11/07/2006
Begbies Traynor bang on track
Begbies Traynor is on course to deliver on the plan set out at float two years ago – to double insolvency work from £20 million and add another 20 per cent of complementary sales taking turnover to £50 million – by the middle
of 2007.
Last year to April was a frenzied one for acquisitions, with up to £15 million spent on six additions which, combined with two subsequent deals, took the annualised sales run-rate to £40 million. Under chairman Ric Traynor, the group has maintained its position as the leading independent national business insolvency and recovery services provider and made a push into corporate finance, forensic accounting investigations and the high-growth consumer debt solutions space.
The year’s financials were strong, with pre-tax profits before goodwill coming in at £7.3 million on a 30 per cent rise in turnover to £33.2 million. Encouragingly the general insolvency market – flat until the turn of the calendar year – has improved with business failures and insolvency appointments on the up and Begbies topping the league in terms of corporate insolvency appointments undertaken. In England, the company is thriving in the lucrative consumer debt solutions market and through its Glasgow office has swiftly become the second placed provider of Protected Trust Deeds in Scotland behind AIM-listed Invocas.
This financial year should see half the number of acquisitions, as the group digests deals done and drives organic development, although any acquisitions it does complete should be bigger in scale. Co-founder Traynor is making noises about the long-term overseas development of the group. For 2007, house broker Shore Capital suggests improved profits of £8.92 million from a top-line of £42 million giving adjusted earnings of 7.8p a share, up from 6.69p.
Originally backed by Growth Company Investor at 55.5p, the shares surged to a high of 204p in May before dropping through the 163.2p stop-loss during the recent sell-off. Readers selling at the stop loss still booked superb gains of 194 per cent and the shares have since re-gained ground to 182.5p. The forward rating of 23.4 and PEG ratio of 1.4 look quite pricey, but Begbies is still worth holding for growth.
DFD delivers record profits
Debt Free Direct, recommended at 44.5p, has delighted with another record year to April. Profits at the company, which advises debt-laden individuals on the best course of action to recover from financial woe, soared 177 per cent to £5.1 million, sending earnings 145 per cent ahead to 9.4p.
According to finance director Paul Latham, frenetic growth was struck on burgeoning market demand for Individual Voluntary Arrangements (IVAs), as well as out-performance by DFD itself, which now commands 20 per cent of the UK IVA market. ‘We managed to reduce our average cost per IVA from £1252 to £807 and we are enjoying better media buying deals as well as improved conversion rates,’ he added.
Followers of the sector have been amazed by growth in the IVA market, which has proved a lucrative space for other quoted players and shows no sign of slowdown. Numis Securities has upgraded its forecasts for DFD yet again, shifting its 2008 profit forecast from £13.7 million to £15.2 million. This year, investors might expect a leap in profits to £9.6 million from £28.2 million sales, placing DFD on a forward multiple of 25, based on a share price of 445p.
Although the shares have had a terrific run from 250p in 2006, there is undoubted growth to come, with Latham warning of an ‘ever-growing number of people with a debt problem’. He thinks there’s ‘between one and two million irreversibly over indebted people in the UK who represent accidents waiting to happen’. We are buyers, even after a great run and a lofty forward multiple, with the 2008 rating more palatable at 16 times. Buy.
Ransom produces profits surge
William Ransom, the UK’s oldest independent pharmaceutical player and erstwhile GCI recommendation at 47p a share, produced a 209 per cent profits surge in a strong year to March. Pre-tax profits powered up from £1.1 million to £3.4 million at the natural healthcare play, on revenues up 64 per cent at £32.5 million, with organic growth running at a respectable 12 per cent.
Under chief executive Tim Dye, Ransom, which had no consumer healthcare business at the turn of the millennium, aims to become the UK’s number one natural consumer healthcare venture in a market growing faster than that of standard over-the-counter healthcare.
Demographics are key, with ‘older people leading more active lives and increasingly self-medicating.’ Smaller players in this fragmented space are facing rising regulatory pressure, a facet that should throw up acquisition opportunities, though there is no pressing need to do deals at the wrong price. Ransom has completed six acquisitions over four years, of which June 2005’s Optima was the biggest to date, delivering £11.2 million of the £24.4 million consumer healthcare sales in just nine months last year and helping increase consumer sales from 61 per cent to 75 per cent of Ransom’s business. Gross margins of 60 per cent are achievable in consumer products, so Ransom still has some work to do to improve on last year’s 42 per cent, admittedly up from 39 per cent.
For the current year, investors might expect profits of £4.6 million and earnings of 3.8p, placing the 48.5p shares – which haven’t performed as well as we had hoped and fell through our 44p stop-loss level in January – on a forward multiple of 12.7. Ransom has yield attractions and the market capitalisation is more than underpinned by £37 million of net assets. Although an erratic share price performer to date, we advise holding your nerve.
