4 imprint (FOUR) NEW ISSUE
WHI SPY
OCTOBER 2012 ISSUE 6
YOUR MONTHLY GUIDE TO THE BEST EQUITY IDEAS FROM THE WH IRELAND RESEARCH TEAM
NEW ISSUE
4 imprint (FOUR)
W
#
An imprint 4 growth FTSE Small Cap – Share price: 334p Market Cap: £88m. www.4imprint.co.uk
D
espite rapid growth since 4imprint turned its focus to the direct marketing of promotional goods to North American businesses, which the Group is still just scratching the surface in terms of market potential. It is the number one direct marketer in this territory and yet has little more than 1% share of the promotional goods market. In the five years to 2011, the group has doubled dollar sales to $224.5m (88% of Group revenue) and intends to do the same again by 2016. The $22bn market remains incredibly fragmented. In the US alone there are circa 22,000 distributors, yet close to 21,000 have Estimates (Dec) 2012 (A)
2013 (E)
2014 (E)
Sales (£m) 180.3 200.3 224.3 PBT (Adj)**(£m) 9.8 11.4 13.0 FD EPS (Adj)** (p) 22.7 26.2 30.0 P/E (x) 14.7 12.7 11.1 EV/EBITDA (x) 8.1 7.1 6.2 DPS (p) 15.3 16.1 16.9 Dividend Yield (%) 4.6 4.8 5.1 Source: WH Ireland Estimates. # 4Imprint is a researched stock by WH Ireland’s Institutional Research team. Analyst: Derren Nathan
annual sales of less than $2.5m. 4imprint’s unique business model sets it apart from the competition. The recent sale of Brand Addition for net cash proceeds of £18.6m (plus £1.25m deferred) has substantially de-risked the balance sheet. After £11.4m has been set aside in an escrow account to reduce risk in relation to the £27m pension deficit, we are forecasting year end net cash balances of £8.2m.
WHAT WE LIKE 4imprint continues to organically consolidate its leadership of the market, targeting 700 monthly product additions, and continuing to leverage its marketing activities, increasingly so online. The balance sheet is strong, and we see 4imprint maintaining its sector beating dividend yield and earnings growth record. Our 375p target price assumes only a modest re-rating which may have further to run should further steps to reduce the burden of the legacy defined benefit pension scheme be introduced. We believe the Group is on track to meet our forecasts. Should favourable economic tailwinds begin to blow in North America, there is significant potential upside to our estimates.
e are delighted to announce that WH Ireland are acting as intermediaries for the forthcoming flotation of insurance giant Direct Line. Owned by Royal Bank of Scotland (RBS), Direct Line is the UK’s leading personal motor and home insurer, with over 4m in-force policies in each of these product categories. It also owns the well established insurance brands: Churchill, Privilege, and NIG – which are aimed at small to medium sized enterprises. Vehicle breakdown specialist Green Flag is the third largest vehicle breakdown operation in the UK and is another business owned by Direct Line. Back in 2008, RBS was ordered to sell the business by European Union regulators as a condition of receiving state aid. The price range has been set at 160p to 195p a share – valuing Direct Line at £2.66bn at the mid-price. Expectations suggest a 6-7% dividend yield. There is a minimum £1000 investment, and the stock can go in a SIPP or an ISA. With a closing date of 9 October, and dealings due to start a week later, the timetable is tight. For further information on how to apply for the shares speak to your usual WHIreland contact. Miles Nolan Editor
For further information about, or before acting on any of the companies mentioned in this newsletter, please speak to your usual WH Ireland contact. Email your name and WHI client number to [email protected] to receive future issues. This report is classified as a marketing communication. WH Ireland Limited, 11 St. James’s Square, Manchester M2 6WH Tel: 0161 832 2174 London office: 020 7220 1666 WH Ireland is authorised and regulated by The Financial Services Authority and is a member of The London Stock Exchange. Important disclosures and certifications regarding companies that are the subject of this report can be found within the disclosures page at the end of this document.
Healthy growth and dividend yield FTSE AIM – Share price: 168p Market Cap: £86m www.caretech-uk.com
CareTech (CTH)*
C
areTech is a leading provider of specialist social services across the UK and has a strong track record, delivering a 35% EPS annual growth rate since coming to market in 2005. Wider sector concerns, pricing pressures and high gearing have led to a de-rating of the shares but these have been overplayed. The business has strong freehold asset backing and looks set to grow earnings by 15% over the next two years from organic initiatives, whilst at the same time reducing debt.
