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Bargain Shares: a trio of earnings upgrades

Our small-cap stock picking expert highlights another three companies on his watchlist that have upgraded profit guidance
Bargain Shares: a trio of earnings upgrades
  • Launch of Currency Impact/ESG fund in collaboration with UBS.
  • Analyst upgrade earnings and dividends sharply.
  • Potential for more upgrades as fund establishes itself post launch.

Currency manager Record (REC: 102p) has launched its market-first Dublin-based Currency Impact/ESG fund in collaboration with UBS Global Wealth Management. The fund size at launch is around US$750m, or almost four times house broker Panmure Gordon’s previous estimate.

The new UCITS ICAV fund aims to improve the flow of development finance to emerging markets and to enhance financing projects in illiquid markets. The strategy targets positive sustainability outcomes using trading in liquid emerging market currencies designed to help stabilise exchange rates and to absorb currency risk.

Furthermore, active engagement with counterparty banks should encourage investment in an underlay of social and sustainability bonds in addition to bonds issued by multilateral development banks. Record will leverage the strategy to increase its contribution to sustainable finance by investing over longer time horizons, in illiquid currencies, and in currencies with elevated volatilities, or in periods of drawdowns.

As I anticipated last week (‘Upgrading target prices’, 22 June 2021), Panmure has been forced to upgrade its profit estimates following the fund launch. Based on a launch fund size of US$750m (US$200m previous estimate), and a revenue margin of 0.4 percentage points (0.2 percentage points previous estimate), analysts at the broking house have raised their current year earnings per share (EPS) forecast from 4.7p to 5p, up from 2.7p in the 12 months to 31 March 2021. On an annualised basis, incremental EPS is 0.5p higher, highlighting the scope for further upgrades as the fund establishes itself post launch. The new dividend forecast is 5p a share, up from 4.7p.

The holding has produced a 154 per cent total return since I included the shares in my 2018 Bargain Shares portfolio, and underpinned by a prospective dividend yield of 5 per cent, and expectations of further earnings upgrades later this year, I maintain my upgraded and perhaps conservative 120p target price. Buy.


Anglo-Eastern primed to deliver eye-catching results

  • Crude Palm Oil (CPO) production up 26 per cent in first five months of 2021.
  • Average CPO price 70 per cent higher year-on-year.

Indonesia and Malaysia plantation Crude Palm Oil (CPO) and rubber producer Anglo-Eastern Plantations (AEP: 580p) has issued a robust trading update at its annual meeting.

Buoyed by favourable weather conditions in the Kalimantan and North Sumatera regions, own production of fresh fruit bunches (FFB) increased 16 per cent to 477,300 per metric tonne (mt) in the first five months of 2021. An abundance of crop enabled Anglo to buy in 39 per cent more than in the same period last year, too, which helped boost production at its six mills by 26 per cent year-on-year.

Moreover, the CPO price (ex-Rotterdam) has averaged US$1,120 per mt in the first nine months of 2021, or 70 per cent higher than the average price of US$659 per mt in 2021. The benign pricing back drop meant that Anglo’s mills enjoyed a 26 per cent higher ex-mill price. The current CPO (ex-Rotterdam) price is US$1,110 per mt, or 9 per cent higher than at the start of 2021.

In 2020, Anglo reported pre-tax profit (before biological asset movement) of US$50.4m and EPS of 77.7c (56p) based on an average CPO price (ex-Rotterdam) of US$723 per mt., so with the current price substantially higher we are guaranteed a hefty profit uplift in 2021. In fact, Anglo’s interim results will be eye-catching given that profits were weighted two-thirds to the second half last year (driven by the strong recovery in the CPO price), so there is a soft comparable to beat given the CPO price (ex-Rotterdam) only averaged US$648 per mt in the first half of 2020. Under the new Indonesian export tax regime, producers capture majority of the upside from price rises when the CPO price (ex-Rotterdam) is above US$1,000 per mt.

Strip out net cash of US$115m (209p a share) and Anglo’s shares are trading on a bargain basement cash adjusted historic price/earnings (PE) ratio of 6.5. They also trade 25 per cent below book value, the solid balance sheet and potential for strong profit growth being key reasons why I included the shares, at 570p, in my 2020 Bargain Shares Portfolio.

