The corny title refers to one of my long standing holdings which has delivered excellent returns for me over the years. As I have written before it is one of those family run businesses which Lord Lee is fond of backing and indeed I think he has been in this one in the past. Any way I digress, but the stock concerned is S & U Plc which is now a £240 million market cap. car loan company which also has a fledgling bridging loan operation. So why mention it today? Well they have their AGM today and have put out a trading update statement ahead of that.
This confirmed continued strong trading despite what the share price might have been suggesting. If that is of interest you can read the announcement and learn more about S&U at their investor relations website. Here you'll also find links to some Proactive Investor Interviews with Anthony Coombs, chairman of S & U. I thought the last one, which you can view here if your want, was interesting as he seemed to be pretty confident about on going growth as they only take a small proportion of all the loans they are offered by their panel.
Cutting to the chase I think the shares look good value down here on around 10x this years forecast earnings with a 5% yield based on both of these growing in double digits, which seem likely given the latest update and the Chairman's confident comments in the interview after the finals in April.
Looking at the chart you are would not getting in at the top if you were to buy in now as the they have come back from over £25 to their current £20 or so. Looking at the chart below I have drawn on the trading range and what is called a triangle formation by connecting the highs in the recent downtrend and it looks like it might break out of this triangle one way or the other fairly soon. The theory is I believe that it should then move by around the height of the triangle which in this case is roughly 500p. So that would suggest targets on a decisive break, of either £15 or £25 which would be around the old highs which could then act as resistance.
My money is obviously on a breakout to the upside and having top sliced some of mine near the £25 high in 2015, I have been buying some back around the £20 levels recently. As ever you pay your money and take your choice. In the meantime I'll continue to enjoy the 5% yield including the 39p final worth 1.95% which is due to go XD on 15th June.
In a busy day for company news we have had final results for Matchtec (MTEC) today, which I flagged up the other day and at first glance they seem up to or slightly ahead of expectations. Group turnover came in slightly ahead of £499.3m forecast at £503m while their adjusted diluted earnings came in at 43.3p v 42p forecast for a modest 3% beat, although I note that the consensus had come down from 42.65p in August after their year end trading update. So it seems that they are not only cautious in their commentary but also manage expectations quite well. On the dividend they also beat expectations by delivering a 12% increase in the final to 16.32p (3.23% yield on that alone and a 10% increase for the full year to 22p versus the 21.4p that was forecast. This was 2.1x covered by earnings and seems to back up their bullish outlook statement with hard cash.
Talking of which, the balance sheet saw debt come in at £33.6m despite the cash portion of the consideration for Networkers of £29.2m and the £8.4m of debt which came with it. This was helped by the strong cash generation of £20.8m on the back of an operating cash conversion rate of 124% up from 115% in the previous year. This debt seems manageable, given the cash generative nature of the business and in the context of the £150m market cap. It also represents 1.9x this years EBITDA which is also within normal ranges that bank covenants look at & I note that they have a £95m facility available in any event suggesting plenty of headroom.
In the statement they suggest that engineering markets remain buoyant and they backed this up by reporting 24% growth in that sector. Meanwhile they say the transformational acquisition of Networkers International, which boosted these figures, is on course to deliver the expected synergies by 2017 as the integration there remains on track. On this they say the Group is realising cost synergies from the combination which they quantify at £1.3m in 2016, although they do say they are reinvesting some of these savings into sales and marketing, regional management and connectivity for some international offices to
improve the business, so not all the savings will drop though to the bottom line. I see that a broker is suggesting that maybe a third to a half of these will be reinvested. There are apparently also early signs of sales synergies coming through with more expected next year.
On the outlook the Chief Executive said "we regard all our international locations to be a huge opportunity to advance our activities in local and regional markets across the world and are planning for substantial growth over the next few years. " He went onto say that as a result he believes they will be able to deliver enhanced shareholder value and improved returns. They also highlight the increased global reach of the group on the back of the acquisition and how this will help them meet the changing needs of their clients. They also suggest that the deal brings them into a new market for providing technicians for the internet of things as they see existing connected car technology spreading into avionics and maritime.
This all sounds quite bullish talk for what is normally a fairly cautious and understated management, so hopefully the seeming promise of the new combined business will match these expectations going forward from here. In a separate announcement today they also named a new non executive chairman with effect from December.
Summary & Conclusion
A good set of numbers from this small (£150m market cap.) and increasingly international recruitment company on the back of a transformational deal which they are bedding in as expected. It seems that earnings may not be upgraded that much yet but may edge up to say 48 p and I suspect dividend forecast will probably edge up to around 24p or so to reflect the 10% growth delivered this year and a 2x cover say. On this basis the share at this mornings 505p are trading on 10.5x with a well covered 4.75% yield.
