A final 10 stocks to follow in 2015

Tuesday, 10th February 2015 09:56 - by David Harbage

Following on from the ‘Looking Forward into 2015’ blog, the writer highlighted five stocks impacted by news making the headlines today (and likely to continue to be of interest throughout the year):  the fall in the price of oil and UK housing. In particular, flagging that Bovis Homes and Telford Homes are expected to trade well in a benign interest rate environ, turnaround regional airline Flybe is set to benefit from lower fuel costs and Petrofac and Ithaca Energy should recover when the oil price stabilises.

The next blog featured Bank of Georgia and GVC Holdings as company stocks which appeared to offer ‘growth at a reasonable price’ (GARP) and this article seeks to provide ten additional ideas in different business activities – to progress the basic principle of diversification.

As ever, we would highlight the need for prospective investors to carry out their own research (investigating online via LSE.co.uk or the company’s own website, perhaps) to ensure that they are comfortable - especially with the inherent risk-reward profile – of the investments that follow.

Cello Group (CLL)

These are marketing consultants serving the pharmaceutical (67% of profits) and consumer (33%) industries. This £82m market capitalised business has grown via acquisition into the United States and Asia, providing research and advice services via software-based, web-enabled analytical tools. Think of this firm in terms of it being the provider of the essential ‘picks & shovels’ to the big drug companies, CLL is characterised by innovation (cleverly directing medicines and healthcare, plus its use of social media) and high employee ownership. Current broker forecasts suggest earnings per share (EPS) of 9.5p in calendar year 2016, putting the stock on a forward-looking price/earnings (PE) multiple of 10.2x with forecast dividend for next year implying an income yield of 3.5%.

Empresaria (EMR)

This international specialist staffing group is emerging economy biased and features incentivised local management stakeholders. Operating in 20 countries (notably the UK, Germany, Japan, Indonesia, China, Chile and Australia), growth has been both organic and via acquisition: opening in Kuala Lumpar, Hong Kong, Mexico City & Dubai in the first half of 2014 and buying a 75% stake in Ball & Hoolahan, a UK recruiter serving the marketing industry, in December. The group is back on an even keel after suffering in the 2009 financial crisis, but EMR stock bears a neglected appearance based on current forward-looking valuation: EPS of 7.5p projected for 2016 implies a PE multiple of 5.5x. A long way short of its peer group’ rating, reflecting in part the illiquidity in this £18m capitalised stock (with two directors owning 38% of the equity), a corporate exit appears a real possibility upon any industry consolidation.

Fairpoint (FRP)

Another relatively small (£49m market cap) but active Alternative Investment Market (AIM) listed business which appears unloved by investors, but which seems well positioned to benefit from the current economic clime and demographic trends, this company provides debt solutions and related legal services to consumers - via Individual Voluntary Arrangements, Debt Management Plans and Claims Management. Aggressive acquisitive growth in 2014 will see the number of cases under management almost double to 29,000; in addition FRP diversified last year by buying family law practices (notably Simpson Millar and Fosters). Despite integration costs, brokers’ earnings forecasts suggest the stock is undervalued: profit progression in the current year is likely to deliver EPS of 17.9p equating to a PE ratio of 6.3x, and an attractive dividend yield of 6.0% (2.5 times covered) provides particular appeal.

Gable Holdings (GAH)

A forward-looking PEG ratio (which compares the PE multiple of a stock with the pace of anticipated growth in earnings) is one of the key metrics an investor can employ to assess a business – taken in conjunction with an assessment of the quality of the earnings (by which I mean the reliability, in particular the extent to which profits equate to actual cash received, as well as the sustainability of the earnings). Insurance is an area where future EPS is typically subject to pricing annual premium renewal and the risk underwritten, as well as the ability to win new business. GAH is a fast growing non-life insurer offering specialist policies for commercial sectors in the UK and across Europe, characterised by a low cost online underwriting platform, exploiting niche insurance segments (neglected by the majors) and growing its broker distribution channel. The business is highly profitable (combined ratio 72%), features a strong balance sheet (£27m cash) and, like most of this article’s selections, an attractive PEG (of below 1.0). This £75m cap is forecast to deliver 7.87p EPS this year representing a PE of 7.2 and PEG of 0.2; a growth vehicle, profits are wholly reinvested and no dividend is envisaged. 

Lancashire Holdings (LRE)

Through its UK and Bermuda-based operations, this is a global provider of speciality insurance and reinsurance products in the areas of aviation, energy, marine, property and Lloyds. Seeking to write business when premiums are high (2012) and less when markets are weak (2014), the firm has been a nimble operator through the insurance cycle and returned excess cash to shareholders via ordinary & special dividends and share buybacks. Unlike the other selections in this article, LRE has limited growth prospects, but rather represents an income play (as its capital is ‘run down’ in the absence of sufficiently attractive underwriting opportunities); in addition, by contrast with the other stocks mentioned in this article, it is listed on the premium segment of the LSE and its £1,050m market capitalisation making it a constituent of the FTSE250 and FTSE350 indices. Based on a consensus of 16 brokers (8 Buy, 7 Hold, 1 Sell), earnings growth in 2015 & 2016 is set to be flat with EPS of 59p forecast putting the stock on a PE of 9.6x (a 15% discount to the wider market) but high dividend distributions (52.5p) would represent a 9.3% income yield. 