ASOS fashions record year
Online fashion retailer ASOS, recommended at 8.13p back in early 2004, fashioned a record performance last year despite its website closing for five weeks over Christmas because of the Buncefield fuel depot explosion.
For the year to March sales sprang up 39 per cent to £18.8 million, adjusted profits before tax by 49 per cent to £1.65 million and diluted earnings by 47 per cent to 2.2p a share. The website doubled cashflow through the year and topped the coffers up to £3.7 million at year-end.
Finance director Jon Kamaluddin contends that the return of customers ‘in droves’ after the five-week closure proves the site’s resilience (it sits second to Next’s online offering). The number of registered users leapt 60 per cent to 960,000, mainly thanks to advertising and the redesign of the website to resemble the celebrity glossy magazines from which its new customers are drawn. Advertising in such stalwarts as Heat, Grazia and Vogue attracts the readership to ASOS.com, where they can buy the fashions of the film stars and footballers’ wives they so love to scrutinize.
Kamaluddin says a buying team augmented with heads hunted from the top high street stores of Top Shop and Miss Selfridge has increased the number of product lines available from 1,500 to 4,000, about which ASOS emails its clientele twice weekly. Margins were down, however, from 44.9 per cent to 43.8 per cent as the product mix moved towards lower-margin products, though Kamaluddin assures this will recover slightly this year.
Rising costs from head office expansion and newly-outsourced warehousing mean City forecasts for this year and next (because of a rising tax charge) are for earnings of 4p a share from pre-tax profits of around £3.7 million in 2006 and £4.2 million in 2007. The lofty prospective price-earnings ratio of 22 times should not put you off a fast-growing stock well worth holding at 89p a share.
Add aerospace star UMECO
Aerospace services and advanced composites play UMECO, flagged up here as one to back at 403p, currently trades 11.2 per cent above our recommendation price at 448p, although the shares have been as high as 585.5p.
Under chief executive Clive Snowdon, the company is thriving with the civil aerospace market firmly in recovery mode and demand for advanced composite materials on
the rise, particularly in the wind energy market.
Last month’s figures for a busy year to March demonstrated strong growth, with revenues soaring 21 per cent to £293.2 million – organic growth was 14 per cent – and pre-tax profits climbing 34 per cent to £18.1 million, some £1 million ahead of forecasts. 2006 was a frantic year for UMECO, with trading remaining robust, a slew of key acquisitions made, a components outsourcing contract with US outfit Goodrich Actuation Systems extended and £48.4 million raised through a well-supported rights issue providing financial firepower for further deals.
UMECO has now delivered high rates of sales and profits growth for the past two years, and its main market, civil aerospace, continues to recover strongly, with orders for new civil aircraft won by Airbus and Boeing reaching record levels in 2005. The year-end order book stood at a bumper £143.8 million, deliverable in the current year, and investors were treated to a nine per cent total dividend increase to 14.5p.
For March 2007, analysts envisage a profits rise to north of £22 million from £344 million sales, giving earnings of 31.4p and a forward p/e of 14.3. If you bought on our advice, it is worth topping up your holding in UMECO, which now attracts a fervent City following. Add.
Latchways looking lofty
Readers following our advice in March, when we urged them to top up holdings in Latchways at 612.5p, will have seen the shares, originally backed by Growth Company Investor at 315p, move higher still to 792.5p, as the market continues to warm to its consistently strong financials, driven largely by ever more stringent legislation in the UK and Europe.
Recent results for the year to March demonstrated sales and profits growth in all parts of the group, which designs, makes and sells ‘fall-arrest’ safety systems that protect ‘at height’ workers. Its systems, which can be fitted or retrofitted, are sold globally through trained installers and protect individuals working on the likes of buildings, telecommunications towers and even aircraft wings.
And a profitable line of work this is, with profits at the pre-tax line sparking up 38 per cent to a record £6.2 million on sales lifted 25 per cent to £28.1 million. Highlights included significant growth in the fall protection products business, where the UK and European markets led the way, as well as a flourish from the HCL service businesses. Also scoring substantial growth was the Wingrip product, bought by Latchways back in 2004. It is enjoying increasing acceptance by aircraft makers and airlines worldwide. Once again, Latchways reported strong cash generation, allowing for a tasty 35 per cent increase in the final dividend to 9.8p, taking the total payout to 13.65p.
We remain bullish on prospects, with another good year shaping up, order books apparently strong and a number of new products set for launch. However, we do not want to push our luck, given the volatility of the market, and urge investors yet
to book some profits to do so now. Reduce.
