UK INVESTOR
MONEY // SHARES // INTERVIEWS ISSUE 1 // JUNE 2015
postcard from greece
We are kebabbed whatever happens
UK Investor Magazine — 1 — June 2015
UK house prices: they really MUST fall Tom Winnifrith’s three stocks to crash this summer Zak Mir’s 3 stock picks for June Tom Winnifrith’s tip of the month
Intro
INSIDE 4 The 11th, 12th, and 13th stock to buy for summer Zak Mir 8 Look at miners for growth Harry Stevenson 10 Postcard from Greece Tom Winnifrith 15 The 2015 rally is done Thierry Laduguie 16 Telecity: a reason to think thematically Chris Bailey 17 Company of the Month: Adept Telecom Steve Moore 18 The General Election means not a jot 20 UK Housing - where have all the doomsayers gone? Tom Winnifrith 22 Feeling smug about my tips of the year Steve Moore
CONTACT US UK Investor Magazine 91 - 95 Clerkenwell Road London, EC1R 5BX E: info@ukinvestorshow.com W: www.UKInvestorShow.com : EDITORIAL
WELCOME TO THE FIRST ISSUE OF UK INVESTOR MAGAZINE I hope you enjoy the 22 pages that follow with material from myself, Steve Moore, Zak Mir, and our pal, Harry, at Beaufort Securities. This is the inaugural edition of UK Investor Magazine and over the coming months we will bring you articles from a range of other writers including Lucian Miers, Malcolm Stacey, Gary Newman and Ben Turney as we offer you ideas for making money from shares in this monthly e-publication. The first rule of making money from shares is not to lose money and with markets at near record highs it may be tempting to think that you are the next Warren Buffett just because your portfolio has zoomed ahead. If only life were that simple. In a bull market we seem to forget about risk. Fraud, over-promotion and stock manipulation flourish, but while shares are heading ever higher no-one seems to care. At the risk of sounding like a very grumpy old man, I must warn you that the good times will not last forever. By any conventional metric of valuation UK equities are - at best - fully valued. At worst they are materially overvalued. Whether one looks at the Q ratio, at PEs or yields it is impossible to argue that shares are cheap. Yet they may go higher still. Calling the top on a bull market is always hard and there is a case to be made that equities actually appear to be value investments when compared to other asset classes, notably bonds. And so we are not seeking to grab headlines with a prediction of an imminent correction, although we would not bet the ranch against it. But merely suggesting that it may be a useful exercise to review your portfolio and looking where you may, on a selective basis, look to lock in a few profits. That would perhaps be the prudent thing to do. We hope that you find what follows provides a useful source of ideas as to where you might withdraw some of your hard-earned capital, but also to invest it. This is certainly a stock picker’s market - or it will be shown to be one once the current bull market insanity wears off.
Tom Winnifrith Editor
Best wishes,
Cover
Tom Winnifrith
Santorini Vista by Misty
Editor UK Investor Magazine — 2 — June 2015
UK Investor Magazine — 3 — June 2015
Zak Mir's 11th,12th, and 13th best shares for summer Based on Zak Mir’s new eBook I have just published a book highlighting my top 10 shares to buy for the summer. Any top 10 list, whether it be shares to buy, or Miss World contestants that you’d like to shag, is somewhat arbitary in that your tenth pick is bound to be not much better than your eleventh, the one that didn’t make the grade. Here are the stocks that didn’t quite make the cut, but arguably should have done, to get into my new book. TRANSENSE TECHNOLOGIES (TRT): It is interesting that prior to the best turnarounds in the small/microcap space one tends to see similar combinations of technical and charting reversal events. These include unfilled gaps through the key moving averages, island reversals, bullish divergence in the oscillator, bear traps and of course golden crosses. On this basis it may be said that Transense Technologies looks to be one of the finer recovery situations in play at the moment. The key drivers here over the Spring have been a final bear trap reversal from below the 1p area, followed by the recovery of the 50 day moving average in April and finally an unfilled gap to the upside through the 50 day moving average - now at 1.43p - in May.
In fact, the saucer-shaped reversal is backed by the way that following May’s gap to the upside we have an island reversal given the way that this move completed the right side of a March gap down. All of this should ensure that, provided there is no end of day close back below the initial May resistance at 2.09p, we will see shares in Transense Technologies head to the top of a rising trend channel from January at 3.5p, just above the 200 day moving average level of 3.21p. The timeframe on such a move is regarded as being the next 2-4 weeks. As far as the bigger picture is concerned, as little as a weekly close above the 200 day line could open up the prospect of a 6p plus destination for the stock 2-3 months following such a clearance.
