The Holy Grail for investors is to identify companies with potential to turn an early-stage recovery story into a multi-month earnings upgrade cycle, so forcing analysts to repeatedly upgrade their earnings estimates. In turn, investors have a habit of paying a higher price for a slice of the action so you can benefit from earnings multiple expansion, too. It therefore pays to know the precise profit drivers to look out for, I certainly do having dedicated several chapters and case studies to this very subject in both of my books.
Areas of interest include a company’s position within its market and whether industry demand (both cyclical and structural) is creating a tailwind to ride off. Understanding operational leverage is important to ascertain the extent to which profits can accelerate as revenue ratchets up. I also take a close look at cash generation and working capital management to identify enterprises that recycle operating cash flow back into their businesses either through organic investment or bolt-on acquisitions to create shareholder value.
It certainly pays to embrace technological change and keep an eye on macroeconomic and political factors that may impact performance. Many of these dynamics are at play with the five companies I highlight below. It’s no coincidence that they have all just posted earnings beats.
Gresham House obliterates forecasts
- £1bn of organic assets under management inflows in 2020.
- Double-digit earnings upgrades for 2020 and 2021.
Gresham House (GHE:810p), a fund manager specialising in renewable energy generation, solar power, wind, forestry, infrastructure funds and public and private equity investment strategies, has smashed analysts’ earnings estimates, and prompted hefty upgrades.
Assets under management (AUM) increased by an eye-catching 42 per cent from £2.8bn to £3.9bn in 2020, or 15 per cent above investment bank Jefferies forecast, buoyed by £1bn of organic inflows. The addition of £640m of AUM in the second half included £266m of capital raises for Gresham House Energy Storage Fund (GRID), Gresham House Forest Fund I LP and the group’s Baronsmead VCTs.
Tight industry pricing, ongoing demand from housebuilders and healthy investment returns are supporting interest in Gresham House’s forestry funds. Moreover, with the benefit of a strong balance sheet – estimated net cash of £21.8m at the 2020 financial year-end – Gresham has been making strategic and complementary bolt-on acquisitions. The proposed earnings accretive acquisition of Republic of Ireland-based Appian Asset Management for an initial consideration of €4.55m (£4m) adds AUM of €330m including a forestry portfolio. Appian plans to launch a social housing fund in Ireland that is complementary to Gresham House's Residential Secure Income LP fund, targeting the shared ownership housing market and aiming to unlock a supply of more affordable houses. This highlights Gresham House’s ESG credentials as do investments in battery storage, solar power and vertical farming.
Jefferies have taken note, raising their 2020 pre-tax profit estimate by 14 per cent to £12m on revenue of £38.1m. The broking house has pushed through an even larger 17 per cent upgrade for 2021, pencilling in pre-tax profits of £13.7m on revenue of £45.2m. On this basis, expect earnings per share (EPS) of 36.5p and 41p, respectively, to support dividends per share of 4.9p and 5.7p.
The shares have passed through the 800p target I outlined when I covered the interim results (‘Investments for the new normal’, 17 September 2020), and are now up 160 per cent since I included them, at 312p, in my 2016 Bargain Shares Portfolio. My new target price of 950p equates to a cash-adjusted 2022 price/earnings (PE) ratio of 20, hardly exacting for an operationally geared asset manager targeting AUM of £6bn by 2025 and one with strong ESG credentials. Buy.
Rosenblatt legal eagles shine
- Rosenblatt enjoys record year.
- Earnings upgrades for 2020 and 2021.
RBG (RBGP: 75p), a professional services group that owns law firm Rosenblatt, a nascent litigation funding arm and specialist finance boutique Convex Capital, has posted a 5 per cent earnings’ beat and declared a final dividend of 3p a share. Closing net cash of £3.5m was materially better than analysts’ net debt estimate of £1.1m.
Rosenblatt enjoyed its best year ever, increasing underlying revenue by 14 per cent to £20.7m and earning a gross margin above 40 per cent. Both its corporate and employment legal divisions enjoyed robust trading, so much so that house broker N+1 Singer predicts corporate revenues more than doubled to £4.4m. The trading backdrop remains favourable for Rosenblatt’s legal eagles, who specialise in litigious/contentious work. Furthermore, one consequence of the economic fallout from the Covid-19 pandemic is increased white collar crime & fraud, another area of Rosenblatt’s expertise. Interestingly, although N+1 Singer have raised Rosenblatt’s 2021 revenue forecast by five per cent to £21.6m to acknowledge the momentum, analysts are “still keeping a level of conservatism in the numbers.”
RBG’s other two smaller divisions are starting to fire too. Convex completed three deals in 2020 which brought in fees of around £1.6m, but fee income could easily double in 2021. That’s because Convex is working on a pipeline of more than 20 corporate deals, and has already completed one in the past few weeks. RBG’s litigation finance arm LionFish concluded £3.2m of asset realisations and N+1 Singer expects a similar outcome this year.
On this basis, expect 2020 group cash profit of £7.1m (post a 5 per cent upgrade) to surge to £9.4m in 2021 on 10 per cent higher revenue of £28m to deliver a similar rise in pre-tax profit to £7.7m. Analysts also upgraded their 2021 EPS estimates by 7 per cent to 7.3p, up from 5.3p in 2020, and raised their 2021 pay-out forecast from 4.1p to 4.4p.