WHAT WE LIKE Organic growth will be driven through the addition of further beds at existing sites, moving the blended occupancy rate of 87%
above average 4.3% dividend yield. Given the freehold asset backing, a comparison in valuation metrics to the quoted healthcare property funds further demonstrates the inherent value.
to a mature rate of 92%, as well as adding new homes in adjacent regions to those in which CareTech already operates. The Group’s recently revised banking facilities of £149.4m are not due to expire until 2017. The shares trade on an FY 2013E PER of 6.1x and EV/EBITDA of 7.2x, supported by an
First half results reflect strengths FTSE AIM – Share price: 142p Market Cap: £233m www.lavendongroup.com
Lavendon (LVD)
L
avendon is a leading – and unusually focused European rental company, which is the market leader in the aerial platforms market in the UK, Middle East and on the Continent. With funds raised in 2009, the balance sheet is clean; and in the past eighteen months the business has (1) developed a new franchise in specialist safety equipment (ancillary to platforms), which is helping it to grow market
Estimates (Sep) 2011 (A) 2012 (E) 2013 (E) Revenue (£m) 109.2 115.3 123.8 EBITDA 23.2 25.0 26.7 PBT 15.9 16.7 17.8 EPS (p) 25.4 26.2 27.4 PER (x) 6.6 6.4 6.1 EV/EBITDA (x) 9.1 7.9 7.2 DIV (p) 6.0 6.6 7.3 Yield (%) 3.6 3.9 4.3 *WH Ireland acts as joint broker to Caretech. Analyst: John Cummins
share in the UK, (2) seen a significant recovery in the Middle East (approximately one third of the business) and (3) worked proactively to improve its cost-base further and maximise ROCE. The recent H1 results showed that the recovery in the business is well entrenched, with underlying EPS +56% (on sales +8%), pricing improvements in the UK and further reductions in net debt.
elsewhere (and a return to 30%-plus operating margins are anticipated in the near future). The “BlueSky” acquisition has created an impressive extra level of intellectual property which is increasingly rolling out in the UK business. Trading at a significant discount to its competitors, we see further upside. Estimates (May) 2011 (A)
WHAT WE LIKE The first stage of the recovery in the business is now well established – but there are substantial further gains to go for over the next eighteen months. The Middle East business is now developing very strongly with underlying structural growth based on expanding investment in Saudi Arabia and
S 2
2013 (E)
Revenues (£m) 225.4 235.5 242.5 PBT (£m) 21.9 26.5 29.1 EPS (p) 10.0 12.1 13.4 P/E (x) 14.2 11.7 10.9 EV/EBITDA 4.4 4.1 4.0 DIV (p) 1.75 2.20 2.50 Yield (%) 1.2 1.5 1.7 Source: Consensus forecasts. Analyst: Nick Spoliar
UPDATE: Anpario hares in natural feeds additives specialist Anpario have not disappointed since our recommendation in July. Recent interim results to June confirmed ongoing progress with sales up 16% to £10.8m, and adjusted EBITDA ahead by 25% £1.35m – driven by increased margins. Earlier this year Anpario acquired rival Meriden, which chipped in a three month
2012 (E)
110p contribution and has helped further salmonella) tightens within the industry. its reach into China. By selling The second half has started briskly into over 60 countries, Anpario and in line with budget. Full-year has managed to partly mask the expectations point to adjusted pre-tax 3 month profits of £2.7m and EPS of 10.6p. disruption in the European and return Consensus share price target of 140p Middle Eastern regions. In the UK market there are a number of seems fair. growth opportunities to boost sales, as disease legislation (particularly surrounding Analyst: Miles Nolan
s +24%
WWW.WH-IRELAND.CO.UK
u
SELL RIO BUY BLT
RIO TINTO (RIO) BHP BILLITON (BLT)
T
he mining sector has enjoyed a revival in recent weeks on the announcement of QE3. However, it is unclear how long the rally will persist and when volatility may return. A number of capex projects have already been curtailed due to the uncertain outlook. It is therefore sensible to focus investment on the most reliable operators within the sector. Rio Tinto shares have recovered handsomely from the August lows. However, our main concern is that earnings are dominated by iron ore which represents close to 80% of EBIT. Despite the recent rally, iron ore is 30% off its peak in April as the market remains oversupplied. Further afield, Fortescue Metals, the world’s fourth largest iron ore
SWITCH IDEA – Sell Rio – Buy BHP Billiton FTSE 100 – Share price: 1952p Market Cap: £111.3bn www.riotinto.com www.bhpbilliton.com
producer, based in Australia, has seen its share price collapse as it has needed to refinance urgently due to weakness in the market. On 8.4x 2012 earnings, the valuation of Rio Tinto does not fully reflect the risks involved and we recommend investors SELL. For reinvestment, BHP Billiton is a sounder proposition. The group offers arguably the best diversification of any mining company with broad exposure to oil, coal and copper in addition to iron ore. This diversification reduces earnings volatility over time and has helped the group deliver consistent growth over the long term. With more reliable and predictable cash flows, it is worth paying a premium for quality and the shares remain a BUY for capital growth and dividend income.
