When Aim-traded 1pm (OPM:35.25p), a specialist provider of finance to small- and medium-sized enterprises (SMEs), issued its interims results in January I concluded it was one of the most lowly-rated companies listed on London’s equity markets (‘1pm unloved, and undervalued’, 22 January 2019).
This was based on predictions of analysts’ at equity research firm Hardman & Co which pointed to the company delivering a near 11 per cent rise in annual pre-tax profit to £8.7m in the 12 months to end May 2019, increasing fully diluted earnings per share (EPS) from 6.46p to 7.02p, and producing a double-digit post-tax return on 1pm’s May 2018 book value per share of 56p.
This morning’s 15 per cent fall in 1pm’s share price reflects that 1pm increased its adjusted pre-tax profit by only 4 per cent to £8.2m, the shortfall reflecting a slight weakness due to some delays in larger, hard asset deals. Moreover, having settled share-based payments on earn-outs on past acquisitions, fully diluted EPS increased by only 2 per cent to 6.6p. News that the company has “prudently increased provisions from 1.5 to 1.9 per cent of the lending portfolio” hardly helped sentiment either.
But it was the outlook statement that probably spooked investors most as the directors’ guidance this morning is to expect “the financial year ending 31 May 2020 to be one of investment and consolidation.” This partly reflects the decision to make “further investments in sales and new business personnel, to simplify 1pm’s asset finance operations and to rationalise the various businesses into a single, nationally recognized, brand.” The additional costs which will be incurred this year also reflect upgrades to IT and communications systems in order to deliver online offerings, improve processing times and make 1pm’s infrastructure more robust.
To put the impact of these actions into some perspective, at the start of 2019, analysts at Hardman were predicting 1pm would deliver pre-tax profit of £9.7m in the 12 months to end May 2020. This is clearly not going to happen as the company is set to incur £1.6m of additional costs. Indeed, house broker Cenkos Securities is expecting adjusted pre-tax profits to be flat at £8.2m in the 2019/20 financial year, but this excludes £600,000 of exceptional costs (restructuring, rebranding). Take these into account and pre-tax profits are set to reverse to £7.6m to deliver EPS of 6.1p in the current financial year.
True, the investments made should help accelerate profit growth in later years - Cenkos is forecasting pre-tax profits of £9.3m and EPS of 7.3p in the 2020/21 financial year, albeit there is execution risk in delivering this, too. However, the absence of any earnings growth near-term is likely to mean that 1pm's shares will continue to be rated on a modest earnings multiple for some time yet. So, even though the board’s commitment to a progressive payout policy implies a dividend yield of 2.4 per cent for the financial year just ended, and the shares are trading on a 40 per cent discount to book value, I simply can't see a catalyst for a higher rating and am cutting my losses. Sell.
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