RBG’s shares are up 10 per cent on my 68p entry point (Alpha Report: ‘Back a winning legal team’, 2 June 2020), and still offer great value on a forward price/earnings (PE) ratio of 10. A prospective dividend yield of 5.9 per cent is attractive, too, and I maintain my 100p target price. Buy.
Inspiration Healthcare’s neonatal care drives hefty upgrades
- Operating profit estimates upgraded 18 per cent.
- SLE acquisition delivers increasing sales.
Crawley-based Inspiration Healthcare (IHC:90p), a fully integrated medical technology company with a strong focus on the high growth neonatal intensive care market, is reaping the benefits of last summer’s £18m complementary acquisition of SLE, a designer and manufacturer of four types of ventilators for neonatal intensive care. SLE always looked like a good fit. That’s because Inspiration’s range of neonatal respiratory products support and assist the care of preterm infants by providing resuscitation, stabilisation and respiratory support.
SLE’s sales have increased steadily since the deal completed in July, partly due to one-off Covid-19 orders but also reflects other factors such as cross-selling opportunities across the enlarged group (neonatal respiratory disposables and breathing circuits, for example). Inspiration’s directors note that the operational savings identified at the time of the acquisition are being achieved. The addition of SLE’s 30,000 sq. ft. facility in Croydon for the assembly of technically advanced capital equipment means that Inspiration now has 50,000 sq. ft. of manufacturing capacity. Inspiration is now less reliant on third party products, too.
Moreover, with Inspiration’s annual revenue set to more than double to at least £36.5m (3 per cent ahead of forecasts) on a gross margin of around 43.6 per cent, then a higher proportion of incremental margin earned drops through to profit given Inspiration’s relatively fixed cost base. This explains why house broker Cenkos Securities has raised its operating profit estimate by 18 per cent to £2.86m, an 88 per cent year-on-year increase. On this basis, Cenkos expects adjusted EPS of 5.9p, up from 3.8p in the 2019/20 financial year, and closing net cash of £5.4m (8p a share).
The SLE acquisition was one reason why I suggested buying the shares, at 75p (Alpha Research: ‘Profit from a medical technology winner’, 27 October 2020), noting that the enlarged business is well placed to benefit from organic growth trends in overseas markets while reaping synergy benefits across a wider customer base. Those dynamics are still at play. So, with the shares priced on a modest cash-adjusted forward PE ratio of 13.5, I maintain my 105p target price. Buy.
BATM smashes market estimates
- Organic revenues up 45 per cent to at least US$180m.
- Robust demand for Covid-19 antigen tests.
BATM Advanced Communications (BVC:110p), a provider of medical laboratory systems, diagnostic kits, cyber security and network solutions, has posted a major earnings’ beat.
Buoyed by ongoing high demand for its COVID-19 antigen test from European and Asian governments, analysts at house broker Shore Capital believe that BATM’s diagnostic division delivered an additional US$19m of revenue and cash profit of US$5.6m above their 2020 forecasts. They now predict an 80 per cent increase in group cash profit to US$18m on revenue of US$181m and pre-tax profit to more than double to US$11.7m. Closing net cash of US$42m (9c a share) excludes the US$33m (£24m) proposed disposal of BATM’s non-core NG Soft software subsidiary. A return to the dividend list is expected when BATM releases results on Monday, 22 February.
The holding is 508 per cent in profit since I included the shares in my 2017 Bargain Shares portfolio, and I reiterate my 170p target price (‘Technology winners for the new normal’, 18 January 2021). Buy.
Bloomsbury’s page turning performance
- Profits only £1m shy of previous year despite national lockdowns.
- Analysts upgrade earnings estimates by 19 per cent.
Bloomsbury Publishing (BMY: 300p), the publisher of JK Rowling’s best-selling Harry Potter books, has handsomely outperformed analyst earnings expectations for the 2020/21 financial year.
Nielsen estimate that the volume of books sold in the UK surged by 5.2 per cent in 2020, a backdrop that buoyed trading in Bloomsbury’s consumer division. Print books account for around 80 per cent of Bloomsbury revenue and its titles have been selling well. Bestsellers include Eat Better Forever by Hugh Fearnley-Whittingstall, Joe Biden - American Dreamer, Why I'm No Longer Talking to White People About Race, by Reni Eddo-Lodge.
Ongoing growth of digital revenue has also made Bloomsbury more resilient as it repositions from mainly being a consumer publisher to a digital business-to-business publisher in the academic and professional information market. Analysts at Investec have taken note, upgrading their 2020/21 revenue estimate by 4 per cent to £170m and now expect pre-tax profit of £14.7m to be only £1m below the previous year despite the closure of book shops during three lockdowns since March.
Moreover, Investec forecasts a 15 per cent rebound in pre-tax profit to £16.9m on slightly higher revenue in the 2021/22 financial year driven by a higher contribution from the academic and professional segment. Estimated free cash flow per share of 19p explains why net cash is forecast to surge by almost 60 per cent to £49.7m (59p a share) by the February 2021 year-end. Expect a maintained pay-out of 8.2p a share.
Bloomsbury’s shares have produced a 37 per cent total return since I included them in my 2019 Bargain Share Portfolio and have hit my previous target of 300p. But with the business outperforming, I feel a new target of 330p is achievable. Buy.
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Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.