T
improvement in the sensor and manufacturing service businesses.
WHAT WE LIKE Demand for luxury cars has been strong in Asia with the increase in the middle classes; TT Electronics is aligned to this with major
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WWW.WH-IRELAND.CO.UK
2013 (E)
2014 (E)
Revenue ($m) 72,226 73,277 78,930 PBT ($m) 23,022 25,533 28,154 EPS (cents) 289.6 308.7 351.6 P/E 11.0 10.6 9.0 DPS (cents) 112 125.1 126.1 Yield (%) 3.5 3.9 4.0 Source: Consensus Forecasts. Analyst: John Goodall
exposure to high end German automobile manufacturers. Underpinning the auto market there is an organic growth trend. As car manufacturers improve environmental and safety features, the number of electronic components will increase per car, making this an attractive market for TT Electronics.
2011 (A) 2012 (E) 2013 (E) Revenues (£m) 591.3 566.1 588.2 PBT (£m) 31.8 32.3 39.0 EPS (p) 15.8 14.5 17.6 P/E (x) 9.3 10.1 8.3 DPS (p) 4.4 5.2 6.1 Yield (%) 3.0 3.5 4.1 Source: Consensus Forecasts. Analyst: Luke Tribe
UPDATE: GULF KEYSTONE (GKP) ulf Keystone has enjoyed a strong share price performance since we wrote last month. The resolution of oil payments from Iraq to the Kurdistan Regional government combined with a strong interim results statement have helped to lift the stock above 250p. The interim results confirmed that the company is on track to achieve 150,000bpd by
2012 (A)
Driving profitable growth FTSE Small Cap – Share price: 148p Market Cap: £237m www.ttelectronics.com
TT Electronics (TTG) T Electronics is an electrical components business for the automotive and medical industry in the US, Asia and Europe, it also has a power supply business that operates in South America. The company has completed a restructuring phase and stands to gain from further margin improvements. Operational performance will come from the investment and relocation to emerging markets such as Mexico, China, Romania and India. As well as lowering the firm’s cost base, the second half will yield higher agreed contract prices and the exit from lower margin agreements. The balance sheet remains healthy following the sale of non-essential businesses and the prospect for acquisitions is positive; with room for
Estimates (Jun)
u
234p
2015, has an array of funding London this could mark a watershed in options in front of it to fund this terms of being able to move to the main development, including the 20% market from AIM, and also increases sale of Akri Bijeel, debt options, the probability of being taken out. Our 1 month target and early production from price of 315p implies a healthy return 26% upside Shaikan set to reach 40,000bpd from here. by 1H’13. With a hearing on the outstanding Excalibur Ventures litigation set u WH Ireland provides paid for research for 8 October in the Commercial Court in services to Gulf Keystone. Analyst: Angus McPhail
s +14%
3
Huge global expansion opportunity FTSE Small Cap – Share price: 200p Market Cap: £163m www.cupid.co.uk
CUPID (CUP)
F
uelled by strong organic growth and a raft of acquisitions, Cupid has established itself as one of the top five global online dating companies. The shares joined AIM just over two years ago at 60p – but even at current levels the journey is far from over. Cupid operates a network of sites which generate revenues from subscriptions rather than advertising. It now boasts 54m members across 58 countries, and recently stepped up its game with the acquisition of the niche site Uniform Dating for up to £7m. The strategy is to offer a network of online dating sites rather than a single core brand, It has also enjoyed a good City following, as
plans to take a 15% share in each of its target markets within five years. The beauty of the model is its subscription nature. Though rumours have surrounded a bid from US giant Match, on little more than 10 times 2013 earnings the shares are attractive.
evidenced by a recently well-subscribed £3.6m placing. Ongoing market growth is being driven by online dating now being socially acceptable.