I reckon this leaves scope for a re-rating if they can deliver on the promise of the combined group that they are highlighting in this statement. I note in the marketing material issued by Equity Development (ED) today (which I attach below) that the sector average yield is 2.9% - so if you used 3% then that could suggest a target price of 800p if it got re-rated to that kind of yield. This would also represent a not impossible 16 to 17x PE.
In the note ED suggest the shares are cheap in both absolute and relative terms and have upgraded their price target to 705p from 680p based on a sum of the parts calculation and an 11x EV/EBITDA rating compared to a sector average of 12.9x. I note that if this multiple moved closer to the sector average then that could also suggest a target price around 800p+.
Thus with a potential for the shares to re-rate up to the 700 to 800p range in the medium term I have been happy to accumulate more shares at these levels. This will not obviously happen over night and may well require some patience as demonstrated so far this year with this one which has been somewhat lacklustre in terms of price performance.
Provided economies and employment markets remain strong then I see no reason whey this one cannot make some progress in the short term from its currently oversold position, at least some way towards matching my price expectations. With this years likely dividend growth of 10% and the 4.75% yield suggesting a minimum expectation of around 550p and a total return of at least 15% in the next year or so in the absence of any change to the rating. This is after all where it was trading as recently as September this year.
Introduction & History
In the recent re-screening of the Compound Income Scores portfolio I mentioned that I was pretty biased against one of the stocks selected, given its share price has gone sideways for years. The stock concerned was RM which for example traded at 177p back in January 2005 which compares with today's price of 165p so very much a flat liner. To be fair though the broader stock market hasn't been much better, although they note they have underperformed the FTSE Small Cap Ex IT index in total return terms in the Directors Long Term Incentives section of the report and accounts. It has also been anything but a smooth ride for shareholders over the last ten years as you can see from the chart below the price has ranged between a high of around 230p and a low of around 60p during that time.
Along the way shareholders also had to suffer a dividend cut over a couple of years starting in 2011 from 7.13p down to 2.61p. From there is has grown back to 4p in 2014 and is forecast to grow quite strongly back to 5.5p in the year to November 2016. So some good growth is forecast and if they achieve that level of dividend next year then it will be on a yield of 3.3%. On the earnings front these are forecast to grow more modestly to 16p which would leave it on just over 10x (or more like 9x if you factor in some of the cash they have) which is quite a cheap rating and would cover the suggested dividend nearly 3x, thereby offering some reassurance on the security and sustainability of said dividend. To be fair it is also worth pointing out that they paid a special dividend of 16p in 2013 presumably after some disposals given they have been restructuring the business. So given the current cash on the balance sheet (see next section) then I guess another special is always possible but I wouldn't bank on it.
Talking of security lets take a quick look at the balance sheet which at the interim stage boasted Net cash of £43.1m and at that time they said that they expected the 2015 year-end cash position was likely to be ahead of current market expectations so presumably that means higher again but lets run with the £43m for now. Against that this one does have a pension deficit of £30 million or £24 million net of deferred tax also at the interim stage. Another triennial review of this is due which may lead to an increase but they do have a remaining £3.3m set aside in an escrow account which can be used to buy insurance and reduce liabilities (see annual report page 8 for details of this). The group has also been quite cash generative with £19.1m cash generated from operations last year for example (Source: Annual Report).
If we treat the current deficit as a debt / liability and net this off against the cash this would leave say £13m net cash which compares to a market cap. of £136m so would give an adjusted enterprise value of £123m or £93m if you ignore the pension fund. Taking their adjusted operating margin of 8.7% at the interim stage and applying this to full year turnover forecasts of around £180 million gives an EBIT of £15.66 million for an earnings yield on the pension adjusted EV of 12.73% which is pretty attractive. Without adjusting for the pension deficit this would be nearer to 17% so presumably the market is discounting this one to a certain extent to allow for the pension fund. However they seem to have addressed this with a recovery plan and planned payments over a number of years plus the remaining escrow account. So maybe I'm being overly cautious on this and it is also notable that other smaller UK companies with big pension funds and deficits deficits have nevertheless attracted bids despite this, with AGA being one notable example recently. Maybe Pearson might like to mop this one up perhaps now they are seemingly tidying up to focus more on Education?
Description of Business
So what is RM today and what are the prospects? Well what it does is probably best summarised with this extract from the Report and accounts as follows:
The RM plc group of businesses creates and maintains an extensive range of innovative solutions and services - all designed or selected to meet the specific needs of educational users.
