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Brandon delivers 107 per cent again

It hasn’t all been plain sailing with main-board quoted tool hire play Brandon Hire, which we backed at 102.5p in early 2004. The price initially raced ahead in the wake of our recommendation, before hitting several bouts of turbulence.

However, we have remained consistently upbeat about long-term prospects for the group, which made £5 million off a top-line £57 million last year. Investors who kept the faith are about to be rewarded with gains of 107 per cent as Brandon is taken over by blue chip heating and plumbing group Wolseley.

The shares leapt 15 per cent, or 27.5p, to 211.5p on news of the recommended 212p-a-share cash offer, which values the group at £71.9 million. It looks excellent value for shareholders, representing a 15.2 per cent premium to the 184p share price before the news hit the market. Encouragingly, the bid is also priced at a near-40 per cent premium to the 153p share price in late December, before Brandon Hire flagged up management talks regarding a possible buy-out. Investors will also be entitled to receive and retain the final dividend of 2.9p for calendar 2005, payable in May. Accept the offer.

Accuma on course

Numbers continue to add up at Accuma, the Manchester-based consumer finance operator backed here at 181.5p, and currently trading at a healthy 50 per cent premium
at 271.5p.

Chief executive and 28-per-cent shareholder Charles Howson recently unveiled superb half-time figures to the end of January, with Accuma moving into the black on a dramatic 310 per cent leap in turnover to £4.1 million. Losses of £40,000 were converted to pre-tax profits of £304,000 – ahead of forecasts.

Howson argues the market for individual voluntary arrangements (IVAs), which doubled last year and of which Accuma holds 12 per cent, will likely double again this year. Levels of unsecured debt are set to swell to over £200 billion in 2006 amid the current ‘buy now, pay later’ culture. Accuma should continue to thrive on the strength of the ties it has with credit agencies, which are a key source of new case referrals and allow the group to reduce its spend on pricey advertising campaigns.

Last year’s £3.3 million acquisition Wilson Phillips, a profitable and cash-generative venture boasting good referral relationships, has been integrated well, offering up great synergies. Accuma closed the half with £1.3 million cash on the balance sheet, a figure since swelled to £5.8 million following a £4.7 million February placing priced at 200p.

For the year to July, analysts have pencilled-in a move from losses of £473,000 to pre-tax profits of over £2 million, giving earnings of 7.52p and a pricey forward p/e of 36 times. Nevertheless, this rating is more than justified by anticipated growth rates in a buoyant market. Keep holding.

Kitchen counter Omega cleaning up

Omega International, recommended as a strong buy at 159p last summer, enjoyed a strong 2005 and business this year is proving similarly sprightly.

For calendar 2005, pre-tax profits sparked up 21 per cent to £4.7 million, meaning Omega has now delivered compound annual profits growth of 50 per cent over the last four years. This from sales up a less than spectacular nine per cent to £23.2 million, as the operational gearing of the business shone through. Strong cash generation enabled the company to move from net debt of £1.8 million to a net cash position of £2.3 million.

For those unaware, Omega designs, makes and markets three brands of kitchen furniture – Sheraton, Omega and Chippendale – and its success is based on a robust route to market, selling through a network of handpicked specialist dealers rather than direct to customers. Omega continues to grow its market share by increasing its dealer network on the back of superior kitchen ranges and service, and still only has a meagre two per cent of the market, meaning there is plenty of profitable growth to chase. Its industry-leading operating margins of 20 per cent could tick higher in coming years.

Omega is looking to double the size of the business over the next five years and will spend £4 million this year (to be funded from cashflow) to increase the size of its Doncaster factory. For 2006, Evolution Securities forecasts profits rising to £5.6 million, giving earnings of 14.1p and a forward multiple of 14.2 at the current 200p. By 2007, profits could hit £7 million. We remain fervent fans.

Rackham bullish about brownfield bonanza

Paul Rackham, the man who delivered substantial shareholder value at Waste Recycling, brought Property Recycling to AIM last June. After tracking the group’s progress, we recommended investors buy the then 57p shares in November 2005.
Property Recycling is looking to create value for investors by ‘recycling’ (cleaning and clearing) brownfield sites and then improving their intrinsic worth by attaining planning permission for development.

Once value has been maximised, sites are marketed to commercial and residential property developers.

The market is being driven by demand for development land, as well as pressures on greenfield sites, to which brownfield offers an attractive commercial – and political – alternative.

