Bargain shares: On the earnings upgrade

House broker Shore Capital raised full-year cash profit estimates from $23.5m to $28.4m, up from $19.9m in 2020, on revenue of $138m (£101m). On this basis, expect 2021 pre-tax profit to rise by 70 per cent to $23m and deliver earnings per share (EPS) of 3c. Admittedly, a non-core business disposal boosts the profit number, but on a like-for-like basis analysts still upgraded their cash profit estimate by 16 per cent to $15.4m.

Moreover, they pushed through high single-digit cash profit upgrades for 2022 (to $18.1m) and 2023 (to $25.9m). Strip out net cash of $59.6m (10p a share), and BATM is rated on 18 times 2023 cash profit estimates even though analysts expect “further upgrade opportunities in coming reporting periods.” The upgrade cycle has further to run. It’s not the only one either.

BATM’s massive earnings upgrades

• Cash profit guidance raised by 20 per cent, implying 40 per cent year-on-year growth, leads to major earnings upgrades.
• Strong order book with diagnostic division seeing sustained demand for Covid-19 diagnostic kits.
• Completion of proof of concept trials of BATM’s new Edgility product suite set to deliver second half orders.
• Roll-out of Edgility by Hong Kong based PCCW.

In the first half, BATM’s gross margin surged from 29.7 per cent to 36 per cent, a reflection of a trebling in higher margin diagnostic revenue (from $6m to $17.8m), as the group continues to benefit from strong global demand for its Covid-19 testing kits and instruments. The product suite has been expanded to include a test that uses self-collected saliva samples and a rapid flow test that can deliver results within 8-15 minutes with 95 per cent efficiency.

BATM has also received CE certification ahead of the forthcoming winter flu season for a new molecular PCR diagnostic test that can identify the specific cause (pathogen) of a respiratory illness, enabling the correct treatment or action to be rapidly implemented. It can detect all prominent respiratory viruses as well as the bacteria that cause the serious pulmonary illnesses that are believed to be a secondary infection of Covid-19, such as pneumonia and Legionnaires' disease. It’s likely to be in high demand in the second half, and beyond. BATM is also anticipating “substantial year-on-year growth” from the rest of diagnostics business, too.

BATM’s edge computing and network function virtualisation product suite, Edgility, is gaining momentum, too. That’s because telecom operators and service providers are now deploying their own virtualised software-based networks to leverage the benefits of 5G through Edge computing and are providing differentiated services to their enterprise customers. BATM’s focus on Edge compute (whereby data processing takes place at the network edge, nearer to the end device, to improve response times and save bandwidth) addresses their needs and is fundamental in enabling Internet of Things (IoT) technologies.

Bearing this in mind, chief executive Dr Zvi Marom expects several successful proof-of-concept trials with potential telecom operators and partners to translate into orders in the second half. Partnerships with albis-elcon, the premier brand of UET United Electronic Technology AG (XETRA: UET), a publicly listed German technology group, and Stem Connect, a network provider which services enterprise and telecom customers in France, South Africa and the UK, significantly increase the group’s market presence.

Importantly, Edgility is compatible for use in public cloud environments (Amazon Web Services and Microsoft Azure). In addition, expects revenue to gain traction from BATM’s licensing strategic partnership agreement with Hong-Kong-based PCCW Global, the Asia-based Tier1 group that is present in more than 160 countries and in 3,000 cities in the Americas and EMEA.

The directors point out that Edgility network revenue produces 85 per cent plus gross margin, and is set to become a multi-million dollar revenue business. Growth from Edgility, ongoing demand for BATM’s diagnostic suite and cyber security contracts (two major government contracts wins worth $14.1m during the summer and a planned move to target large corporations in 2022) explain why analysts forecast strong underlying profit growth in the years ahead.

BATM’s share price is up from the 80p level when I suggested buying ahead of the results, taking the total gain to 402 per cent since I included the shares in my 2017 Bargain Shares portfolio. I maintain my 170p sum-of-the-parts valuation (‘Technology winners for the new normal’, 18 January 2021). Strong buy.

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.

Anexo on the upgrade

• Profit guidance raised.
• Analysts raise 2021 and 2022 earnings estimates by 4-5 per cent.
• Bid talks end with 29 per cent shareholder DBAY Advisors.

Liverpool-based Anexo (ANX:134p), a provider of a litigation claims processing focused on the recovery of credit hire and repair costs for impecunious non-fault motorists involved in road traffic accidents, has prompted analysts to upgrade full-year earnings guidance ahead of the company’s interim results on 13 September 2021.

In a pre-close trading update, the directors highlight higher monthly cash collection rates year-on-year within their legal services division, a trend that is set to continue as courts re-open and Anexo’s increased headcount feed through to higher case settlements. Furthermore, the sharp increase in the number of cars on the road since this year’s lockdown ended is helping to drive up vehicle credit hire volumes.