UK Investor Magazine — 4 — June 2015
XTRACT RESOURCES (XTR):
The view now is that the technical picture here appears to be well set on the daily chart. This is said on the basis that it is possible to draw a rising trend channel from January this year, with its resistance line projection currently pointing as high as 0.55p. One should assume such a target for the stock, especially while there is no sustained price action back below former March resistance at 0.3p. Indeed, at this stage, only sustained price action back below the trailing 50 day moving average of 0.23p would really endanger the buy argument. The timeframe on the upside is seen as being the next 1 to 2 months.
Shares of Xtract Resources have been one of the highlights of 2015 to date in the small caps space from both a fundamental and a technical perspective. In terms of the technicals, what we have been able to enjoy is a sharp spike in March through the 200 day moving average, then still falling, and now standing at 0.17p, followed by a golden cross buy signal via a gap to the upside at the end of April. This is a classic set up which usually is the precursor to an extended rally/re-rating of a stock or market.
VERONA PHARMA (VRP):
This started with the break higher above the 200 day moving average at 1.90p, followed by a golden cross buy signal between the 50 day and 200 day moving averages in February. Since then there has been sustained price action along the floor of a rising trend channel from June last year and above the 50 day moving average at 3.13p.
One of the better rules as far as finding and sticking to decent, reliable bull situations is to identify them early and then be determined enough to remain in place even after significant gains have been notched up. This can be seen from the current charting setup at Verona Pharma, with the way that the shares have been able to sustain the big January 2015 turnaround. continues on page
The view at the moment is that, at least while there is no break back be6
UK Investor Magazine — 5 — June 2015
continued from page
low the 50 day line, we should see further accelerated gains, with a best-case scenario target over the next 2 to 3 months being as high as the top of last year’s channel and its resistance line projection heading to 8p. In the mean-
5
time any dips towards the 4p level/former April resistance can be regarded as a buying opportunity as they would cool off the overbought RSI reading above the 70 level.
Get your free copy of Zak Mir’s new ebook, Real Bulletin Board Heroes: The Ten Stocks to Buy for Summer 2015 by clicking here.
UK Investor Magazine — 6 — June 2015
GOLD BEARS &T R A D E R S
Star speakers from the world of commodities and investment including Zak Mir, Amanda van Dyke, Willem Middelkoop and Tom Winnifrith. Meet and chat to gold and commodities companies, their CEOs and Chairmen. Tickets half price for limited time. 28 November 2015 QEII Conference Centre, Westminster, London goldandbears.com UK Investor Magazine — 7 — June 2015
Look at miners for growth. Yes, really. By Harry Stevenson research analyst, beaufort securities
I
n this inaugural edition of UK Investor Magazine we highlight three companies in the Basic Materials sector that have recent news activity and which we believe warrant a closer look. It is a contentious view that we are near the bottom of the cycle for mining companies and we would encourage investors to revisit…
Kibo Mining* (KIBO, 5.125p) – Speculative Buy Kibo Mining is an exploration and development company focused on mineral and energy projects in Tanzania which recently announced an update on its Rukwa Definitive Mining Feasibility Study. Phase 2, Stage 1 of the Study (pre-feasibility) remains on schedule and within budget. More importantly, trade-off studies indicate that overburden material is free-digging and that the use of surface continuous mining equipment for the coal seams has proven feasible at this stage.
OUR VIEW: We are encouraged with the progress being made on the Feasibility Study and with the potential use of surface continuous mining equipment for the coal seam we expect to see a significant reduction in mine operating costs. We maintain a speculative buy on the stock. *Beaufort Securities acts as a corporate broker to Kibo Mining plc
Caledonia Mining Corp (CMCL, 49p) – Speculative Buy The company recently released its operating and financial results for Q1 2015. Gold production from the 49% owned Blanket mine in Zimbabwe stood at 9,960 ounces (oz), compared with 10,241oz a year ago. Gold sales declined to 10,773oz from 12,210oz, while the all-in sustaining cost increased to Canadian$959/oz from C$923/oz. The average realised price for the year stood at C$1,200/oz. Consequently, the gross profit narrowed to C$4.6 million from C$6.0 million. Cash and equivalents stood at C$26.1 million. The company disposed of its non-core operations in Zambia and South Africa in order to reduce expenses. On 3rd November 2014, the company announced a revised investment plan to improve the underground infrastructure and logistics of the Blanket mine and develop a Tramming loop.