WHAT WE LIKE The online dating market in the US and Europe alone is estimated to be worth £2bn. Cupid
Unlocking Taranaki’s Secrets FTSE AIM – Share price: 8p Market Cap: £42m www.keapetroleum.com
KEA PETROLEUM (KEA)*
N
ew Zealand is a relatively under explored frontier province, with the Taranaki Basin (North Island) offering the majority of existing exploration prospects. Kea Petroleum’s prospects are all conventional plays as opposed to unconventional higher
Estimates (Dec) 2011 (A) 2012 (E) 2013 (E) Revenues (£m) 53.6 78.4 96.8 PBT (£m) 7.0 16.1 21.4 EPS (p) 7.1 14.9 19.4 P/E (x) 28.2 13.4 10.3 DIV (p) 2.25 2.74 3.16 Yield (%) 1.1 1.4 1.6 Source: Consensus forecasts. Analyst: Miles Nolan
cost and more technically challenging shale plays, with a mixture of oil and gas targets. The current share price is underpinned by the valuation of Puka 1 & 2, however we see additional upside through further wells all of which may be drilled in 2012/13.
WHAT WE LIKE Kea has currently one producing well (Puka-1) with a second producing well (Puka-2) due online at the end of this year with production set to increase from 500bpd to 2,000bpd at the end of this year through the drilling of 6-10 wells. Kea has 9 prospects across four licences, the largest prospect lies offshore in Mauka.
Strong newsflow in terms of drilling, farm outs, and production ramping up will all help to increase the current valuation. Our conservative valuation target price of 21.6p/share implies the stock is worth double from here. Estimates (May) 2011 (A) 2012 (E) 2013 (E) Revenues – 4,813 12,828 EBIT 4,412 122 9,528 EPS (p) 1 0 2 Production (bpd) 68 418 508 Cash at end of period 12,547 7,436 19,443 Source: WH Ireland Estimates *WH Ireland acts as Joint Broker to Kea. Research Team Analyst: Angus McPhail
Editorial Team Miles Nolan - Editor Formerly editor of Growth Company Investor, Miles has worked on the buy-side and spent seven years at the Investors Chronicle. [email protected]
John Goodall Having joined in 2007, John heads Private Client Research. He is a CFA Charterholder and is married with one son. [email protected]
Luke Tribe Luke joined WH Ireland in 2010. He holds a degree in financial economics and is studying for the CFA designation. [email protected]
Disclaimer This research contains recommendations of both a general and specific nature. This research does not constitute advice or a personal recommendation or take into account the particular investment objectives, financial situations or needs of individual clients. Clients are advised to contact their investment advisor as to the suitability of each recommendation, for their own circumstances, before taking any action. This research has been prepared with all reasonable care and is not knowingly misleading in whole or in part. The information herein is obtained from sources which we consider to be reliable but its accuracy and completeness cannot be guaranteed. The opinions and conclusions given are those of WH Ireland Ltd. and are subject to change without notice. Clients are advised that WH Ireland Ltd. and/or its directors and employees may have already acted upon the recommendations contained herein or made use of all information on which they are based. WH Ireland is or may be providing, or has or may have provided within the previous 12 months, significant advice or investment services in relation to some of the investments concerned or related investments. Recommendations may or may not be suitable for individual clients and some securities carry a greater risk than others. The value of securities and the income from them may fluctuate. No responsibility is taken for any losses, including, without limitation, any consequential loss, which may be incurred by clients acting upon such recommendations. Clients are advised that the manager of an Investment Trust may use gearing as an investment strategy which may increase the risk profile of that trust. It should be remembered that past performance is not necessarily a guide to future performance. Shares in smaller companies tend to be traded less frequently and in smaller amounts that those of larger companies, this can make the timing of sales and purchases more difficult. Clients should be aware that companies whose shares are traded on an unregulated market for example the Alternative Investment Market (AIM) carry a higher degree of risk than companies whose shares are listed on a regulated market for example the London Stock Exchange (LSE). For our mutual protection, telephone calls may be recorded and such recordings may be used in the event of a dispute. Please refer to www.wh-ireland.co.uk for a summary of our conflicts of interest policy and procedures. u WH Ireland provides paid for research services to this company. # The company is a researched stock by WH Ireland’s Institutional Research team. Such research is classed as ‘non-independent’ as defined by the FSA’s COB rule 12.3 and is classified as a marketing communication. Our ref: FP063