Following mid-single digit earning upgrades, Arden Partners expects full-year pre-tax profit to rise by a third to £21.5m on 11 per cent higher revenue of £97m to deliver EPS of 14.8p and a third higher dividend per share of 2p. For 2022, analysts are pencilling in revenue of £111m, pre-tax profit of £26.1m, EPS of 18p and a dividend of 2.4p. On this basis, the shares are rated on a forward price/earnings (PE) ratio of 7.5 and on a modest 1.3 times book value even though Anexo is representing 15,000 UK claimants to pursue claims against German carmaker VW in relation to the emissions scandal. Panmure Gordon estimate these claimants could generate £16m of operating profit for the £155m market capitalisation company, a sum that’s not embedded in forecasts.

Given the strong earnings momentum, and hidden value in the balance sheet, it’s hardly surprising that Anexo received an indicative 150p-a-share bid approach from 29 per cent shareholder DBAY Advisors. It’s hardly surprising either that talks have ended after an offer was not forthcoming at a level which the board could recommend. Chairman Alan Sellers and Samatha Moss, managing director of Anexo’s legal services subsidiary Bond Turner, control 35 per cent of the shares.

However, the end of bid talks should not detract from what is a cracking earnings recovery story as the UK economy emerges strongly from last year’s recession. It is one that is being boosted by the structural expansion of the UK’s vehicle delivery market (motor cycle couriers are a key market for Anexo), and some rivals exiting the market. I continue to see upside to my 200p fair value target, having included the shares, at 136.9p, in my 2021 Bargain Shares portfolio. Buy.

Source: London Stock Exchange.

Riding off Sigmaroc’s earnings upgrade cycle

• €470m earnings enhancing acquisition of privately-owned Nordkalk funded by £261m share placing and new £305m debt facility.
• 2021 EPS upgraded by 15 per cent to 5.7p, implying 26 per cent year-on-year growth, and by 15 per cent to 6.4p in 2022.
• First half underlying pre-tax profit surges 63 per cent to £8.7m to deliver 35 per cent higher EPS of 2.7p.

SigmaRoc (SRC:104p), a group pursuing a buy-and-build strategy in the heavy building materials sector, was a £117m market capitalisation well under the radar of investors when I first made the case to buy the shares, at 46p (Alpha Report: ‘A general election winner’, 12 December 2019).

I was attracted by the group’s highly regarded management team, and their strategy to buy, improve and integrate platforms of companies in the heavy building materials sector, focusing on cash-generative assets in niche markets that produce aggregates, concrete, and other related assets.

Acquisition targets are asset-backed and control strong market shares in mainly regional markets, thus offering protection from the strong customer relationships they have while providing scope to add value by improving operational efficiencies. The benefit of this approach is that SigmaRoc can take advantage of acquisition opportunities at modest earnings multiples resulting from multi-nationals scaling back their operations to pay down borrowings as well as smaller privately-owned players crystallising the value of their assets where succession issues come into play. Businesses bought from major players can offer potential to revitalise sales that may have flagged due to a lack of focus, while value can be added to smaller acquisitions by strengthening sales teams, and improving the cost effectiveness of finance and administration activities.

The fact that the share price has risen 126 per cent since I initiated coverage is testament to the success of SigmaRoc’s management in executing their game plan. It also highlights an ongoing earnings upgrade cycle that is attracting new investors. It has some way to run.

That’s because earlier this month SigmaRoc announced its largest acquisition to date, the €470m (£402m) purchase of limestone and lime products company Nordkalk from privately-owned Rettig Group. Nearly 95 per cent of Nordkalk’s annual revenue comes from Poland, Finland and Sweden, thus diversifying SigmaRoc’s southern European revenue base while offering scope to expand Nordkalk’s geographic footprint through bolt-on acquisitions. There is also potential to develop its downstream construction activities around a network of 23 quarries (four dormant) that currently extract 13m tonnes of limestone each year from a reserve base of 262m tonnes.

Nordkalk is a highly profitable business, generating a cash profit margin of 24.2 per cent on revenue of €276m (£235m) in 2020. SigmaRoc is paying 7.2 times cash profit for the business, in line with the average of the 11 other acquisitions made since IPO in 2017. It’s worth noting that Peel Hunt had no problem raising £261m in a placing mainly to fund €270m (£231m) of the consideration, nor did SigmaRoc struggle to arrange a new £305m debt facility (2.35 to 2.6 per cent over SONIA), half of which will settle €150m of the purchase price with the vendors also taking £43m in SigmaRoc’s shares.

SigmaRoc’s forecast operating free cash flow of £71.1m, up from £39m estimated by Peel Hunt in 2021, helps explain why both debt and equity investors have been eager to back its management. These predictions are based on the group making a cash profit of £90m on revenue of £435m in 2022, a sensible prediction. On this basis, SigmaRoc is being valued on 8.5 times 2022 cash profit to enterprise valuation, a small discount to peers. A premium is more than warranted and I raise my target price to 120p. 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].

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