Rackham admits the timing of realisations will prove erratic, but to cover operating costs Property Recycling generates rentals on its sites. Recent maiden annual results to December were encouraging, with pre-tax profits coming in at £2.4 million (equating to profits per share of 5.7p) with the profit and loss account boosted by the sale of a site at Saddlebow for £3.5 million.

This sale allowed Property Recycling to declare a 1p dividend, though the timing of future returns will depend on realisations made throughout the year, with dividend timing balanced by the need to ‘broaden the base’ by investing cash in new sites and corporate acquisitions.

Lucrative returns look assured and special dividends could feature. We remain fans of this terrific capital appreciation situation, which now trades at a healthy 72p.

Careforce still worth nurturing

Deal-hungry domiciliary care specialist Careforce, tipped here at 149p, reported impressive interim figures to January. Losses of £612,000 turned round to pre-tax profits of £203,000, on revenues up 70 per cent to £14 million (£8.2 million), and the shares regained ground to 151p. Driven by chief executive Mike Rogers, Careforce closed the half with a strong balance sheet – net assets moved from £6.4 million to £7.1 million, of which £1 million was cash.

Careforce provides home-care to the elderly and to people with physical or learning disabilities and Rogers attributed the group’s growth to renewals of major ‘block’ contracts as well as acquisitions. Though he was disappointed that the pace of acquisitions slowed in the first half, Rogers says investors can expect further deals ‘before too long’. For the year, City analysts predict earnings of 10p, implying a prospective multiple of 15. We still think the shares are worth nurturing on a long-term view, with the ageing population underpinning prospects. Buy.

EG sets growth examples

Fast growing EG Solutions’ stellar run continues. Backed on these pages at 110p last year, the shares continue to trade healthily above our recommendation price at 161.5p and annual numbers gave investors plenty to cheer.

Despite investment in staff and product, the company, which helps financial services firms improve efficiency and cut costs, scored adjusted pre-tax profits of £1.2 million on a 43 per cent rise in turnover to £5.9 million, allowing chief executive Elizabeth Gooch to declare a maiden dividend of 1.1p.

Gooch lauded an exceptional performance that was ahead of analysts’ forecasts. As well as the impressive top-line growth, operating margins were maintained at the 20 per cent level achieved over the last three years and blue chips continue to populate the client roster.

New work has been won with Portman Building Society, Co-operative Financial Services, Nationwide Life and two subsidiaries of a mystery US investment bank. One of the year’s key developments was ‘an implementation’ in the retail business of The Co-operative Group, work that is actually outside the group’s traditional financial services market. Gooch continues to scout for further work in core markets, as well as business in new UK sectors and overseas, where first sales should be scored later this year. ‘The sky is the limit as to how big a business we could be,’ enthuses Gooch, who plans to build eg into a £100 million company.

Following the numbers, broker Brewin Dolphin upgraded its 2007 forecasts. Investors can expect pre-tax profits of £1.7 million from £7.5 million sales, giving earnings of 9.4p and a forward rating of 17.2. With cash on the balance sheet and earnings set to grow more than 30 per cent this year, that isn’t too high a price to
pay. Buy.

Asset foundations underpin Michelmersh

Michelmersh Brick, vaunted as a long-term play here at 107.5p, produced solid figures for the 13 months to December despite unprecedented gas price hikes in the last throes of 2005.

The UK’s largest producer of handmade specification bricks focuses on the niche, rather than volume, end of the market, a fact which helped it score a decent 15 per cent rise in turnover to £21.1 million in an overall market that went backwards last year.

Pre-tax profits fell from £1.3 million to £518,000. However, this dip reflected the one-off hit of £535,000 arising from a change in its accounting period. The thirteen-month period to which the figures related included two traditionally lower-sales December months. Profits before interest charges edged up from £1.8 million to £1.9 million thanks to efficiency gains arising from the completion of a five-year, £15 million, investment programme.

Michelmersh enjoyed rising demand for its hand made bricks, paviors and tiles, supplying projects such as the St Pancras Station reconstruction and a new extension to the British Library.

Aside from resilient progress with the brick business, Michelmersh continues to boast asset attractions, with net assets spiking up from £31.3 million to £44.8 million thanks to the maiden balance sheet inclusion of the first slug of land earmarked for residential development in Telford. Michelmersh has a partnership with Persimmon, which is progressing detailed planning for the first phase of land, and will develop a master plan with planning authorities for the rest. This could bring plenty of cash into the company coffers.

While gas prices remain a worry at this capital-intensive business, the true value of the group’s land assets has yet to fully emerge. We still think the shares are worth snapping up. Buy.

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