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Targeting value plays

Simon Thompson highlights several value opportunities that also provide a decent income stream and earnings growth potential, too
Targeting value plays

Hargreaves Services (HSP:209p), a diversified industrial services group and brownfield land developer is set to reap the major benefits of its strategic transformation over the past four years, culminating in the recent cessation of UK coal mining. Coal inventories will be wound down from £40m to £8m-£10m over the next two years, the bumper cash flow from which will pay down net debt of £28m and be recycled into lucrative land regeneration activities.

For instance, the recently announced disposal of 32 hectares of land at the former Hatfield Colliery site near Doncaster will realise £25m on completion next summer for Hargreaves and its joint venture partner. The purchaser is a national retailer that plans to build an 800,000 square feet (sq ft) distribution and training centre. The 618-acre site has planning consent for the construction of a further 1.2m sq ft of industrial, commercial and logistics space and 3,100 residential plots. It’s not the only valuable land being developed either.

Hargreaves has already sold 14 acres of land to housebuilders Cruden Homes and Bellway at its 390-acre site at Blindwells, East Lothian. The £10m sale proceeds would have been recognised in the financial year if the UK lockdown hadn’t prevented contingent infrastructure work being carried out. That was the only reason why Hargreaves' underlying pre-tax profit dipped from £6.4m to £4.9m in the 12 months to 31 May 2020 as its other operations have traded largely unscathed through the pandemic. The deals will complete this year when house broker N+1 Singer factors in £15m of land sales on a healthy 22 per cent operating margin to support its group pre-tax profit estimate of £7m. On this basis, expect earnings per share (EPS) of around 19p.

Importantly, prospects for Hargreaves' other business units underpin that forecast, too. The logistics operation is trading strongly, not surprisingly given its focus on waste markets including clinical waste. In addition, Hargreaves’ specialist earthworks subsidiary is a strategic partner to the consortium (Kier/Eiffage/BAM/Forrovial) constructing the Chiltern Tunnels to Brackley section of the new HS2 railway. Subject to contract sign-off, Hargreaves will start ground engineering work in the autumn on a 4.5-year contract that should generate annual operating profit of £1.5m from the 2021-22 financial year onwards. The group is well placed to pick up further work on HS2, too. Chief executive Gordon Banham also expects the earthworks business to win contracts on a slice of the £4bn of government-funded infrastructure projects (reservoirs, road projects and nuclear industry) scheduled to be delivered over the next decade.

So, with bank debt set to be paid down quickly – N+1 Singer forecasts free cash flow of £23m this year – and the German metals trading subsidiary (net profit contribution of £2.1m in the 2019/20 financial year) now able to repatriate dividends to its parent following completion of a carbon pulverisation plant – shareholders are in line for some hefty payouts. The board has just declared a maintained final dividend of 4.5p a share (ex-dividend: 17 September), and anticipates declaring a special dividend of 12p along with the final in the 2020/21 financial year. Analysts are pencilling in a total payout of 20p.

Offering a 9.5 per cent prospective dividend yield, on a prospective price/earnings (PE) ratio of 10 and trading on a 48 per cent discount to a conservative net asset value (NAV) of 403p (land is in the books at cost), the shares offer material upside to my 320p target price. Having suggested buying the shares, at 206p (Alpha Report: ‘A high yielder offering significant hidden value’, 19 March 2020), and taking into account how well the company has traded throughout the Covid-19 pandemic, I now rate them a strong buy.


Oakley’s value proposition

The pre-close first half trading update from private equity investment company Oakley Capital Investments (OCI: 228p) not only supports the 14 per cent share price rise since my last article (‘Deep value buying opportunities’, 8 April 2020), but highlights the outstanding value still on offer.

A high proportion of Oakley’s 15 portfolio investments have defensive characteristics, benefiting from strong structural market growth, asset-light business models and high cash conversion rates. Over 70 per cent of investee companies operate a subscription-based or recurring revenue business model, so are less vulnerable to temporary declines in customer demand; and two-thirds of the portfolio companies deliver products or services digitally or can shift to online delivery in a short time frame. The portfolio’s technology bias is a key reason why valuations have held up well despite the Covid-19 outbreak. In fact, 10 of the 15 portfolio companies, representing half of Oakley’s NAV, have either traded close to or above expectations in the six-month period. Oakley’s latest NAV of 356p per share is 4 per cent higher than at 31 December 2019, and 13 per cent up year on year.