Our offices: Birmingham l Bristol l Cardiff l Colchester l Colwyn Bay l Leeds l London l Lymington l Malvern l Manchester l Norwich l Poole l Saffron Walden l Swansea l Windsor l Woking
4
WWW.WH-IRELAND.CO.UK
OCTOBER 2012 ISSUE 6
YOUR MONTHLY GUIDE TO THE BEST EQUITY IDEAS FROM THE WH IRELAND RESEARCH TEAM
NEW ISSUE
4 imprint (FOUR)
W
#
An imprint 4 growth FTSE Small Cap – Share price: 334p Market Cap: £88m. www.4imprint.co.uk
D
espite rapid growth since 4imprint turned its focus to the direct marketing of promotional goods to North American businesses, which the Group is still just scratching the surface in terms of market potential. It is the number one direct marketer in this territory and yet has little more than 1% share of the promotional goods market. In the five years to 2011, the group has doubled dollar sales to $224.5m (88% of Group revenue) and intends to do the same again by 2016. The $22bn market remains incredibly fragmented. In the US alone there are circa 22,000 distributors, yet close to 21,000 have Estimates (Dec) 2012 (A)
2013 (E)
2014 (E)
Sales (£m) 180.3 200.3 224.3 PBT (Adj)**(£m) 9.8 11.4 13.0 FD EPS (Adj)** (p) 22.7 26.2 30.0 P/E (x) 14.7 12.7 11.1 EV/EBITDA (x) 8.1 7.1 6.2 DPS (p) 15.3 16.1 16.9 Dividend Yield (%) 4.6 4.8 5.1 Source: WH Ireland Estimates. # 4Imprint is a researched stock by WH Ireland’s Institutional Research team. Analyst: Derren Nathan
annual sales of less than $2.5m. 4imprint’s unique business model sets it apart from the competition. The recent sale of Brand Addition for net cash proceeds of £18.6m (plus £1.25m deferred) has substantially de-risked the balance sheet. After £11.4m has been set aside in an escrow account to reduce risk in relation to the £27m pension deficit, we are forecasting year end net cash balances of £8.2m.
WHAT WE LIKE 4imprint continues to organically consolidate its leadership of the market, targeting 700 monthly product additions, and continuing to leverage its marketing activities, increasingly so online. The balance sheet is strong, and we see 4imprint maintaining its sector beating dividend yield and earnings growth record. Our 375p target price assumes only a modest re-rating which may have further to run should further steps to reduce the burden of the legacy defined benefit pension scheme be introduced. We believe the Group is on track to meet our forecasts. Should favourable economic tailwinds begin to blow in North America, there is significant potential upside to our estimates.
e are delighted to announce that WH Ireland are acting as intermediaries for the forthcoming flotation of insurance giant Direct Line. Owned by Royal Bank of Scotland (RBS), Direct Line is the UK’s leading personal motor and home insurer, with over 4m in-force policies in each of these product categories. It also owns the well established insurance brands: Churchill, Privilege, and NIG – which are aimed at small to medium sized enterprises. Vehicle breakdown specialist Green Flag is the third largest vehicle breakdown operation in the UK and is another business owned by Direct Line. Back in 2008, RBS was ordered to sell the business by European Union regulators as a condition of receiving state aid. The price range has been set at 160p to 195p a share – valuing Direct Line at £2.66bn at the mid-price. Expectations suggest a 6-7% dividend yield. There is a minimum £1000 investment, and the stock can go in a SIPP or an ISA. With a closing date of 9 October, and dealings due to start a week later, the timetable is tight. For further information on how to apply for the shares speak to your usual WHIreland contact. Miles Nolan Editor
For further information about, or before acting on any of the companies mentioned in this newsletter, please speak to your usual WH Ireland contact. Email your name and WHI client number to [email protected] to receive future issues. This report is classified as a marketing communication. WH Ireland Limited, 11 St. James’s Square, Manchester M2 6WH Tel: 0161 832 2174 London office: 020 7220 1666 WH Ireland is authorised and regulated by The Financial Services Authority and is a member of The London Stock Exchange. Important disclosures and certifications regarding companies that are the subject of this report can be found within the disclosures page at the end of this document.
Healthy growth and dividend yield FTSE AIM – Share price: 168p Market Cap: £86m www.caretech-uk.com
CareTech (CTH)*
C
areTech is a leading provider of specialist social services across the UK and has a strong track record, delivering a 35% EPS annual growth rate since coming to market in 2005. Wider sector concerns, pricing pressures and high gearing have led to a de-rating of the shares but these have been overplayed. The business has strong freehold asset backing and looks set to grow earnings by 15% over the next two years from organic initiatives, whilst at the same time reducing debt.
