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The Holy Grail for investors is to identify companies with potential to turn an early-stage recovery story into a multi-month earnings upgrade cycle, so forcing analysts to repeatedly upgrade their earnings estimates. In turn, investors have a habit of paying a higher price for a slice of the action so you can benefit from earnings multiple expansion, too. It therefore pays to know the precise profit drivers to look out for, I certainly do having dedicated several chapters and case studies to this very subject in both of my books.
Areas of interest include a company’s position within its market and whether industry demand (both cyclical and structural) is creating a tailwind to ride off. Understanding operational leverage is important to ascertain the extent to which profits can accelerate as revenue ratchets up. I also take a close look at cash generation and working capital management to identify enterprises that recycle operating cash flow back into their businesses either through organic investment or bolt-on acquisitions to create shareholder value.
It certainly pays to embrace technological change and keep an eye on macroeconomic and political factors that may impact performance. Many of these dynamics are at play with the five companies I highlight below. It’s no coincidence that they have all just posted earnings beats.
Gresham House obliterates forecasts
£1bn of organic assets under management inflows in 2020.
Double-digit earnings upgrades for 2020 and 2021.
Gresham House (GHE:810p), a fund manager specialising in renewable energy generation, solar power, wind, forestry, infrastructure funds and public and private equity investment strategies, has smashed analysts’ earnings estimates, and prompted hefty upgrades.
Assets under management (AUM) increased by an eye-catching 42 per cent from £2.8bn to £3.9bn in 2020, or 15 per cent above investment bank Jefferies forecast, buoyed by £1bn of organic inflows. The addition of £640m of AUM in the second half included £266m of capital raises for Gresham House Energy Storage Fund (GRID), Gresham House Forest Fund I LP and the group’s Baronsmead VCTs.
Tight industry pricing, ongoing demand from housebuilders and healthy investment returns are supporting interest in Gresham House’s forestry funds. Moreover, with the benefit of a strong balance sheet – estimated net cash of £21.8m at the 2020 financial year-end – Gresham has been making strategic and complementary bolt-on acquisitions. The proposed earnings accretive acquisition of Republic of Ireland-based Appian Asset Management for an initial consideration of €4.55m (£4m) adds AUM of €330m including a forestry portfolio. Appian plans to launch a social housing fund in Ireland that is complementary to Gresham House's Residential Secure Income LP fund, targeting the shared ownership housing market and aiming to unlock a supply of more affordable houses. This highlights Gresham House’s ESG credentials as do investments in