Realisations have helped, too. The sale of Oakley’s remaining stake in Inspired, a co-educational independent school, added 10p a share to NAV. The exit was pitched at a 25 per cent premium to carrying value, highlighting Oakley’s conservative approach to valuations (average 34 per cent uplift on realisations since inception). The net proceeds of £99m boosted Oakley’s cash pile to £261m (135p a share), a sum that backs up 60 per cent of the company’s market capitalisation in cash.

The directors clearly see value in the shares (heavy buying around 205p to 209p over the summer), and justifiably so. Adjust for cash and Oakley’s private equity portfolio (221p a share) is in the current price for 90p, an eye-watering 60 per cent below book value. There is even a small dividend to appeal to income investors as Oakley has paid out 15.75p a share of dividends since I suggested buying the shares, at 146.5p, in my 2016 Bargain Shares portfolio. Ahead of interim results on Thursday, 10 September 2020, the shares rate a strong buy.


Strix sizzles to record high

Shares in Isle of Man-based Strix (KETL:208.5p), a global leader in the manufacture and design of kettle safety controls and one with strong relationships with global original equipment manufacturers (OEMs), passed through my 200p target price last Friday, justifying my buy rating, at 128p, at the annual results (‘Three buying opportunities’, 18 March 2020).

First half trading has held up well despite the disruption caused by the Covid-19 pandemic and ongoing macroeconomic uncertainty. Output from Strix’s manufacturing facilities in China declined 9 per cent in the first half, a decent result given that the shortfall was 27 per cent in the first quarter. True, net sales were down a fifth, but Strix implemented a range of efficiency measures and initiatives to manage its variable cost base and mitigate the impact on full year profits.

Importantly, the business has started to see signs of a bounce-back in trading as lockdown conditions have started to ease globally. A strong order book for July and August points to a continuation of the marked recovery in June. So, although analysts at joint house broker Zeus Capital expect full-year revenue to decline almost 7 per cent to £90m, they also expect pre-tax profits to hold steady at £30m to deliver EPS of 14.3p and support a maintained dividend of 7.7p. On this basis, the shares are rated on a PE ratio of 14.7 and offer a dividend yield of 3.7 per cent.

That’s not a steep rating for a company that has a raft of new product launches slated for the second half, and is also benefiting from pent-up demand. So, having seen the share price double since I first suggested buying, at 100p, in my pre-IPO analysis three years ago (‘Tap into a hot IPO', 7 August 2017), and banked 17.6p-a-share of dividends, too, I remain positive ahead of the next trading update at the interim results on 23 September 2020.

That’s because the company’s enterprise value to cash profit multiple of 11.5 times represents a 10 per cent discount to a specialist engineering cohort of well-known UK-listed businesses that includes Halma (HLMA) and Spirax-Sarco Engineering (SPX), according to analysis from Hannah Crowe and Alex DeGroote at Equity Development. The chart break-out above the previous record high of 200p is a signal that the valuation gap with peers is set to narrow. There is certainly a case to be made as Strix has scarcity value, a dominant market share and enjoys hefty profit margins that are protected by its heavily patent protected intellectual property rights.

Furthermore, as the Covid-19 crisis highlights, the company offers defensive qualities when economic conditions are less benign, not to mention the ability to pay an attractive dividend when income investment opportunities are at a premium in the current zero-interest policy environment. Buy.


Brand Architekts in bargain basement territory

Brand Architekts (BAR:116p), an Aim-traded beauty brands business, has reported second-half sales of £5.7m (2019: £7.2m), an outcome better than management had expected at the time of the April trading update (‘Small-cap recovery buys’, 20 April 2020). This reflects strong growth through grocery stores and e-tailers such as Amazon.

Inevitably, the company was unable to completely offset the full impact of the Covid-19 crisis. Full-year revenue declined 17 per cent to £16.3m. That was mainly due to the lengthy lockdown on UK high street outlets, but also because some orders in key international markets were only placed in the final quarter of the financial year. The business is still profitable, although the impact of the revenue shortfall means that annual underlying operating profit could well be half last year’s £2m figure when Brand Architekts releases results in September.

