Driver Group (DRV:52p), a consultancy that provides clients in the construction and engineering sectors with specialist services including project management and dispute resolution support services, warned of weaker trading in the Middle East and Asia Pacific regions in March so the decline in first half reported pre-tax profits from £1.7m to £1m, on revenues down by £2m to £29.7m, was not wholly unexpected especially as the company absorbed £500,000 of restructuring costs in the period.
What’s more relevant is that enquiry levels from Driver’s 586 clients are running at high levels – chief executive Gordon Wilkinson, who has led the company’s revival in the past few years, says they are 10 per cent higher than at the same time last year – so the directors’ guidance is for second half revenues to meet last year’s high water mark of £31m. Importantly, finance director David Kilgour points out that the company has already taken swift action to realign the cost base and the break-even revenue point has been lowered by £200,000 per month.
In the first half, operating costs reduced by £800,000, so with second half sales generating a higher level of profitability then analysts at house broker N+1 Singer predict that Driver should be able to increase second half pre-tax profits by more than half to £2.55m. Bearing this forecast in mind, Driver’s Europe & Americas division, accounting for half of group revenue, increased underlying profit before tax by over 40 per cent in the first half, so the main profit centre is actually doing rather well even if trading in Asia and the Middle East was more subdued. Some of the delayed contracts from those regions have now started, says Mr Kilgour.
On this basis, and after accounting for share-based payments, full-year reported pre-tax profits after share based payments should still rise from £2.7m to £3.5m to deliver EPS of 5.1p. Furthermore, with cash building – net cash has surged sixfold to £5m since March 2018 and is predicted to rise to £7.2m (13p a share) by the 30 September 2019 financial year-end – expect the annual dividend per share to double to 1p. As a sign of confidence, the board introduced a half-year payout per share of 0.5p. Sensibly, the company has earmarked some of its cash to make earnings accretive share buybacks, although a strategic acquisition remains the main focus of the burgeoning cash pile.
True, the shares are one of the laggards in my 2019 Bargain Shares portfolio, and are trading at the same level when I last updated the investment case in March (‘Driver reverses on profit warning’, 11 March 2019), but there is obvious value on offer here. That's because net of cash on the balance sheet the shares are being valued on a cash-adjusted forward price/earnings ratio of 7 for the 12 months to end September 2019. That modest rating fails to reflect the decisive action that has already been taken to realign the cost base, Driver’s higher level of profitability going forward, the opportunity to make an earnings’ enhancing acquisition, and the cash generation of the business to support a highly progressive dividend policy. Buy.
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