OUR VIEW: 2015 is set to be a significant year for Caledonia Mining as the company moves ahead with sinking shafts at the Blanket mine to improve earnings and production for 2016. With increased production output, we expect the cost per ounce to decline. The company aims to maintain its dividend policy of paying 6 cents per annum in equal quarterly instalments while upholding its strong financial position. It continues to benefit from the recent reduction in the Zimbabwe royalty rate to 5%, from 7%. In light of the above, and the modified investment plan, we reiterate a Speculative Buy rating on the stock.
UK Investor Magazine — 8 — June 2015
Hummingbird Resources (HUM, 35.5p) – Speculative Buy Hummingbird has two projects - Yanfolila Gold in Mali and Dugbe Gold in Liberia. The recent Q1 report highlighted an optimisation report on Yanfolila with an NPV8 of $72 million and an Internal Rate of Return (IRR) of 35% at $1,250/oz gold. This is with production in year 1 (first gold pour targeted H1 2016) of 100,000oz and 79,000oz over a 6.5 year life of mine, with an initial grade of 2.64g/t and all-in sustaining costs of $733/oz. There are plans for a longer life 1 Mtpa project. Yanfolila mine construction is in progress, with debt facilities secured.
OUR VIEW: There is a combined gold inventory of 6 million ounces, with excellent grades and recoveries, with robust IRRs. We see a clear path to low cost production in H1 2016 at Yanfolila. The 5,000km2 fully permitted licence area also has life of mine extension opportunities so, with near-term production and exploration upside, we initiate with a Speculative Buy.
At Dugbe, there is a current resource of 4.2 million ounces of gold from 2 deposits - with an NPV10 of $186 million and an IRR of 29% at $1,300 gold. The company anticipates 125k per annum production.
At Beaufort Securities we offer a bespoke advisory service. Our people are dedicated to the markets day in and day out for one reason and one reason only - to help our clients profit. To discuss your strategies with a broker, please call us on 020 7382 8384. Beaufort Securities Ltd is authorised and regulated by the Financial Conduct Authority, registered number 155104 and is a member of The London Stock Exchange and ISDX.
Hot Stock
ROCKETS SStoc toc ks k s R e a dy to tak e o ff hotstockrockets.com UK Investor Magazine — 9 — June 2015
postcard from greece
It is two minutes to midnight By Tom Winnifrith
A
s I write the sun is rising in Greece a day before the country is set to go bankrupt. Sounds dramatic? Well it could be but then we have been here before, so many times before. Do a google search on Greece debt deadline and you will see that it has been two minutes to midnight so many times before and yet somehow the can gets kicked down the road on every occasion.
Of course Greece should never have entered the Euro and never taken on such borrowings. That was political folly driven by those who wanted to enlarge the Eurozone and who did not understand basic economics and by a corrupt political class in Greece who saw all things European as a route to personal enrichment and sod the consequences.
But this week Greece is mean to repay loans which it simply does not have the cash to repay. As a bonus it must also repay to the IMF money taken out of its emergency deposit last month to repay that month’s loan repayment. It is a double whammy. Every single piggy bank has been raised by our valiant Government from bank accounts held by the embassies abroad to local authority bank accounts. But the game really does look like it is up this time.
That political class was swept away in the last elections. Traditionally Greece has only had two parties that mattered, Pasok (nominally left wing crooks) and New Democracy (nominally right wing crooks). The former was all but wiped out at the polls. The latter came a poor second to a new party Syriza led by the charismatic Alex Tsipras. But that party is itself a coalition of social Democrats like Tsipras, those who just wanted to kick the old parties in the goolies and a hard core of folks who in the old days who have voted Kappa Kappa - EuroCommunists.
Notwithstanding that, some fudge may well be found to allow for another can kick so the drama could be postponed that little bit longer. But the reality is that Greece is totally bust. It has heavy loan repayments to make not just this month but every month this year and every years up to 2057 and the struggling economy here simply will not generate enough revenues for the State to allow repayment.