Lombard Risk Management (LRM)

The identification of novel trends, at home or further afield, and the wish to capture the potential beneficiaries of such new product, service or development lies behind almost all of these company stock selections. Most are relatively immature and small (‘big oaks from small acorns grow’) and have therefore come to market via a listing on AIM, rather than the more expensive premium or full stock market listing. Post the financial crisis, regulators in the banking, insurance and financial services industry have increasingly demanded more reporting; UK banks, for example have to report to the European Banking Authority, as well as the local regulator. As a provider of software to banks and financial services, LRM is a beneficiary through its market leading capability in collateral management, liquidity & regulatory reporting and compliance solutions. Significant Research & Development cost, to deliver new software, has been incurred but has not been expensed to the P&L (up front) - so flattering immediate earnings (whilst legitimate, it is prudent to note such accounting practice, when assessing the quality of the published earnings). Having made that proviso, brokers’ consensus forecast EPS of 2.4p, for the year to 31 March 2017, implies a PE of 6.1x; a minimal 0.9% dividend is paid.   

OPG Power (OPG)

In an earlier blog, strong economic growth in Georgia (GDP in excess of 5% in 2014 & 2015) prompted investigation and the selection of Bank of Georgia. India represents another country evidencing above average economic growth (annual GDP of 5%+ anticipated 2013-2018). India’s critical shortage of electricity represents an opportunity for OPG: a local operator of 270 mega watts (MW) of power projects, with an ambitious development program (480MW of capacity due to be commissioned in 2015). This will dramatically impact profitability, although reduced when translated into sterling (rupee weakness in early 2014 restrained earnings by 30% and raised the level of debt, to effective gearing of 56%). A £315m capitalised AIM stock, supported by brokers (including Investec, Jeffries and Shore Capital) who anticipate 14p EPS in the year to March 2017, representing a PE ratio of 6.6x; a token dividend can be expected a year earlier.

Optimal Payments (OPAY)

This online payments provider, operating in over 200 countries via mobile phone & web, appears to be highly regarded by retailers, other corporates and consumers. This time a year ago, chief executive Joel Leonoff (2.5% stakeholder) was voted CEO of 2013 by the London stock exchange. Netbanx is a gateway platform for merchants to simplify how they accept credit/debit card, direct-from-bank and other payments (principal membership of Visa Europe & Mastercard Europe) and OPAY’s other prime product is Neteller (sponsors Crystal Palace FC), an online wallet used to make secure payments (perhaps best known for its involvement in the US gambling industry). Expansion of its reach in the US and Asia, aided by the acquisition of Meritus and GMA in July 2014, is promising and the trading update on 14 January indicated that

last year’s profits will be ‘materially ahead of market expectations’. A move from AIM to a full listing for this £565m cap business could prompt an upward re-rating, and counter last year’s controversy over the CEO’s 0.5% stock disposal. EPS of 34p is forecast for 2016, putting this non-dividend paying growth stock on a sub-market PE of 10.9x. 

Plus500 (PLUS)

Continuing the theme of online businesses, this is a web-based (smartphone & tablet friendly) platform for retail customers to trade CFDs in equities, foreign exchange, indices and commodities, featuring a very low cost base as compared to the peer group. The company believes its platform’s ease of use, targeted online marketing and an emerging market focus (available in 50 countries via 31 languages) is a winning differentiator. This Israeli-based, £728m market cap launched on AIM in July 2013 @115p and a succession of trading upgrades has jet fuelled the stock price, aided by a strategy to pay out at least 50% of retained profits. Based on EPS of 72.6p forecast for 2016, the stock is on a forward looking PE multiple of 8.8x and an income yield of 6.9%. Plans to move from AIM to a full listing would broaden the investor base and aid credibility.    

Telit Communication (TCM)

Maintaining a focus on new technology which can either reduce corporate costs or change the way we live and work, this company is at the forefront of wireless technology that enables devices to ‘talk’ or connect to each other. Termed ‘machine to machine’ and also the ‘internet of things’ (m2m & IoT), its connectivity applications range from vending machines reporting stock levels to vehicles notifying service centres of maintenance issues, automated meter reading to positional awareness and real-time data collation. Israeli-based, the directors owning 23% of the £242m market cap, TCM is a global leader (31% of the market) in industrial and number 3 in consumer applications. Strong growth is anticipated to take EPS from a forecast 11.5p for the year just ended, to 24.3p in 2016, which would put this non-dividend paying stock on an undemanding PE of 8.7x.

David Harbage   15 January 2015