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Driver delivers strong second half

The profit recovery looks set to gather momentum in the new financial year.
October 17, 2019

Driver Group (DRV:56p), a consultancy that provides clients in the construction and engineering sectors with specialist services including project management and dispute resolution support services, has delivered a markedly stronger second half trading performance, reversing a weak first half result when underlying pre-tax profits fell sharply from £2.1m to £762,000. The board expects to report second half underlying pre-tax profits of £2.38m, up from £1.7m in the same period of 2018, albeit this is slightly shy of analysts’ expectations.

A strong performance in the UK and Europe offset a weaker result in the Middle East and Asia, the latter being the cause of the first half shortfall. Importantly, the new business enquiry pipeline remains strong, according to chief executive Gordon Wilkinson, adding further credibility to house broker N+1 Singer’s view that adjusted pre-tax profits for the new financial year can bounce back from £3m to £3.7m on revenue up slightly to £62.3m. Swift cost cutting to realign the cost base means that Driver’s break-even revenue point has been lowered by £200,000 per month, a key reason to expect profit margins to improve.

True, Driver’s closing net cash position of £5m (£9.6m) was shy of analysts’ expectations of £7.2m. However, the board did spend around £500,000 making earnings accretive share buybacks in the six months to 30 September 2019, introduced a half-year payout per share of 0.5p at a cost of £260,000, and invested in working capital, too. Analyst Greg Poulton at N+1 Singer still expects the annual payout to double to 1p a share at a cost of a further £260,000 for the final dividend, thus leaving ample surplus cash available for investment in the business.

Admittedly, Driver’s shares are the laggard in my market beating 2019 Bargain Shares portfolio, and are unchanged since I covered the interim results in early June (‘Driver set for bumper second half, 4 June 2019). But there is clear value on offer in the shares of the £27.5m market capitalisation company. Net of cash on the balance sheet, they are trading on a cash-adjusted price/earnings (PE) ratio of 10 for the year just ended, falling to a forward cash-adjusted PE ratio of 7.4 for the new financial year, a modest rating for a company that is expected to deliver earnings per share (EPS) growth of 25 per cent and one which has already taken steps to realign the cost base to support a higher level of profitability going forward.

Furthermore, there is scope to make an earnings’ enhancing acquisition, while at the same time using the company’s cash generation to underpin a progressive dividend policy. I maintain my stance that Driver’s shares have recovery potential and I remain a buyer ahead of the next trading update at the annual results in December. Buy.

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