Playing the precious metal complex

In that article, I highlighted Aim-traded Sylvania Platinum (SLP:33p), a cash-rich, fast-growing and low-cost South African producer and developer of platinum group metals (PGMs) platinum, palladium and rhodium, as an obvious beneficiary. The company’s share price is riding highs, having risen by 80 per cent since the start of the year and the holding has now produced a total return of 120 per cent since I first highlighted the potential in my market beating 2018 Bargain Shares portfolio.

The stellar share price performance reflects the surge in palladium and rhodium prices, up 68 per cent and 50 per cent in the past 12 months, respectively, and the profits Sylvania is making in this favourable pricing environment. Indeed, house broker Liberum Capital's forecasts point towards Sylvania lifting full-year pre-tax profit by more than half to $24.7m on revenue of $69m in the 12 months to 30 June 2019.

On this basis, expect the company to deliver 60 per cent higher earnings per share (EPS) of 6.13¢ (4.9p), an outcome that implies the shares are rated on a modest price/earnings (PE) ratio of 6.5. Strip out net cash on the balance sheet and the PE ratio falls to 5. That’s a miserly rating and one that is clearly at odds with the bullish prospects for the 2019/20 financial year and the robust pricing environment for Sylvania’s basket of PGMs. In fact, Liberum forecasts that Sylvania could make annual pre-tax profit of $29.4m and EPS of 7.09¢ (5.7p) in the 12 months to end June 2020, a performance that should boost its net cash to $38.7m (11 p a share). On this basis, the cash-adjusted forward PE ratio is well below 4 for the 2019/20 financial year. Expect the board to be generous with the dividend, too.

So, with the company set to release a bumper set of annual results at the end of August, this looks like a timely buying opportunity given that the target price of 40p I outlined when I covered Sylvania’s third quarter results (‘Bargain shares: small-cap buying opportunities’, 7 May 2019) is now looking very conservative. In fact, I am raising my fair value target to 50p. Strong buy.

Pawnbroking for glistening profits

It’s not just the price of palladium and rhodium that have been on a tear, the same is true of the gold price as the yellow metal is a major beneficiary of any easing of monetary policy by the US Federal Reserve. In fact, the gold price has risen by 15 per cent in sterling terms since the start of January and, at £1,150 per ounce, is within touching distance of hitting the September 2011 all-time sterling high of £1,182 per ounce. I had anticipated as much when I suggested buying shares in Aim-traded pawnbroker H&T (HAT:330p), a constituent of my market beating 2017 Bargain Shares portfolio, as a way to play the sterling upside in precious metal (‘A golden opportunity’, 24 June 2019). The gold price surge is also very good news for Aim-traded diversified financial services group Ramsdens (RFX:193p), a constituent of my 2019 Bargain Shares portfolio.

That’s because both companies buy precious metal for scrap and have pledge books that are secured against jewellery, a chunk of which is gold. The point being that not only does a rising sterling gold price give rise to windfall gains on the scrap side, but it means that both companies can offer larger pledges to customers, and make bigger profits from pawnbroking, too. If the gold price environment remains favourable, as I strongly suspect it will, then I feel it is only a matter of time before both H&T and Ramsdens release bullish trading updates, a possibility that is simply not being priced into their current valuations.

To put their valuations into perspective, H&T’s shares are trading on a forward price/earnings (PE) ratio of 10, and offer a prospective dividend yield of 3.5 per cent. The company also made the earnings accretive acquisition of 65 shops and 29 pledge books from The Money Shop earlier this month. Cash-rich Ramsdens is attractively priced too, trading on a forward cash-adjusted price/earnings (PE) ratio of 8.5, and offers a prospective dividend yield of 4 per cent. Needless to say, the glistening gold price is set to shine on the trading profits of both companies. Buy.

 ■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.