Tsipras lied to the electorate, in the most charming of ways, claiming that he could get the EU and IMF to give Greece more cash, be more flexible on loan repayments without insisting on structural changes. For Greece needs to make radical structural changes to labour laws, to the size of the bloated Government payroll and to its pension system if it is ever to have a competitive
UK Investor Magazine — 10 — June 2015
economy within the Euro and to have a chance of repaying some of its debts. Or put another way, why the hell should you and I and 80 million Germans work until we are 70 to pay taxes to raise money to go to Greece to pay the pension of my brother in law which he can start collecting at 52. You want to work until you drop so that my brother in law can sit on the beach from when he is 52? Nope me neither. There is a hope in some quarters that Tsipras himself and perhaps half his party might agree to some reforms in order to get another bailout. But at least half his party would rather default than betray their promises to protect pensions and the bloated public sector. The Syriza coalition would fracture if such a deal was agreed. Tsipras could perhaps continue as Prime Minister in coalition with New Democracy but he knows that he would face a Nick Clegg style wipeout if he did that. Noone wants to be the new Nick Clegg. At some stage Greece has to accept that it is bust. And also that as the bank run described opposite demonstrates, that all of our banks are also bust. If the banks were honest about their level of bad debts and were forced to call those debts in only to get cents in the Euro back they would all be bust. The banks like the nation live in a state of pretence. Oh poor Greece it gets worse for as well as the debt bomb there is another timebomb ticking away - demographics. The average age in Greece is now 46 and it is rising fast. In the good times the young people with drive moved from the villages around where I live and from small settlements across Greece to Athens. They did not want to pick olives like their parents and so headed to the Capital. Those same young people now facing youth unemployment of 65% have now in many cases packed their bags again, heading for London, Berlin or to relatives in Melbourne or Astoria. And each week more young folks leave poor Hellas for a better life abroad. The only people heading the other way are old Northern Europeans who want to retire in the sun and refugees from Africa and the Middle East who land on the Greek coast in rusty old ships. The latter are not mad. There are probably more job opportunities going in Chad than there are in Greece so after three months the refugees head North to Germany or Britain. They are a drain on the Greek state for just 12 weeks before they get EU travel clearance. But still they are an additional drain on a Government that has no cash. The young Greeks who leave may come back. But most will not. They will marry overseas and bring their kids up in countries with better prospects overseas. And so Greece will get steadily older and older. Within a decade the average age may well be greater than 52, the age at which my Brother in law gets to go sit on the beach drawing his pension paid for by you and I. The ability
of a country with those sort of demographics to support its own ageing population will be challenging, but the idea that Greece could actually service or repay its debts as well is ludicrous.
Is there a way out? There is and it involves doing what our neighbours in Albania did a few years ago, that is to say to default. Suddenly Greece’s loans will not be our problem but that of those banks daft enough to lend us money in the first place. The New Drachma notes have already been designed and we would head back to a soft currency. The banks will all go bust and their assets (ie those loans that can never be repaid) will be sold off to new banks that will emerge. Of course the new banks will call in the loans causing misery as houses and businesses have to be sold at knockdown prices. I accept that the value of the Greek Hovel where I sit would probably halve. But that is the opportunity. Suddenly Greece will become terribly cheap. This country has real assets in minerals, in agriculture, in shipping and as a stunning and hot place to live. The area in which I live is known as Toumbia. It is not a village but a scattering of isolated farmhouses. My guess is that of the forty or so houses, three - if you include mine - are inhabited. The majority are now uninhabitable unless you are a goat or a snake. But since no-one is forced to sell, none ever change hands at a realistic price. In the scenario I outline these properties would start to be offered for peanuts by forced sellers and folks from Northern Europe would buy. Heck I might pick up the neighbouring ruin which is currently used to house goats. And folks like me would slowly start to renovate these places creating real jobs for Greeks. The same drivers would see outside investment in Greek businesses and agriculture across the land. Yes the default scenario would cause short term pain. Tsipras would have to admit that he was elected on a false prospectus. But he can always blame the accursed Germans as he walks out of the Euro with pride. As the economy recovers thanks to the very soft New Drachma a sensible leadership would use that breathing room to start ther process of structural reform, firing public sector workers knowing that real jobs in the private sector were available to them and slowly increasing the retirement age so that my Brotherin-law has to work a few more years before heading to the beach. Things can get better here but only when Greece accepts that there is no way other than default. Okay it might screw the Euro and German banks but that is their problem not ours.