WHAT WE LIKE Organic growth will be driven through the addition of further beds at existing sites, moving the blended occupancy rate of 87%
above average 4.3% dividend yield. Given the freehold asset backing, a comparison in valuation metrics to the quoted healthcare property funds further demonstrates the inherent value.
to a mature rate of 92%, as well as adding new homes in adjacent regions to those in which CareTech already operates. The Group’s recently revised banking facilities of £149.4m are not due to expire until 2017. The shares trade on an FY 2013E PER of 6.1x and EV/EBITDA of 7.2x, supported by an
First half results reflect strengths FTSE AIM – Share price: 142p Market Cap: £233m www.lavendongroup.com
Lavendon (LVD)
L
avendon is a leading – and unusually focused European rental company, which is the market leader in the aerial platforms market in the UK, Middle East and on the Continent. With funds raised in 2009, the balance sheet is clean; and in the past eighteen months the business has (1) developed a new franchise in specialist safety equipment (ancillary to platforms), which is helping it to grow market
Estimates (Sep) 2011 (A) 2012 (E) 2013 (E) Revenue (£m) 109.2 115.3 123.8 EBITDA 23.2 25.0 26.7 PBT 15.9 16.7 17.8 EPS (p) 25.4 26.2 27.4 PER (x) 6.6 6.4 6.1 EV/EBITDA (x) 9.1 7.9 7.2 DIV (p) 6.0 6.6 7.3 Yield (%) 3.6 3.9 4.3 *WH Ireland acts as joint broker to Caretech. Analyst: John Cummins
share in the UK, (2) seen a significant recovery in the Middle East (approximately one third of the business) and (3) worked proactively to improve its cost-base further and maximise ROCE. The recent H1 results showed that the recovery in the business is well entrenched, with underlying EPS +56% (on sales +8%), pricing improvements in the UK and further reductions in net debt.
elsewhere (and a return to 30%-plus operating margins are anticipated in the near future). The “BlueSky” acquisition has created an impressive extra level of intellectual property which is increasingly rolling out in the UK business. Trading at a significant discount to its competitors, we see further upside. Estimates (May) 2011 (A)
WHAT WE LIKE The first stage of the recovery in the business is now well established – but there are substantial further gains to go for over the next eighteen months. The Middle East business is now developing very strongly with underlying structural growth based on expanding investment in Saudi Arabia and
S 2
2013 (E)
Revenues (£m) 225.4 235.5 242.5 PBT (£m) 21.9 26.5 29.1 EPS (p) 10.0 12.1 13.4 P/E (x) 14.2 11.7 10.9 EV/EBITDA 4.4 4.1 4.0 DIV (p) 1.75 2.20 2.50 Yield (%) 1.2 1.5 1.7 Source: Consensus forecasts. Analyst: Nick Spoliar
UPDATE: Anpario hares in natural feeds additives specialist Anpario have not disappointed since our recommendation in July. Recent interim results to June confirmed ongoing progress with sales up 16% to £10.8m, and adjusted EBITDA ahead by 25% £1.35m – driven by increased margins. Earlier this year Anpario acquired rival Meriden, which chipped in a three month
2012 (E)
110p contribution and has helped further salmonella) tightens within the industry. its reach into China. By selling The second half has started briskly into over 60 countries, Anpario and in line with budget. Full-year has managed to partly mask the expectations point to adjusted pre-tax 3 month profits of £2.7m and EPS of 10.6p. disruption in the European and return Consensus share price target of 140p Middle Eastern regions. In the UK market there are a number of seems fair. growth opportunities to boost sales, as disease legislation (particularly surrounding Analyst: Miles Nolan
s +24%
WWW.WH-IRELAND.CO.UK
u
SELL RIO BUY BLT
RIO TINTO (RIO) BHP BILLITON (BLT)
T
he mining sector has enjoyed a revival in recent weeks on the announcement of QE3. However, it is unclear how long the rally will persist and when volatility may return. A number of capex projects have already been curtailed due to the uncertain outlook. It is therefore sensible to focus investment on the most reliable operators within the sector. Rio Tinto shares have recovered handsomely from the August lows. However, our main concern is that earnings are dominated by iron ore which represents close to 80% of EBIT. Despite the recent rally, iron ore is 30% off its peak in April as the market remains oversupplied. Further afield, Fortescue Metals, the world’s fourth largest iron ore
SWITCH IDEA – Sell Rio – Buy BHP Billiton FTSE 100 – Share price: 1952p Market Cap: £111.3bn www.riotinto.com www.bhpbilliton.com
producer, based in Australia, has seen its share price collapse as it has needed to refinance urgently due to weakness in the market. On 8.4x 2012 earnings, the valuation of Rio Tinto does not fully reflect the risks involved and we recommend investors SELL. For reinvestment, BHP Billiton is a sounder proposition. The group offers arguably the best diversification of any mining company with broad exposure to oil, coal and copper in addition to iron ore. This diversification reduces earnings volatility over time and has helped the group deliver consistent growth over the long term. With more reliable and predictable cash flows, it is worth paying a premium for quality and the shares remain a BUY for capital growth and dividend income.
