5 August 2015
By Maynard Paton
Today I’m reviewing the six shares that reside on my Watch List. After all, there’s no point in me operating a Watch List if I don’t occasionally review the progress of my potential investments — and ensure I’m all ready to buy when their valuations become more attractive!
So here is what’s happened at my Watch List companies since the initial write-ups.
Ashmore (ASHM)
I reviewed this fund manager during March, when I homed in on some very impressive accounts and a founder-entrepreneur with a massive £808m riding on the share price.
After my write-up, ASHM went on to say its funds under management (FUM) had declined by $4.1bn to $61.1bn during the first quarter of 2015… and then said its FUM had declined by a further $3.6bn to $58.9bn during the second quarter. Nervous clients, weak markets and mixed investment returns were all blamed for the shortfalls.
The shares were 280p in my write-up and are now 260p, which I calculate gives an enterprise value (EV) of £1,365m — or 193p per share — after adjusting for £474m of non-regulatory net cash and investments.
Assuming i) FUM stays at $58.9bn, ii) management fees remain at 60 basis points, and; iii) £1 continues to buy $1.56, I reckon annual management fees could now be running at £227m.
Assuming no performance fees are collected and other costs remain the same, I reckon operating profits could be running at £109m and earnings might be around 15.5p per share (which is less than the trailing 16.55p per share dividend).
The potential P/E on my EV and EPS calculations is therefore 193p/15.5p = 12.5. I mentioned originally that I am minded to await a single-digit P/E for this share and that remains the case.
Bioventix (BVXP)
I evaluated this monoclonal antibody specialist in May, when its vast margins, owner-friendly boss and appealing growth prospects caught my eye.
No company news has emerged following that review, but that has not stopped the share price rising from 850p to £10.
Similar to numerous other quality companies at present, BVXP’s shares reflect some attractive fundamentals and are valued at about 20 times near-term profits. In the current market, it can be easy to ‘pay up for growth’ when P/E multiples keep on rising.
But I continue to keep my feet on the ground, and believe it is much easier for a share on a P/E of 10 to find the necessary growth to be re-rated to a P/E of 15 — and therefore enjoy a 50% multiple re-rating — than it is for a share on a P/E of 20 to enjoy the same 50% multiple re-rating and expand to a P/E of 30.
For now I shall keep watch on BVXP.
Daejan (DJAN)
I studied this commercial-property landlord back in February, when my attention was grabbed by a family management team that had increased the group’s asset base 259-fold in 55 years!
Following my review, DJAN issued preliminary results that showed a mighty 20% further advance to the asset base, while the dividend was upped another 7%. It seems to me the long-haul credentials of this dependable business remain firmly in place.
The share price has risen from £58 to £65 since my initial write-up, and currently represents 80% of DJAN’s net book value.
However, rightly or wrongly, I am ‘burdened by experience’ here — and am reluctant to pay the present valuation when DJAN’s shares have almost always sold below book. Indeed, the discount hit 50% for lengthy periods between 2008 and 2012 and the shares only topped book value during the credit boom.
DJAN’s latest annual report contains a few interesting snippets. In particular, the boss is cautious about the upcoming EU referendum, and reckons rents in London could be hit if the NO vote wins. I also see he has joined the £1m salary club.
Goodwin (GDWN)
A family management team that had multiplied profits 16-fold in 20 years was enough reason for me to look into this engineering firm in March.
Since my review, GDWN has issued full-year results that showed trading having deteriorated markedly. After first-half profits improved 9% to £13.6m, second-half-profits dived 43% to £6.9m. I note fourth-quarter profits plunged 54% to £2.8m.
GDWN blamed its performance on the downturn within the oil and gas sector, having admitted its order book remains 19% down on last year and that a “higher level of competition” was affecting margins.
Since my write-up, the shares have dropped from £28 to £25, but I don’t feel they are super-attractive at present. The trailing P/E is about 13, but the dilemma now is whether the bumper first half (EPS of 141p) or the challenging second half (EPS of 67p) is more likely to occur during the next few years. With subdued oil and gas activity likely for the next year or two, my guess is profits could remain under pressure.
All told, I’d become more interested if the shares fell below £20.
Latchways (LTC)
Now to this safety-equipment specialist, which I analysed during February. An impressive history, decent accounts and loyal executives were among the key features I noted.
Annual results issued during June showed revenue down 14%, profits down 28% and the dividend maintained at 39.6p per share — and uncovered by earnings of about 38p per share. However, I noted second-half profits were a touch higher than those recorded in the first.
The figures represented the second consecutive year of difficult trading, and a “significant investment” has been made to “restore growth”. A trading statement today said the investment should drive revenues “significantly higher in due course”, although current trading remains somewhat mixed.
Although these shares have declined from 800p to 750p since my review, the trailing P/E (adjusted for LTC’s net cash) does appear to already expect an earnings recovery at 17. My sums tell me to become more interested if the price dropped to 700p.
Shoe Zone (SHOE)
Finally to this retailer of cheap shoes, which I studied during March. The simple business, veteran family executives and a cash-rich balance sheet were among the main attractions.
SHOE’s newsflow since my review has not been great, with a full-year profit warning delivered in April and a 25% interim-profit setback confirmed in June. The shares have since dived from 250p to 170p.
I’ve seen broker estimates for pre-tax profits of £10m for 2015, which imply second-half profits could drop by just £0.7m to £8.0m. A £10m pre-tax profit equates to earnings of 16p per share and a P/E of almost 11. I have to admit that earnings of 16p per share do seem quite optimistic given the preceding first-half performance.
Anyway, given SHOE’s recent stumble and the lack of expansion opportunities (shop numbers are stagnant as new outlets are offset by closures), a decent investment return here is very much dependent on bagging a cheap price. I may be acting too conservative, but I’d want a single-digit P/E and a share price well below 150p to become interested.
Maynard Paton
Disclosure: Maynard does not own shares in Ashmore, Bioventix, Daejan, Goodwin, Latchways and Shoe Zone.
