06/10/2006
Despite posting profits slightly below forecasts due to investment in staff, interims from Cologne-based software testing supplier SQS – backed here at 211.5p in February – were loaded with optimism. Hiring and training of new consultants constrained first half profits, yet management expects second half sales to be very strong and full year forecasts should be met.
For the half to June pre-tax profits rose 2.4 per cent to £1.14 million from revenues up 18.5 per cent to C31.5 million (£21.2 million). In July, to cut dependence on its German market leading position, SQS made its first AIM acquisition, picking up profitable London-based testing and quality management group Cresta for up to £18 million in cash and shares, a purchase that makes the group the UK market leader and means it derives 40 per cent of revenues from these two markets.
26 new clients were signed in the first half and management is striving to improve earnings quality and visibility: repeat business accounts for 80 per cent of sales, dependence on larger customers is reducing and more clients are signing longer-term contracts. The group is tentatively entering business consulting so as to be in an advanced position to steer clients towards its testing services.
For the full year, analysts are forecasting earnings ahead almost a third to 19.5p from profits up 78 per cent to £4.4 million. A forward p/e of 10.4 at the current 202.5p offers investors a big discount to the sector and we argue the shares retain strong appeal.
Omega assembles superb growth
Recommended as a strong buy at 159p in June 2005, Omega International is running ahead of its own growth plans and expects to smash full year forecasts. Bullish comments from management followed storming interims to June that sent the shares 30p higher to 277.5p. Highlights ranged from a 54 per cent profits hike to £3.1 million, turnover growth of 20 per cent to £13.5 million, and 50 per cent net asset expansion to 72p-a-share.
The maker of branded kitchen furniture is also throwing off large amounts of cash and was left with a net £4.5 million at half time. Subsequently, along with the 0.7p interim payout, investors are being furnished with a special 8p dividend.
Omega raised operating margins from 18 per cent to 22 per cent during the half despite soaring energy costs. And fears the flat-pack kitchen market might be hit by the World Cup tournament proved unfounded, with a special four-week promotion helping Omega sail through June. 'The promotion excited more than England did,’ remarked chief executive Francis Galvin, 'and helped us maintain volumes through
the month.’
The strategy is to double in size by 2010, which looks achievable, with Omega still having less than three per cent of a £1 billion market and growing its share through superior kitchen ranges and high service levels to its dealers.
For 2006, Evolution analyst Nick Bubb upgraded his profit forecast by 12 per cent to £6.25 million, for earnings of 15.8p a share. 2007 numbers were also ratcheted northwards and investors can now expect £8 million of profit and earnings of 20.2p, placing the 300p shares on forward multiples of 19.0 and 14.9. That looks cheap for a superior growth stock with a more-than-robust balance sheet. We urge you keep buying.
Grass remains green for Rackham
Property Recycling, profiled here at 57p, recycles brownfield sites by acquiring and improving them, then selling them onto developers at a profit. To improve the value of the land, it carries out all manner of decontamination and remediation work and promptly applies for planning permission. It is a complex process that demands close management.
Chairman Paul Rackham reported lower pre-tax profits of £400,000 (£2.3 million) for the half to June, translating into earnings of 0.77p (7.99p), on turnover of £1 million (£3.9 million) derived from rental income and a small sale. At first glance, and without understanding the model, these financials might concern. However, the 2005 figures were boosted by the £3.5 million sale of a site at Saddlebow, contrasting with no significant property sales in this half, underscoring Rackham’s message that results will be affected by timing and special dividends could feature.
Furthermore, major initiatives are underway, with a former MOD site with potential acquired near Norwich, and planning permission recently granted for a 1.2 million square foot distribution centre at the group’s Stanton site, which is under option to Swedish retailing behemoth Ikea.
Trading ahead of our recommendation price at 65.5p, the shares remain a buy with demand for commercial and residential development land high, the Government committed to boosting the proportion of development land sourced from brownfield, and Property Recycling possessing five freehold sites totalling 198.8 hectares. The balance sheet was flush with £6.4 million net cash at the half-year, allowing the group to declare a 0.5p interim dividend, demonstrating its unwavering confidence in prospects.