T
improvement in the sensor and manufacturing service businesses.
WHAT WE LIKE Demand for luxury cars has been strong in Asia with the increase in the middle classes; TT Electronics is aligned to this with major
G
WWW.WH-IRELAND.CO.UK
2013 (E)
2014 (E)
Revenue ($m) 72,226 73,277 78,930 PBT ($m) 23,022 25,533 28,154 EPS (cents) 289.6 308.7 351.6 P/E 11.0 10.6 9.0 DPS (cents) 112 125.1 126.1 Yield (%) 3.5 3.9 4.0 Source: Consensus Forecasts. Analyst: John Goodall
exposure to high end German automobile manufacturers. Underpinning the auto market there is an organic growth trend. As car manufacturers improve environmental and safety features, the number of electronic components will increase per car, making this an attractive market for TT Electronics.
2011 (A) 2012 (E) 2013 (E) Revenues (£m) 591.3 566.1 588.2 PBT (£m) 31.8 32.3 39.0 EPS (p) 15.8 14.5 17.6 P/E (x) 9.3 10.1 8.3 DPS (p) 4.4 5.2 6.1 Yield (%) 3.0 3.5 4.1 Source: Consensus Forecasts. Analyst: Luke Tribe
UPDATE: GULF KEYSTONE (GKP) ulf Keystone has enjoyed a strong share price performance since we wrote last month. The resolution of oil payments from Iraq to the Kurdistan Regional government combined with a strong interim results statement have helped to lift the stock above 250p. The interim results confirmed that the company is on track to achieve 150,000bpd by
2012 (A)
Driving profitable growth FTSE Small Cap – Share price: 148p Market Cap: £237m www.ttelectronics.com
TT Electronics (TTG) T Electronics is an electrical components business for the automotive and medical industry in the US, Asia and Europe, it also has a power supply business that operates in South America. The company has completed a restructuring phase and stands to gain from further margin improvements. Operational performance will come from the investment and relocation to emerging markets such as Mexico, China, Romania and India. As well as lowering the firm’s cost base, the second half will yield higher agreed contract prices and the exit from lower margin agreements. The balance sheet remains healthy following the sale of non-essential businesses and the prospect for acquisitions is positive; with room for
Estimates (Jun)
u
234p
2015, has an array of funding London this could mark a watershed in options in front of it to fund this terms of being able to move to the main development, including the 20% market from AIM, and also increases sale of Akri Bijeel, debt options, the probability of being taken out. Our 1 month target and early production from price of 315p implies a healthy return 26% upside Shaikan set to reach 40,000bpd from here. by 1H’13. With a hearing on the outstanding Excalibur Ventures litigation set u WH Ireland provides paid for research for 8 October in the Commercial Court in services to Gulf Keystone. Analyst: Angus McPhail
s +14%
3
Huge global expansion opportunity FTSE Small Cap – Share price: 200p Market Cap: £163m www.cupid.co.uk
CUPID (CUP)
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uelled by strong organic growth and a raft of acquisitions, Cupid has established itself as one of the top five global online dating companies. The shares joined AIM just over two years ago at 60p – but even at current levels the journey is far from over. Cupid operates a network of sites which generate revenues from subscriptions rather than advertising. It now boasts 54m members across 58 countries, and recently stepped up its game with the acquisition of the niche site Uniform Dating for up to £7m. The strategy is to offer a network of online dating sites rather than a single core brand, It has also enjoyed a good City following, as
plans to take a 15% share in each of its target markets within five years. The beauty of the model is its subscription nature. Though rumours have surrounded a bid from US giant Match, on little more than 10 times 2013 earnings the shares are attractive.
evidenced by a recently well-subscribed £3.6m placing. Ongoing market growth is being driven by online dating now being socially acceptable.
