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Bargain Shares: On the upgrade

A lowly rated diversified financial services group has delivered better than expected first half results and prompted analysts to push through earnings upgrades for this year, and next.
June 8, 2022
  • Interim pre-tax profit of £2.2mn on 52 per cent higher revenue of £29.3mn beats previous earnings guidance by 10 per cent
  • Foreign currency volumes have risen from 60 to 85 per cent of pre-pandemic levels since March 2022
  • Pledge book and precious metal buying now back to pre-pandemic levels
  • Analysts push through 17 and 7 per cent profit upgrades for 2022 and 2023

Middlesbrough-based Ramsdens (RFX:208.5p), a diversified financial services group, has delivered a better than expected first-half pre-tax profit of £2.2mn, reversing a Covid-impacted loss of £0.1mn in the same period last year.

Despite travel restrictions in the final quarter of 2021, the group’s foreign currency exchange business delivered £94mn of currency to customers. At 31 March 2022, volumes were around 60 per cent of pre-pandemic and have since risen to 85 per cent, reflecting the surge in air travel in recent months. Moreover, foreign currency exchange gross margin is higher than before the pandemic, partly as rivals such as Hays Travel and Thomas Cook exited the market. Having generated 22 per cent of group gross profit of £15.7mn in the first half, house broker Liberum Capital believes the segment will account for 35 per cent of its upgraded full-year gross profit estimate of £36.7mn.

Gross profit of £3.1mn from precious metals buying was almost back at pre-pandemic levels as customers take advantage of the favourable gold price to sell unwanted jewellery. Liberum expects a similar outcome in the second half, one reason for raising their full-year group pre-tax profit forecast by 17 per cent to £7mn. On this basis, expect earnings per share (EPS) of 17.3p and an annual dividend of 8.1p a share, implying the shares are price on a modest current year price/earnings (PE) ratio of 12 and offer a 3.9 per cent prospective dividend yield.

Analysts’ earnings forecasts are also well underpinned by the ongoing recovery in Ramsdens’ pawnbroking business. The pledge book increased by 23 per cent to £7.5mn in the six-month period, and is now above the £7.7mn level at the start of the Covid-19 pandemic. Expect the growth to continue as customers denied credit from mainstream banks look to alternative lenders to meet their short-term cash flow needs. Loan to value ratios are two-thirds of the gold price, so growth is not at the expense of asset security. Liberum expect the division to account for £8mn of its group gross profit estimate of £36.7mn.

2021 Bargain Shares Portfolio Performance
Company nameTIDMOpening offer price 05.02.21Bid price 08.06.22 DividendsPercentage change (%)
Vietnam Holding (see note one)VNH201.4p316p0.0p67.8%
Wynnstay GroupWYN424p610p25.5p49.9%
San Leon EnergySLE27.5p40.75p0.0p48.2%
Ramsdens RFX142.8p207p1.2p45.8%
Duke RoyaltyDUKE29p35.5p2.95p32.6%
Canadian General InvestmentsCGI3,611c3,710c134c6.5%
AnexoANX136.9p135p3.0p0.8%
Springfield PropertiesSPR135.6p123p7.25p-3.9%
Downing Strategic Micro-Cap DSM69p65.4p0.8p-4.1%
Arix BioscienceARIX177p113p0.0p-36.2%
Average     20.7%
FTSE All-Share Total Return 7,135 8,452 18.5%
FTSE AIM All-Share Total Return 1,384 1,137  -17.8%

Note One: Simon recommended tendering 30 per cent of holdings in Vietnam Holdings at US$4.4528 (322.3p) a share, and tendering 3.9 per cent in the excess application ('Exploiting a tender offer', 4 August 2021), with a view to buying back the tendered shares at the lower market price (284p offer price on 13 and 14 September 2021) when the cash distribution was made during the week of 13 September 2021. Total return reflects these transactions which have reduced the entry point to 188.3p a share.

Source: London Stock Exchange

Ramsdens’ self-help measures across its retail jewellery business are generating meaningful returns, too. For instance, management has invested £6mn in stock in the past six months, a third of which in luxury watches, an attractive alternative asset class for investors. Watch sales surged 176 per cent year-on-year and the 55 per cent higher gross profit of £4.9mn earned from the jewellery business also reflected a much-improved e-commerce offering (15 per cent of divisional sales, up from 9 per cent), and better instore design windows and presentation to showcase items. 

Importantly, the group retains a rock-solid balance sheet. Net cash of £9.3mn equated to a quarter of net assets of £37.6mn (121p a share) at the end of March 2022 even though the group invested in stock, new store openings and relocating some shops to better sites.

So, with trading across all segments showing decent momentum, Liberum has raised its 2022/23 pre-tax profit estimate by seven per cent to £8mn, implying 14 per cent year-on-year growth. That forecast is ahead of the pre-pandemic high watermark of £7.7mn (once you adjust for windfall gains that year from scrapping gold stock). On this basis, the shares are rated on a forward PE ratio of 11 and offer a 4.4 per cent prospective dividend yield based on two times dividend cover.

The holding has produced a 45.8 per cent total return since I included the shares in my 2021 Bargain Share Portfolio, during which time the FTSE Aim All-Share Total Return index has shed almost 18 per cent of its value. The share price hit my 220p target price post results, but I wouldn’t bank profits yet as the bullish narrative of management and scale of Liberum’s upgrades support my upgraded target of 250p. Buy.

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