The RM group comprises the following divisions:
This division comprises two operating businesses:
TTS and SpaceKraft. TTS provides a wide range of
resources for use in schools and other educational
settings. TTS is a leading provider of physical resources
to UK schools, with over 14,000 product lines and an
established leadership position in Primary and Early Years
age groups. SpaceKraft is a leading provider of resources
and immersive environments to meet the specific
requirements of learners with Special Educational Needs.
RM Results Formerly known as Assessment and Data Services,
RM Results supplies government ministries, exam
boards and professional awarding organisations with
technology and expertise to improve efficiency, accuracy
and clarity in the assessment cycle, both in the UK and
internationally. This includes the systems required to
provide the ‘league tables’ for English schools.
RM Results is a business that provides products and
services that include secure, innovative systems for
creating high-stakes exams and tests, on screen testing,
on screen marking and the management and analysis
of educational data.
RM Education Formerly known as Education Technology,
the division provides technology-based software
and services, specifically designed for UK schools
and other educational establishments, across the
Outsourcing, support and implementation services,
including managed services, on site support,
telephone support and consultancy services.
Network software, tools and infrastructure services,
such as the Community Connect network and device
management tools and virtualisation.
Digital Platforms and Content
Access to curriculum resources and school management
solutions, including RM Integris school management
systems, RM Unify ‘launch pad to the cloud’, RM Books
e-book system, RM Easimaths and RM Easiteach.
Internet The provision of broadband and e-safety solutions.
The group has been restructuring over the last few years and has exited from some of its lower margin hardware and other operations. As such it is now much more focussed on software and services to the educational sector primarily in the UK and as a result costs have been cut and margins increased although this has been at the expense of turnover which has fallen by around £200m from £380 million in 2010 to the expected £180 million or so this year. That's fine though as dear old Warren Buffet said "turnover is vanity, profit is sanity."
At the interim stage they suggested that they expect revenue (turnover) growth to resume in 2016 with all three divisions expected to show growth by 2017. They also suggested maintained strong margins in the Results and Resources divisions where they seem to make mid teens operating margins and this represented 54% of turnover at the interims and 70% of adjusted operating profits. They also suggested increased margins from Education as it focusses more on software and services and this made just over 7% operating margin on £36m of turnover so maybe they could double profits from this division if they can achieve the same kind of margins here as in the other divisions. So things seem to be on a recovery track operationally so lets finish up now as I'm sure you are getting bored with this now too.
Summary & Conclusion
Here we have a small (£100m or so enterprise value) company which has had something of a chequered past but which seems to be on an improving track in terms of the quality of its remaining businesses and prospects after a period of restructuring. They have a strong cash rich balance sheet and strong cash flow generation, although this is offset to a certain extent by a pension deficit of around £30m which is sizeable but probably manageable for them as they have a funded deficit reduction plan in place. But it will be worth watching out for the forthcoming triennial review of this.
The group is expected to show modest turnover and earnings growth next year after strong earning growth on declining turnover in prior years. This has allowed them to rebuild dividends with some strong growth after a cut a few years ago but does leave the currently forecast dividend well covered by expected earnings.
This has all left it looking quite good value on just over 10x for 2016, or 9x adjusted for the cash, with a 3.3% yield and a double digits earnings yield although I note on Stockopedia it only scores 66 for value given the other metrics they take into account. On the Compound Income Scores it gets a higher value score of 88 as I only use earnings yield and dividend yield. Looking at it another way the EV/ Sales seems low at around 0.5 - 0.55x compared to the operating margins which seem to be heading towards 10% or more. This could argue for a fairer EV/ Sales of closer to 1x which suggests the shares could double or more in the medium term on this basis.
Furthermore looking at the rating of 10x and 3.3% yield, perhaps if they can continue to deliver improved returns and the market starts to recognise and reward this more fully then maybe it could move onto a more average rating of say 14x. With next years earnings forecast at 16p this would equate to a price target of 224p which wouldn't be far off the highs of recent years which I guess might then act as resistance. I also note when it re-rated back in 2013 it moved up from a 60p to 100p range to a new range between 120p and 180p which it has been stuck in since. If it can break out of this range then this could also suggest a move up into a new range extending up to perhaps 240p.
Aside from that it scores well on most of the other factors I look at although operational quality is a low score of 35 reflecting the historically lower profitability but this seems to be on an improving track now. Despite this the overall CIS is 96 and the Stockopedia QVM Stock Rank comes in at 97 with stronger scores for Quality (97) and momentum (85). Talking of momentum I note that the 12 month price momentum, whilst positive, only ranks at 42 in the CIS universe of stock while the earnings momentum is stronger at 76 after recent upgrades and suggests that the market perhaps shares some of my scepticism on this one - but therein maybe lies the opportunity? Some good institutional investors seem to agree as Schroders have a 21% stake, Aberforth the highly regarded value investors, have just over 16% and Artemis have just over 10%.