Gangmaster going gangbusters
We first recommended Staffline, the provider of ‘blue collar’ temp and contract staff to industry, at 122p, and though the price has proved volatile, swinging between highs and lows of 138.5p and 85.5p over the past 52-weeks to settle at 127.5p, growth has proved unwaveringly sturdy and we still think the shares are well worth holding.
Famed for providing a fully outsourced service by managing temporary recruitment for clients at their own premises, Staffline delivered again at the interim stage to June, with pre-tax profits lifted 45 per cent to £1 million on £34.4 million sales. Net debt was pared by 30 per cent to £5.8 million and the half-time payout pushed 43 per cent higher to 1p a share. The resounding numbers prompted upgrades from analysts, who now expect annual pre-tax profits of £3.4 million (£2.5 million), earnings of 10.9p and dividend growth from 1.9p to 2.4p.
Amid the highlights was ongoing growth in ‘OnSites’, the main growth engine, to 63 locations, a net increase of 21 year-on-year, as well as a good performance from the industrial branch network. Prospects are also underpinned by the fact that in May, Staffline became one of the first food production sector labour suppliers to be awarded a licence under the gangmaster Licensing Act 2004. From December, it will become a criminal offence for food companies using temp labour to use an unlicensed gangmaster, the rather catchy term describing recruiters providing these services.
We suggest the compliance push can only throw up opportunities for the group, which is coping well with ever-increasing Home Office scrutiny regarding the checking and verifying of workers supplied to customers from EU accession states. On a forward multiple of 11.7 with a prospective yield of almost two per cent, the shares are not to be sold.
Stay tuned in at Concurrent
Shares in ‘high-end’ embedded computer products play Concurrent Technologies, our Company Profile in May, clipped ahead on well-received interims to June revealing pre-tax profits almost doubled to £940,000 (a 93 per cent leap), on turnover lifted 26 per cent to £5.8 million, in favourable markets. The balance sheet was similarly robust, with the coffers flush with £4.3 million cash and unfettered by borrowings, allowing an improved dividend.
Managing director Glen Fawcett flagged up an order book standing at record levels and commented that the introduction of new products based on the latest dual core processors should help Concurrent attract new business. Investors might recall the company’s products are supplied to the defence, communication, transport and industrial markets, where they are integrated into applications that require superior levels of processing power and reliability. These range from military systems, to communications, and even to scientific research. Concurrent supplies boards that are used in standard operating conditions, as well as ‘ruggedised’ versions for extreme conditions.
Today, the largest markets for its products are communications and defence, together accounting for 82 per cent of sales by value during the half. Fawcett says investors might expect rising sales and profits over the coming years as volumes burgeon and the higher margin extended temperature range makes up a greater element of sales. A more intensive sales assault in the US and China also augurs well.
Given bumper cash reserves, Concurrent might look to buy back some of its own shares, which will enhance earnings for investors. Readers who bought on our advice at 30.25p should hold this stock for growth and yield.
Mavinwood moves for Mono
Support services play Mavinwood launched onto AIM as a shell in 2004 and has built strong positions in the burgeoning emergency services insured repair and document handling sectors through canny acquisitions. Led by chief executive Kevin Mahoney and 58 per cent-owned by Lord Ashcroft, Mavinwood met forecasts for the half to June, posting profits of £700,000 on £16.3 million turnover. Alongside the numbers, the £6 million acquisition of Mono, a domestic repair services provider to insurance companies and housing associations, was announced.
Funded from cash, the deal should enhance earnings in 2007 and will beef up Mavinwoods’ presence at the insured repair end of the emergency services sector, complementing the existing and profitable ANSA arm and the recently acquired Independent Inspections business. This trio of operations serving the insurance sector will, according to Mahoney, look to offer clients 'one call centre, one IT platform and all the various trades, more quickly’.
The interim highlight in document handling was the £11 million February cash acquisition of Wansdyke, which alongside Restore, has turned Mavinwood into a significant player in the document handling market. Restore's margins moved from 23.7 per cent to 27.5 per cent on rising volumes, whilst the higher-margin Wansdyke posted a 31.7 per cent return on sales over five months and could achieve margins of 35 per cent ‘over the next couple of years’. Based on forecast earnings of 1.15p for 2007 the shares, tipped here at 13.75p and now 14.75p, trade on a prospective multiple for that year of 12.8. We urge readers to hold firm.
