, and is successfully recycling operating cash flow into solid organic growth prospects. Strong 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