The fundamental investment thesis remains strong, and I view the share price pull-back from May’s three-year high of 724p as a repeat buying opportunity. For good measure, the 14-day RSI (reading of 33) is bottoming out at the same level as the low point November and that preceded a major share price rally. Buy.


Simon Thompson's 2020 Bargain Shares Portfolio Performance
Company nameTIDMMarketOpening offer price 07.02.20 Bid price 29.06.21 DividendsPercentage change (%)
XaarXARMain 42p191.2p0.0p355.2%
Metal Tiger (see note two)MTRAim11.8p26p0.0p120.3%
Cenkos SecuritiesCNKSAim56p77p2.0p41.1%
Brand ArchitektsBARAim 160p190p0.0p18.8%
Chenavari Capital Solutions (see note one)CCSLMain61.4p35p0.0p3.4%
Anglo Eastern PlantationsAEPMain570p572p0.4p0.4%
CIP Merchant CapitalCIPAim57p57p0.0p0.0%
PCF (suspended)PCFAim33.3p23p0.4p-29.7%
Average      60.6%
FTSE All-Share Total Return index7,7967,893 1.2%
FTSE Small-Cap Total Return index9,27411,785 27.1%
FTSE AIM All-Share Total Return index1,0991,447 31.7%

Note 1. Chenavari Capital Solutions made a compulsory capital redemption of 34.73 per cent of the share capital at 85.72p a share in March 2020, and subsequent compulsory capital redemption of 21.9 per cent of the share capital at 72.93p a share in July 2020. The total return takes into account the capital redemptions. The company delisted its shares from AIM on 30 September at a closing bid-price of 35p. Approximately 17.9 percent of each holding was then redeemed on 9 November 2020 at 65.26p per share, and a further 67 per cent at 44.7p in May 2021. The board plans to make further compulsory capital redemptions in due course.

Note 2. Metal Tiger shares consolidated on the basis of one share for every 10 shares previously held on 1 July 2020.

Source: London Stock Exchange.


Xpediator’s drives earnings upgrades

  • Profit guidance upgraded by 10 per cent.
  • Analysts’ dividend and earnings forecasts raised.

Braintree-based international freight management services group Xpediator (XPD:78p) has announced the earnings beat I anticipated a few weeks ago (‘Primed for a major earnings beat’, 14 June 2021).

Demand for the group's services across all three divisions – freight forwarding, logistics and warehousing, and transport services – continues to be strong with those parts of Xpediator’s Transport and Logistics & Warehousing businesses that were impacted by the Covid-19 pandemic now all trading positively.

The directors are now guiding shareholders to expect annual pre-tax profit “in excess of £8.5m”, up from £7.7m previously forecast in the market and £7.2m reported in 2020. House broker Cenkos Securities has taken note and upgraded its operating profit estimate from £8.9m to £9.7m, implying 20 per cent annual profit growth, on 12 per cent higher revenue of £247m (5 per cent upgrade). Expect closing net cash of £8.1m, up from £6.7m in 2020.

On this basis, Xpediator has an enterprise valuation of £101m, or 10.4 times operating profit. The shares also offer a prospective dividend yield of 2.2 per cent based on the annual pay-out being raised by 13 per cent from 1.5p to 1.7p a share, in line with the double-digit dividend growth in 2020.

I wouldn’t be surprised at all to see earnings guidance being upgraded again given that Xpediator’s key markets – Baltic states and nine central and Eastern European (CEE) countries account for 63 per cent of group revenue – offer superior growth prospects compared with the rest of Europe, thus underpinning demand for its services. Also, the UK economy is recovering strongly from the Covid-19 pandemic, so much so that investment bank Goldman Sachs predicts 8.1 per cent economic growth in 2021. That’s clearly good news for logistic companies.

The holding has produced a total return of 70 per cent since I initiated coverage, at 45p, four months ago (Alpha Report: Profit from a Brexit winner’, 19 February 2021) and with the earnings risk skewed to the upside, I am upgrading my target price from 85p to 90p. Buy.


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