Join our community of smart investors

On the bargain hunt

A cash-rich financial services firm is benefiting from strong retail demand and is starting to rebuild its lending book. A cash-adjusted forward price/earnings ratio of six and prospective dividend yield of 4.4 per cent are likely to attract retail buyers, too.
On the bargain hunt

If my email inbox is a barometer of market trends, then an ever-increasing number of small-cap companies want to gain coverage in the financial press. In part I would like to think it’s a reflection of the high-quality journalism both my colleagues and myself try to provide to our large retail investor following.

However, it also reflects a realisation amongst the directors of small and micro-cap listed companies that the market price of their shares is now largely being determined by retail investors buying and selling activity, rather than by block trades from fund managers. To put this into some perspective, IC’s subscriber base has in aggregate over £30bn of liquid assets (bonds, equities and cash), a hefty sum even for the fund management industry. So, for example, if three per cent of IC subscribers decide to buy £7,500 of shares in a £100m market capitalisation company, then in aggregate this would represent a £7.5m buy order, or 7.5 per cent of the equity.

This factor alone explains why there can be some dramatic re-ratings in the share prices in companies I highlight assuming other investors share my positive view. For good measure, I have spotted another opportunity this week.

Tap into a retail recovery stock

  • Daily average pledge book lending back to around 90 per cent of pre-pandemic levels.
  • Jewellery and high-end watch sales outperforming since national lockdown restrictions eased.
  • Interim dividend per share hiked 60 per cent to 4p.
  • New finance director Dianne Giddy to join in the autumn from South African financial services group FirstRand.
  • Material analysts earnings upgrades.

Chief executive Chris Gillespie of pawnbroker and financial services firm H&T’s (HAT:285p)  exuded confidence delivering his first set of maiden half-year results since taking over from John Nichols who retired at the start of the year. His optimism is warranted.

The UK national lockdown meant H&T was unable to provide retail sales to customers instore until the second half of April, but first-half revenue and pre-tax profit only declined 7 per cent to £51.9m and £4.7m, respectively, a credible result. Importantly, Gillespie points out that momentum in retail sales (jewellery and high-end watches) has outperformed since the restrictions were lifted, highlighting pent up demand from consumers who have cash resources to spend and enjoy doing so, and increasing public interest in their investment merits. H&T’s retail segment increased gross profit by 139 per cent to £6.7m on 26 per cent higher sales of £12.4m, including a £1m credit for release of previous provisioning for slow moving stock.

Having seen its pawnbroking book decline by a third to £48.3m during 2020 (as cash rich customers who were unable to spend during lockdowns redeemed pledges), the book is rebuilding, up by almost £2m during May and June and a further £2m in July. House broker Numis Securities expects a year-end closing pledge book of £59.5m, a conservative expectation in my view. Pawnbroking accounted for 55 per cent of H&T’s gross profit in the first half, so remains H&T’s core profit generator.

Simon Thompson's 2017 Bargain shares portfolio performance
Company nameTIDMOpening offer price on 03.02.17 (p)Bid price on 09.08.21 (p) or exit price (see notes)DividendsTotal return (%)
Kape Technologies (formerly Crossrider)KAPE47.93473.55631.8
BATM Advanced Communications (see note seven)BVC19.2588.20391.9
Chariot Oil & Gas (see note one)CHAR8.297.420144.9
Avingtrans AVG2003881199.5
Cenkos Securities (see note two)CNKS88.4251069.530.6
Manchester & London Investment Trust (see note three)MNL291.653773.028.4
H&T HAT289.752824011.1
Management Consulting Group (see note five)MMC6.18360-3.0
Bowleven (see note four)BLVN28.95.515-6.1
Tiso Blackstar Group (see note six)TBG5520.40.54-61.8
Average    126.7
FTSE All-Share Total Return  64858017 23.6
FTSE AIM All-Share Total Return 9771456 49.0

Note 1. Simon Thompson advised selling two-thirds of the Chariot Oil & Gas holding at 17.5p on 3 April 2017 ('Bargain shares on a tear', 3 April 2017). Simon subsequently advised participating in the one-for-8 open offer at 13p a share ('On the earnings beat', 5 Mar 2018) and buying back the shares sold at 4p ('Chariot's North African adventure', 17 April 2019). Simon then advised taking up the one-for-six opern offer at 5.5p ('Exploiting margins of safety', 1 June 2021). Total return reflects these transactions.

2. Simon Thompson advised selling the Cenkos Securities holding at 106p on 3 April 2017 and the 106p price quoted in the above table is the exit price on the holding ('A profitable earnings beat', 3 Apr 2017). Please note that Simon has since included the shares in his 2020 Bargain Shares Portfolio and  rates the shares a buy.

3. Manchester and London Investment Trust paid total dividends of 3p a share on 2 May 2017. Simon Thompson then advised selling half of the holding at 366.25p on 26 June 2017 ('Top slicing and running profits', 26 June 2017), and selling the remaining half at 377p ('Bargain shares second chance', 17 August 2017). The 377p price quoted in the table is the final exit price.

4. Simon Thompson advised banking profits on half your holdings in Bowleven at 33.75p (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019 and the balance of the holding was sold at 5.5p ('Taking stock and profits', 9 December 2019).

5. Simon Thompson advised to sell Management Consulting's shares at 6p in February 2018 (‘How the 2017 Bargain share portfolio fared’, 2 February 2018). The price quoted in the table is the 6p exit price.

6. Tiso Blackstar transferred its UK listing to the Johanesburg Stock Exchange. The shares were then delisted on 23 November 2020 when shareholders received an exit cash payment of R415 per share on cancellation of their shares.

7. Simon Thompson advised banking profits on half your holdings in BATM shares at 49.9p ('Bargain Shares: Exploiting pricing anomalies and top-slicing', 3 December 2018) and subsequently bought back the shares at 43.5p ('BATM armed for a re-rating', 11 July 2019). 

Source: London Stock Exchange.

 

One consequence of the redemptions is that net cash of £32.5m (83p a share) is up 151 per cent year-on-year, accounting for almost a quarter of H&T’s net asset value of £136m (347p). Furthermore, with the benefit of an undrawn £35m credit facility, the company has firepower to fund bolt-on acquisitions and exploit organic growth opportunities resulting from the withdrawal from certain high interest margin lending activities by rivals such as Provident Financial. It’s reassuring that H&T’s personal loan book of £3.4m only includes a tiny balance of High Cost Short-Term loans that led to the ongoing FCA Review of its lending practices in this niche area. The redress cost should not hold back H&T’s growth prospects.

Analysts at Shore Capital expect to upgrade their 2021 pre-tax profit estimate from £7.9m to £10m, a cyclical low, to produce earnings per share (EPS) of 20p and a pay-out of 10p a share (18 per cent upgrade). For 2022, Shore forecasts pre-tax profit, EPS and a dividend of £15.5m, 31.4p and 12.5p, respectively.

The shares have produced 11 per cent total return since I included H&T in my 2017 Bargain Shares Portfolio, well behind the portfolio’s 126 per cent return. On a cash-adjusted forward price/earnings ratio of six, offering a prospective dividend yield of 4.4 per cent and priced 18 per cent below book value, a re-rating to my 400p fair value estimate looks firmly on the cards. 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].

Promotion: Subject to stock availability, both books can be purchased for the promotional price of £25 with free postage and packaging.

Both books include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.