WHAT WE LIKE The online dating market in the US and Europe alone is estimated to be worth £2bn. Cupid
Unlocking Taranaki’s Secrets FTSE AIM – Share price: 8p Market Cap: £42m www.keapetroleum.com
KEA PETROLEUM (KEA)*
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ew Zealand is a relatively under explored frontier province, with the Taranaki Basin (North Island) offering the majority of existing exploration prospects. Kea Petroleum’s prospects are all conventional plays as opposed to unconventional higher
Estimates (Dec) 2011 (A) 2012 (E) 2013 (E) Revenues (£m) 53.6 78.4 96.8 PBT (£m) 7.0 16.1 21.4 EPS (p) 7.1 14.9 19.4 P/E (x) 28.2 13.4 10.3 DIV (p) 2.25 2.74 3.16 Yield (%) 1.1 1.4 1.6 Source: Consensus forecasts. Analyst: Miles Nolan
cost and more technically challenging shale plays, with a mixture of oil and gas targets. The current share price is underpinned by the valuation of Puka 1 & 2, however we see additional upside through further wells all of which may be drilled in 2012/13.
WHAT WE LIKE Kea has currently one producing well (Puka-1) with a second producing well (Puka-2) due online at the end of this year with production set to increase from 500bpd to 2,000bpd at the end of this year through the drilling of 6-10 wells. Kea has 9 prospects across four licences, the largest prospect lies offshore in Mauka.
Strong newsflow in terms of drilling, farm outs, and production ramping up will all help to increase the current valuation. Our conservative valuation target price of 21.6p/share implies the stock is worth double from here. Estimates (May) 2011 (A) 2012 (E) 2013 (E) Revenues – 4,813 12,828 EBIT 4,412 122 9,528 EPS (p) 1 0 2 Production (bpd) 68 418 508 Cash at end of period 12,547 7,436 19,443 Source: WH Ireland Estimates *WH Ireland acts as Joint Broker to Kea. Research Team Analyst: Angus McPhail
Editorial Team Miles Nolan - Editor Formerly editor of Growth Company Investor, Miles has worked on the buy-side and spent seven years at the Investors Chronicle. [email protected]
John Goodall Having joined in 2007, John heads Private Client Research. He is a CFA Charterholder and is married with one son. [email protected]
Luke Tribe Luke joined WH Ireland in 2010. He holds a degree in financial economics and is studying for the CFA designation. [email protected]
Disclaimer This research contains recommendations of both a general and specific nature. This research does not constitute advice or a personal recommendation or take into account the particular investment objectives, financial situations or needs of individual clients. Clients are advised to contact their investment advisor as to the suitability of each recommendation, for their own circumstances, before taking any action. This research has been prepared with all reasonable care and is not knowingly misleading in whole or in part. The information herein is obtained from sources which we consider to be reliable but its accuracy and completeness cannot be guaranteed. The opinions and conclusions given are those of WH Ireland Ltd. and are subject to change without notice. Clients are advised that WH Ireland Ltd. and/or its directors and employees may have already acted upon the recommendations contained herein or made use of all information on which they are based. WH Ireland is or may be providing, or has or may have provided within the previous 12 months, significant advice or investment services in relation to some of the investments concerned or related investments. Recommendations may or may not be suitable for individual clients and some securities carry a greater risk than others. The value of securities and the income from them may fluctuate. No responsibility is taken for any losses, including, without limitation, any consequential loss, which may be incurred by clients acting upon such recommendations. Clients are advised that the manager of an Investment Trust may use gearing as an investment strategy which may increase the risk profile of that trust. It should be remembered that past performance is not necessarily a guide to future performance. Shares in smaller companies tend to be traded less frequently and in smaller amounts that those of larger companies, this can make the timing of sales and purchases more difficult. Clients should be aware that companies whose shares are traded on an unregulated market for example the Alternative Investment Market (AIM) carry a higher degree of risk than companies whose shares are listed on a regulated market for example the London Stock Exchange (LSE). For our mutual protection, telephone calls may be recorded and such recordings may be used in the event of a dispute. Please refer to www.wh-ireland.co.uk for a summary of our conflicts of interest policy and procedures. u WH Ireland provides paid for research services to this company. # The company is a researched stock by WH Ireland’s Institutional Research team. Such research is classed as ‘non-independent’ as defined by the FSA’s COB rule 12.3 and is classified as a marketing communication. Our ref: FP063
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