So on the fundamental and technical picture I could see a potential upside of between 35 and 45% or lets say 40% taking the average of the two which gives a target of around 230p at which level the earnings yield would still be a reasonable but perhaps fairer 9% or so. While my back of the envelope EV/ Sales calculations suggest that it could even potentially double in price if they can deliver higher turnover with increased margins.
So given that the MCIS Portfolio has been doing well and the Scores have been quite good at identifying some good performers that are not necessarily that palatable and having done this work on this one, I have treated myself to a few too. Please don't follow me blindly and do your own research as this one could obviously still disappoint if they don't deliver the expected improvement in turnover and margins. If it does then I think the chances of a re-rating are quite good, although it seems there is no immediate catalyst for that. If you do decide to buy it you have to accept a fairly wide spread but at least it has come back from its recent highs.
As we have had traffic statistics for September from Easyjet (EZJ). These saw a continuation of growth with passenger numbers up by 7.6% on the month and 6% year on year. The load factor (how full the planes are) was also up by 0.9% on the month and over the year to a decent 93.1% & 91.5% respectively. They also re-confirmed that their full year profit before tax guidance continues to be within a range of £675 million to £700 million for the year to 30 September 2015.
Regular readers may re-call that I suggested boarding this one back in June when it was trading below 1600p and at the time I suggested that 1800p could be a reasonable target for it. This price has now been achieved and this has given a decent 20% or so out performance against a soggy market over the same period.
So trader types might want to think about taking profits up here and go looking for something else which has perhaps suffered more in the recent market declines. While medium term investors might want to stay on board this well managed group as it remains reasonable value on around 12x next years earnings with a 3.5% yield. It also still looks OK if not outstanding on the Compound Income Scores with a 79 score, while Stockopedia's Stock Rank is 87 which interestingly is driven more by quality and momentum rather than value.
It is also worth noting that this one unusually only pays its dividend once a year so the final and only dividend is due to be announced soon and this usually goes xd in February before being paid in March. So if income is important to you then it might be worth staying on board for this years dividend which is expected to yield around 3.3% at the current price of 1809p. In addition there is also a possibility of a special dividend as they paid one of these back in 2014 and they still have large cash balances.
Technically, I also note that the previous 12 month highs were closer to 1900p, so as the stock is not yet over bought and with a possible tail wind from a stronger market if we do get a year end rally then I guess it is possible it could push on up a bit further too over the results and the year end perhaps?
Interim results that is from Maintel (MAI) the small £65m Aim listed telecommunications company which currently Scores 90 on the Compound Income Scores and is in the Mechanical Scores Portfolio. Similar to other smaller telecoms companies like Alternative Networks (AN.) and Adept Telecom (ADT) this one has grown by doing add on acquisitions. This period was no different as they saw the benefits of last years acquisition of a firm called Proximity enhancing their results as expected.
Underlying profits were flat but earnings were up by 8%. However, this includes various cost associated with acquisitions and when they adjust for these their reported adjusted numbers show earnings up by 30% with the dividend being raised by 38% as they bring the pay out ratio up towards 50% of adjusted earnings. This was achieved on Sales up by 20% and with increased gross margins of 38.3%.
The CEO sounded pretty bullish on the back of this when he said: "After another successful period, we have never been better placed; with a broader range of services and skills we have the ability to manage highly technical transformation projects for customers. Our new sales pipeline continues to grow and being appointed as an approved supplier on the new public sector network services framework agreement offers us the opportunity to tender for business not previously available to us".
The shares have been somewhat becalmed as you can see in the chart at the end of this piece, but I guess the news flow could act as a catalyst for a re-rating as they look good value compared to other similar companies like those mentioned above (Stockopedia Subscribers see here for a comparison). If you are not a subscriber to Stockopedia see free trial details.
They currently stand at about 670p +11% today and trade on around 10x with a 4.5 to 5% yield which seems like good value to me given the growth and the bullish outlook. However be aware that it is not terribly liquid stock as it only has about 37% free float and the spread is fairly horrendous at around 6% - 630 - 670p. Finally looking at the chart and technical picture it has been stuck in a 600 - 700p range so resistance and all time highs not far away, although proximity to 12 months high can be bullish for momentum. So if it can break out of that range that might suggest it could move up into the 700 - 800p range - the top of which would still only leave it on a more reasonable looking 13x with a 3.7% yield.