Mpac (MPAC:268p), a small-cap niche packaging engineering business supplying customers in the pharmaceutical, healthcare, nutrition and beverage industries, has prompted analysts to push through their fifth earnings upgrade since the annual results in March last year ('Mpac’s massive earnings upgrades', 5 Mar 2019).
Mpac supplies its blue-chip client base with high-speed, cutting-edge packaging machinery and equipment in a global market growing by 4 to 6 per cent a year, and one where demand is being underpinned by the need for large original equipment manufacturer (OEM) customers to improve efficiency and lower costs and wastage in their production lines. Mpac earns more than 80 per cent of annual revenues outside the UK, so it is benefiting from strong global trends including the migration to smart technologies, which is accelerating growth rates as large companies adopt artificial intelligence-enabled equipment and robotics in their production facilities and warehouses.
Mpac’s order intake (especially in the US and healthcare segment), profit margins and cash generation are all ahead of analysts' full-year expectations even though they had already lifted forecasts at the time of the 2019 half-year results (‘Mpac delivers fourth earnings upgrade this year’, 9 Sep 2019). Paul Hill at Equity Development now expects Mpac’s 2019 pre-tax profits to rise from £1.4m to £7.5m, representing a £500,000 upgrade, on revenue up by more than half to £89m, buoyed by a surge in operating profit margin from 2.4 to 8.4 per cent – the margin expansion highlighting the operating leverage of the business given its relatively fixed cost base.
On this basis, expect 2019 earnings per share (EPS) to soar from 4.5p to 33.7p, implying the shares are rated on a lowly price/earnings (PE) ratio of eight, or half the sector average, a valuation that can no longer be justified by Mpac’s legacy pension scheme liabilities. Moreover, expect closing net funds of around £17.8m (88p a share), or 80 per cent higher than at the end of the first half, cash generation being buoyed by an unwinding of working capital, the better-than-expected profit contribution and receipt of customer deposits.
Mpac’s shares are up around 70 per cent since I included them, at 156p, in my market-beating 2018 Bargain Shares Portfolio and smashed through my 250p target price following the latest earnings upgrade. However, the shares still only trade on a cash-adjusted PE ratio of 5.5 and I now feel that a fair value of 330p is more appropriate. Strong buy.
| 2018 Bargain shares portfolio performance | |||||
| Company name | TIDM | Opening offer price on 02.02.18 (p) | Closing bid price on 10.01.20 (p) | Dividends (p) | Total return (%) |
| Sylvania Platinum | SLP | 14.5 | 41.2 | 1.13 | 191.9 |
| Mpac | MPAC | 156 | 265 | 0 | 69.9 |
| Parkmead | PMG | 37 | 47.6 | 0 | 28.6 |
| PCF | PCF | 27 | 33 | 0.49 | 24.0 |
| U and I Group | UAI | 205 | 175.2 | 25.5 | -2.1 |
| Record | REC | 43.3 | 37.7 | 5.79 | 0.4 |
| Conygar | CIC | 160 | 158 | 0 | -1.3 |
| Titon | TON | 159.86 | 125 | 6.5 | -17.7 |
| Shore Capital | SGR | 213 | 140 | 20 | -24.9 |
| Crystal Amber (note one) | CRS | 207.2 | 140 | 7.5 | -28.8 |
| Average | 24.0 | ||||
| FTSE All-Share Total Return index | 7088 | 7859 | 10.9 | ||
| FTSE AIM All-Share Total Return index | 1184 | 1095 | -7.5 | ||
| Source: London Stock Exchange share prices. | |||||
| 1. Simon Thompson advised selling Crystal Amber's shares at 140p ('Crystal Amber takes a hit', 10 December 2019) | |||||
Diversified financial services group Ramsdens (RFX:248p) has also prompted analysts to upgrade their forecasts, vindicating my buy advice, at 204p, when I covered the half-year results (‘Ramsdens on the money’, 3 Dec 2019). Key drivers are the ongoing strong sterling gold price (up 24 per cent since May 2019), which is benefiting the group’s precious metals segment and profits from scrapping slower moving jewellery sales, and double-digit sales growth in both new and second-hand jewellery with premium watches (Rolex and Breitling, in particular) standout performers. Both pawnbroking and foreign currency exchange activities continue to produce good results, too.
Following a 10 per cent earnings upgrade, house broker Liberum expects pre-tax profits to rise by 25 per cent to £8.7m on revenue of £58.4m in the 12 months to 31 March 2020. On this basis, expect to EPS to rise by 30 per cent to 22.6p to support a payout per share of 8.1p. Net cash equates to 40p a share, implying the shares are rated on cash-adjusted PE ratio of nine.
| Simon Thompson's 2019 Bargain Shares portfolio performance | ||||||
| Company name | TIDM | Market value | Opening offer price 01.02.19 | Closing bid price 10.01.20 | Dividends | Percentage change |
| TMT Investments (note one) | TMT | $163m | 250¢ | 580¢ | 20¢ | 140.0% |
| Futura Medical (note two) | FUM | £70m | 14.85p | 34p | 0p | 129.0% |
| Ramsdens Holdings | RFX | £76m | 165p | 245p | 4.8p | 51.4% |
| Inland | INL | £174m | 57.75p | 84p | 0.85p | 46.9% |
| Bloomsbury Publishing | BMY | £214m | 229p | 286p | 8.03p | 28.4% |
| Augmentum Fintech | AUGM | £121m | 102.4p | 103p | 0p | 0.6% |
| Mercia Technologies (note three) | MERC | £83m | 29.57p | 27.5p | 0p | -7.0% |
| Driver Group | DRV | £36m | 74p | 66p | 0.5p | -10.1% |
| Litigation Capital Management | LIT | £72m | 77.5p | 66.2p | 0.81p | -13.5% |
| Jersey Oil & Gas | JOG | £34m | 205p | 155p | 0p | -24.4% |
| Average | 34.1% | |||||
| FTSE All-Share Total Return index | 6,852 | 7,859 | 14.7% | |||
| FTSE AIM All-Share Total Return index | 1,023 | 1,095 | 7.0% | |||
| Note 1: Simon advised taking profits on TMT Investments at 580c a share on Monday, 9 September 2019 ('Takeovers, tender offers and taking profits', 9 September 2019). The selling price is the one used in the performance table. | ||||||
| Note 2: Simon advised taking profits on Futura Medical at 34p a share on Monday, 14 October 2019 ('Bargain Shares: golden opportunities', 14 October 2019). The selling price is the one used in the performance table. | ||||||
| Note 3: Simon advised selling Mercia Asset Management at 27.5p a share on Monday, 9 December 2019 ('Taking stock and profits', 9 December 2019). The selling price is the one used in the performance table. | ||||||
| Source: London Stock Exchange opening offer prices at 8am on 1 February 2019 and closing bid prices on 10 January 2020 or when Simon advised exiting the holding. | ||||||
The holding has produced a total return of 51 per cent since I included the shares, at 165p, in my 2019 Bargain Shares Portfolio and hit my 250p target price post the latest earnings upgrade. However, with the gold price on a tear, the upgrade cycle has further to run and I raise my target price to 275p. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous 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 £3.25 [UK]. Postage and packaging is only £3.95 for purchases of both books.
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Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.
