Good morning! Apologies for yesterday's report being extremely late, but I caught up in the evening and wrote a review of results from Vislink and Pilat Media. Click here to see that report.
I'm encouraged by the sound results from Vislink (LON:VLK), and more importantly the significant rise in their order book. Also, the small acquisition announced yesterday seems inspired, in bolting on a decent slug of additional profit, at very little cost. I'm not sure how they secured such a favourable deal, but it certainly seems as if patience has paid off. Management have proved good to their word of not doing acquisitions for the sake of doing deals, but waiting until the right deal can be done.
Broker forecasts for Vislink seem too low to me. N+1 indicate 2.7p adj. EPS for 2013, and 3.6p for 2014. Edison have raised their estimates to 3.0p for 2013 and 4.2p for 2014. Given that Vislink shares have so far risen to 42.5p, that still only puts them on a 10 times PER multiple for 2014, which leaves a decent amount of upside potential in the share price. I'm struggling to see why the PER should be under 15, especially given the still strong net cash position, which would justify a share price of c.63p, therefore I am happy to continue holding in the expectation of further share price rises.
The FTSE 100 Futures look fairly stable today, with an open slightly down (7 points) at 6,482.
Turning to today's results, there isn't a great deal going on in the small caps area. Interim results from equipment hire company, Lavendon (LON:LVD) don't look terribly exciting. Turnover for the six months to 30 Jun 2013 was slightly down at £113.6m, underlying operating profit up £0.5m to £13.9m, and due to a fall in their net finance expense, profit before tax rose from £8.6m last H1, to £11.1m this H1.
This go tme thinking, it's all very well churning out good profits when interest rates are very low, but equipment hire companies will all face much higher interest cost when interest rates rise. Perhaps that will be offset by increased demand in a recovering economy, but it's worth bearing in mind.
Forecast of 13.6p EPS this year look likely to be achieved or slightly exceeded, so at 170p the PER looks about right at 12.5, given that there is also a fair bit of debt.
There's more evidence today that pension deficits are reducing, with Smiths News (LON:NWS) reporting that they have agreed their triennial actuarial valuationfor their primary defined benefit pension scheme. This has reduced the deficit significantly, from £50.0m last time (in Mar 2009) to £23.0m this time, in Jun 2013. Overpayments have correspondingly been reduced from £5.8m p.a. to £4.1m p.a. through to Mar 2019.
Therefore in my opinion, investors are likely to be viewing pension deficits as less of an issue going forwards, as the trend now appears favourable, with deficits shrinking mainly because bond yields are rising, which has a knock-on effect in reducing the present value of pension scheme liabilities.
Regulars will know that I've written positively about Sweett (LON:CSG) a number of times, but wasn't sure about buying any. That changed this morning, as I've added it to Paul's Value Picks today at 42p. This is a selection of my favourite stock ideas for readers to do further research of your own, and is really performing well, as you can see from the above link.
The catalyst was this remarkable trading update today. Bear in mind that even after today's 13% rise, to 42.5p per share, with 67.7m in issue, the market cap is currently £28.8m.
Yet in today's statement they say (my edited highlights & my bolding):
Following the trading update released on 22nd July, I am particularly pleased to inform shareholders that your Company continues to perform strongly and that the Board anticipates that the Group's results for the year ending 31st March 2014 will exceed management expectations ...
... Furthermore, we are confident that the outlook for Sweett is very positive...
... The current order book is £102.5m (August 2012: £90.2m). Net debt at the end of July 2013 stood at £6.3m with an expectation of further reduction being achieved by 31st March 2014 ...
However, it is this bit that really convinced me to hit the buy button today:
It is my belief that within the next two years Sweett Group can grow to a £100m turnover business with margins recovering to 7-8%.
So that all sounds tremendously positive, and a £100m turnover business, generating profit of £7-8m would surely justify a PSR of say 0.5-0.75, so we're looking at potentially a £50-75m market cap within 2 years, if those targets are achieved.
Therefore the upside potential is that these shares could perhaps double or triple from the current market cap of £28.8m. That looks pretty exciting to me, and is sufficiently good upside potential that I've been able to suppress my reluctance to pay up for a share that has already more then doubled recently, since the fundamentals justify the increase, and there appears to be enough upside still on the table for me to want to get involved.
The group is an international property and infrastructure consultant, their website is here.
I'll need to do some more detailed research to decide whether to go in deeper with this one, but as an initial idea it looks good to me. What do readers think? I welcome feedback on this one, as always.
That's pretty much it for today, and indeed this week. It's been an absolutely stellar week for my portfolio, with major rises in Zanaga Iron Ore Co (LON:ZIOC), Clean Air Power (LON:CAP), and Vislink (LON:VLK). It's always difficult to know when to sell, so personally I just stick to fundamentals, and try to assess if there is still a favourable balance of risk/reward at the current price. In all three cases, my estimation is that the position is still favourable, so I've not even begun to top slice any of those three. This is because, in my opinion (and it's only ever just one person's opinion, so sometimes I'll be right, and sometimes wrong) they have all risen for good sound reasons.
Wishing you all a pleasant weekend.
(of the companies mentioned today, Paul has long positions in ZIOC, CAP, VLK, and CSG.
A small caps Fund to which Paul provides research services, has long positions in ZIOC and VLK).