However, this is more than priced in, with the equity trading on a 34 per cent discount to NAV of £30.6m (178p a share) even though net cash of £18m (105p a share) backs up 90 per cent of the market capitalisation. Effectively, the profitable brands business is in the price for less than £2m.

So, although the shares have lost a quarter of their value since I included them in my market-beating 2020 Bargain Shares portfolio, the potential for a sales recovery as lock-down restrictions ease, coupled with the solid balance sheet, makes them a bargain basement recovery buy.


SigmaRoc on solid ground

SigmaRoc (SRC:41p), a company that is pursuing a buy-and-build strategy in the heavy building materials sector, has issued a robust pre-close trading update ahead of interim results on 7 September 2020.

First half revenue increased by 83 per cent to £54.5m which propelled cash profit up 91 per cent to £10.9m on slightly higher margins despite the disruption caused by the Covid-19 pandemic. True, the headline numbers benefited from last December’s acquisition of a Belgium blue limestone and aggregates business. However, SigmaRoc’s like-for-like revenue was still maintained year on year, highlighting just how well the business is trading.

The point is that in the absence of any further Covid-19 disruptions then analysts’ forecasts are on the light side. Indeed, broking house Peel Hunt is only pencilling in full-year sales of £90m, cash profit of £16.9m and pre-tax profit of £7m, down from £9m in 2019. It’s not inconceivable that the group could match or surpass last year’s profit performance. Net debt has also been reduced by 7 per cent to £46.3m since the start of 2020, highlighting SigmaRoc’s cash generation.

The impressive first half profit performance also adds considerable weight to Peel Hunt’s expectations that SigmaRoc can deliver cash profit of £24.4m on revenue of £102m in 2021, an outcome that would propel pre-tax profit to £14.5m and produce EPS of 4.7p. A 2021 PE ratio of 8.5 and enterprise value to cash profit multiple of 6 times is a low rating for a group that has a strong position in the UK market for precast and pre-stressed products, and is well placed to benefit from the UK government’s major infrastructure projects. Interestingly, the directors have been buying shares, too.

I suggested buying SigmaRoc’s shares, at 46p (Alpha Report: ‘A General Election winner’, 12 December 2019), and maintain my 60p target. Buy.


Bango’s record performance

Aim-traded Bango (BGO:143p), a provider of a state-of-the-art mobile payment platform enabling smartphone users to charge purchases made in app stores straight to their mobile phone account, has issued a bullish pre-close trading update ahead of interim results on Tuesday, 15 September 2020.

Platform revenues surged by 50 per cent to a record £4.8m, buoyed by a 60 per cent higher end user spend (EUS) of £740m. Cash profit will not only exceed the £450,000 reported for the whole of 2019, but Bango is now generating positive cash flow. Analysts at house broker finnCap estimate first half operating cash flow of £0.8m, and forecasts a bumper performance in the traditionally stronger second half, targeting over £1.26bn of EUS. They have good reason to think this way.

In the first half, Bango signed a direct carrier billing (DCB) agreement with global technology giant SoftBank (TSE: SOBKY) to enable Japanese customers of Amazon (NASDAQ: AMZN) to charge the cost of goods, membership fees and subscription services to their mobile phone bill. The company also signed a three-year contract, worth £1.5m, with a major global telecoms’ group, and launched new google play routes in three continents. In addition, the number of app developers registered on Bango Marketplace has soared fivefold to more than 1,000 since the start of the year, so providing a lucrative revenue stream for the monetisation of customer data insights.

finnCap expects full-year cash profits to rise eightfold to £3.4m on revenue of £12m to produce pre-tax profit of £1.7m. The highly operationally geared business could be making cash profits of £10m within a few years given that an increasing proportion of incremental platform fees earned will be converted into profit on a relatively fixed cost base. The strong operational momentum adds yet more weight to my target of 225p a share based on an enterprise valuation of £160m, well above my 93p entry level ('Bang on the money', 26 September 2016). Buy.


■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at, 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].

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Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.