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Bargain Shares: Winners in an uncertain world

A diversified financial services group is firing on all cylinders and offers scope for upgrades, while a radiation detection technology company is benefiting from the uncertain geopolitical environment
Bargain Shares: Winners in an uncertain world

When I was creating  2022 Bargain Shares Portfolio I wanted to gain exposure to likely winners from the cost of living crisis. My pick was H&T (HAT: 365p), a diversified financial services group and the leader in UK pawnbroking, a segment of the alternative credit market that is shunned by the mainstream lenders. A trading update highlights robust growth across all segments.

Since the start of the year, H&T’s pledge book has surged 17 per cent with redemptions stable and loan-to-value ratios prudent, while gold purchasing volumes are back at pre-pandemic levels, supported by a 9 per cent rise in the sterling gold price. Moreover, foreign exchange volumes are recovering quickly as millions of cash-rich holidaymakers jet off to sunnier climes. Self-help initiatives are buoying retail sales of both new and pre-owned jewellery, too.

House broker Shore Capital pencils in a 54 per cent rise in 2022 EPS to 32.2p (and sees upside), and a 16 per cent higher payout per share of 14p, implying a forward PE ratio of 11.3 and prospective dividend yield of 3.8 per cent. H&T’s share price has risen a fifth in the past three months and I raise my target from 400p to 430p.

Simon Thomposn's Bargain Shares Portfolio 2022 
Company nameTIDMMarketOpening offer price 11.02.22Latest bid price 16.05.22DividendsTotal return
Tavistock InvestmentsTAVIAim4p5.2p0p33.3%
H&THATAim304p361p8p21.3%
Henry BootBOOTMain300p316p3.63p6.5%
Billington BILNAim214p228p0p6.5%
TekcapitalTEKAim29.15p30.5p0p4.6%
Vector CapitalVCAPAim46.6p47p0p1.0%
Sylvania Platinum SLPAim98.4p88p2.25p-8.3%
ConygarCICAim160p146p0p-8.8%
Average      7.0%
FTSE All-Share Total Return index8,525 8,262  -3.1%
FTSE Aim All-Share Total Return index1,258 1,109  -11.8%

Source: London Stock Exchange

 

Poised for a strong recovery

  • Estimated contract backlog of £55mn
  • Cash profitability expected in 2022/23 financial year
  • Cash position to be bolstered by unwinding of inventory

Sedgefield-based Kromek (KMK:9.75p), a radiation detection technology company focused on the medical imaging and nuclear markets, has reported accelerating growth across both business segments.

Buoyed by £5.9mn of contract wins in the last three months of the 2021/22 financial year, the directors expect a near 50 per cent ramp up in revenue to £18mn in the 12 months to 30 April 2023. Importantly, 50 per cent of the revenue forecast is already contracted, 37 per cent is going through contract negotiation and the balance represents repeat orders.

The recent contract awards have been partly driven by increasing interest for Kromek’s chemical, biological, radiological and nuclear (CBRN) detectors from governments. I can only see demand gaining further momentum given the current geopolitical environment and the need for multiple sovereign states to step up their national security as an urgent priority.

The directors also report high demand for the group’s cadmium zinc telluride (CZT) based products from original equipment manufacturers (OEMs) in the medical imaging industry. Following Canon’s acquisition of Redlen Technologies, medical imaging OEMs that adopting CZT technology in their next generation x-ray and gamma ray imaging products – Phillips and United Imaging, for example – are now far more reliant on Kromek, the only independent manufacturer of CZT.

The strong demand that is now in evidence is slightly tempered by supply chain disruption. Specifically, the late arrival of certain components prevented £2.9mn worth of orders being completed in the 12 months to 30 April 2022. These will be shipped in the current financial year. As a result, the group will post a cash loss of £1.2mn on revenue of £12.1mn for the year just ended, an improvement on the prior year but shy of the breakeven result that Equity Development had anticipated.

That said, Kromek looks incredibly well placed to return to profit in the new financial year when analysts pencil in a small cash profit of £0.3mn. Also, the unwinding of inventory and cash inflow from order completions will bolster gross cash of £5.1mn (excluding £6.5mn of borrowings) so the group is adequately funded to deliver on its order book. Moreover, it will not take too many additional CBRN wins from governments to deliver a material step change in profits given the high gross margin earned. I also expect Kromek to be awarded multi-year and multi-million dollar contracts from medical imaging OEMs looking to lock in surety of supply.

So, although the news void since my last article has undermined investor confidence (‘Pivotal year unfolding for Kromek’, 18 January 2022), as more tenders are converted in major orders, a reappraisal of Kromek’s prospects should lead to a re-rating. New house broker finnCap has a 12-month target price of 27p, but sees scope for a move towards 40p as new orders are landed. Recovery 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. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £4.50 [UK].

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They 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.