- Material improvement in activity levels during the fourth quarter
- Pre-tax profit forecast to increase 60 per cent to £3.2m in 2021/22 financial year
- Dividend per share of 1.5p for 2021 forecast to rise 16 per cent to 1.75p in 2022
Consultancy group Driver (DRV:55p) has announced a material improvement in activity levels during the fourth quarter to 30 September 2021 and a positive start in the 2021/22 financial year. The group provides clients in the construction and engineering sectors with specialist commercial management, planning, project management, and dispute resolution services.
Driver’s operations in Europe and Americas have continued to perform strongly, reaping the upside of new offices (Spain and US), higher headcount, restructuring, and expert witness work undertaken by its high-margin Diales subsidiary. Analysts at Equity Development estimate revenue from these territories increased 14 per cent to £35.4m in the 12 months to 30 September 2021, accounting for 71 per cent of group revenue. The research house also predicts 12 per cent top-line growth from Europe and Americas in the 2021/22 financial year.
|Simon Thompson's 2019 Bargain Shares portfolio performance|
|Company name||TIDM||Opening offer price 01.02.19||Bid price 21.10.21 or exit price (see notes)||Dividends||Percentage change|
|TMT Investments (note one)||TMT||250¢||900¢||20¢||579.2%|
|Futura Medical (note two)||FUM||14.85p||34p||0p||129.0%|
|Litigation Capital Management||LIT||77.5p||120.5p||0.71p||56.4%|
|Mercia Asset Management (note three)||MERC||29.57p||27.5p||0p||-7.0%|
|Jersey Oil & Gas||JOG||205p||163p||0p||-20.5%|
|FTSE All-Share Total Return index||6,852||8,129||18.6%|
|FTSE Aim All-Share Total Return index||1,023||1,433||40.0%|
Note 1: Simon advised taking profits on TMT Investments at 580c a share to bank 140 per cent gain including dividend of 20c ('Takeovers, tender offers and taking profits', 9 September 2019), and subsequently advised buying back the shares at 318c ('On the hunt for recovery buys', 6 July 2020).
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 used in the performance table. Current share price 32p.
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 used in the performance table.
Source: London Stock Exchange opening offer prices at 8am on Friday, 1 February 2019 and latest bid prices or when Simon advised exiting the holding.
Importantly, Driver’s problem regions, the Middle East and Asia Pacific, returned to profitability in the fourth quarter, so reducing their annual losses, as countries exited lockdowns and operations benefited from restructuring and a lower cost base (exiting an expensive Abu Dubai property lease has generated £100,000 of cost savings, for example).
Admittedly, it’s early days, but it’s clear from my lens that the group’s profits are highly operationally geared to what could be a strong recovery and one underpinned by pent-up demand and a move to higher-margin activities. Indeed, even if gross margin of 26 per cent only holds steady, then with group revenue expected to rise from £50m to £53m in the 2021/22 financial year, and operating costs trimmed by £0.5m to £10.6m, then operating profit should surge from £2.1m to £3.3m as a higher proportion of incremental gross margin earned drops through to the bottom line.
On this basis, expect adjusted earnings per share (EPS) to rise 62 per cent to 4.7p and support a 16 per cent higher dividend per share of 1.75p. Current net cash of £6.5m is forecast to rise to £7.4m (13.6p a share) by September 2022, reflecting annual operating free cash flow of £2.8m (5.2p a share). This implies the shares offer a prospective free cash flow yield of 9.4 per cent, are priced on a forward price/earnings (PE) ratio of 12, and Driver’s enterprise valuation equates to a miserly five times forward cash profit estimates of £4.5m.
To put the rating into perspective, Driver’s peer group (Tetra Technologies, Sweco, Jacobs, AECOM, WSP Global and FTI Consulting) have an average PE ratio of 28, and are rated on a three times higher multiple of cash profit to enterprise valuation. Of course, a small-cap liquidity discount needs to be applied, but even if the group is only rated on 10 times prospective cash profit to enterprise valuation – a near 40 per cent discount to larger peers – then it still supports a re-rating to the 100p target I outlined when I last suggested buying the shares at 50p (‘Tap into a bargain basement recovery play’, 8 June 2021). Strong buy.
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