UK Investor Magazine — 11 — June 2015
Witnessing the great bank run
J
im Mellon says that the Greeks should build a statue in my honour as on Friday I opened a bank account in Greece and made a deposit. Okay it was only 10 Euro, I need to put in another 3,990 Euro to get my residency papers so I can buy a car, a bike and a gun, but it was a start. But the scenes at the National Bank in Kalamata were of chaos, you could smell the panic and they were being replicated at banks across Greece. For tomorrow is a Bank Holiday here and if you are going to default on your debts/ switch from Euros to New Drachmas a bank holiday weekend is the best time to do it. And with debt repayments that cannot be met due on June 5 (next Friday) Greece is clearly in the merde. If it defaults all its banks go bust. But I had to open an account and make a deposit. Outside the bank in the main street of Kalamata there are two ATMs. The lines at both were ten deep when I arrived and when I left an hour later. Inside I was directed to the two desks marked “Deposit”. You go there to put in money, to open an account or if you are so senile that you cannot do basic admin of your account without assistance. As such it was me depositing cash and four octogenerians who had not got a clue about anything. Actually I lie. These folks may have been gaga but they were not so gaga that they were actually going to deposit cash, I was the sole depositer. Friday was also the day when pensions are paid into bank accounts. On the Wednesday and Thursday it was reported that Greeks withdrew 800 million Euro from checking accounts. Friday’s number will dwarf that. Whe you go to a Greek bank you pull off a
UK Investor Magazine — 12 — June 2015
ticket and wait for your number to be called. The hall in my bank contains about 60 seats all of which were filled. There were folks standing behind the seats and in fact throughout the hall, all wanting to get their cash out before the bank closed at 2 PM. At the side of the room, shielded by a glass screen sat a man behind a big desk. He tapped away at his screen and made phone calls. Ocassionally folks wandered over, shook papers in his face and harangued him having got no joy elsewhere. So I guess he was the bank manager. I rather expected him to end one phone call and stand up to say “That was Athens - all the money has gone, its game over folks.” But he didn’t. He may well do so at some stage soon. Eventually I got the the front of my five person queue of the senile and opened my account. Passport, tax number, phone number all in order. I handed over a 10 Euro note and the polite - if somewhat stressed - young man gave me about ten pieces of paper to sign and stamped my passbook. I have done my bit for Greece and have given it 10 Euro which I will lose one way or another in due course. So Jim - time to lobby for that statue. The Government did not put up a default notice on Friday as I half expected. The can kicking goes on. The ATMs will be emptied this weekend and on Tuesday and in the run up to a potential default day next Friday the banks will be packed again with folks taking out whatever money they can. It is not just the bank coffers that are being emptied. To get to The Greek Hovel where I sit now from my local village of Kambos is a two mile drive. On my side of the valley there is some concrete track but it is mainly a mud road. On the other side of the valley there is a deserted monastery so to honour the Church - even if there are no actual monks there - a concrete road was built in the good times. By last summer it was more pothole than road. By law, since I have water and electricity, I can demand that the road be mended and so last summer I went to the Kambos town hall (4 full time staff serving a population of 536) and did just that. They said “the steam roller is broken and we have no money but will try to do it in the Autumn.” They did not. But last week a gang of men appeared and the road is now pothole free, indeed in some places we have a whole new concrete surface. And as I head towards Kalamta there are extensive road mending programmes. At Kitries, the village has found money to renovate its beach front. It is a hive of activity across the Mani. Quite simply each little municipality is spending every cent it has as fast as it can. The Greek State asked all the town halls to hand over spare cash a few weeks ago to help with the debt repayment. The town halls know that next time it will not be a request but an order. But by then all the money they had hoarded will have been spent. That is Greekeconomics for you. Everyone knows that something has to give and that it will probanly happen this summer. The signs are everywhere. Tom Winnifrith
UK Investor Magazine — 13 — June 2015
“i will not tip any share this year”
The rally in 2015 is done By Thierry Laduguie trading strategist, bettertrader.co.uk
At the UK Investor Show I made a bearish statement; I won’t tip any share this year because in my view, the rally in 2015 is done. I expect a large correction sometime in the not too distant future. The FTSE 100 could go down by as much as 10%.
I
explained that my sentiment indicator (34-day BTI) gave a sell signal, basically bullish sentiment reached an extreme in the first quarter of this year. This behaviour generally coincides with market tops. Furthermore there is a disconnect between the FTSE 100 and the S&P 500 – the FTSE 100 is lagging the S&P 500, and the economy and the stock market are not in sync. Furthermore there is a bearish divergence between the Dow Jones Industrial Average and the Dow Jones Transportation Average. While the Dow Jones Industrial Average is making new highs, the Dow Jones Transportation Average was making a new 6-month low. According to Bob Prechter of Elliott Wave International, “I doubt this has ever happened before…it is very bearish”. On top of that the global economy is losing steam; China is slowing, Europe is flirting with deflation, Greece is running out of money. In the UK, consumer price inflation turned negative, it is the first time CPI has turned negative since 1960. In the US, the economic recovery is stalling, recent GDP data was sharply down and other economic indicators point to a slow down. The stock market too is running out of steam. We saw a good example of a market running out of steam yesterday after the FOMC meeting minutes. The news was good, Fed officials believed it would be premature to hike interest rates in June. Yet the S&P closed down. The Fed is concerned by the fragility of the recovery, the falling oil prices did not translate into increased consumer spending and they are worried about China and Greece. If the market can’t rally on good news, how can it rally? The S&P produced a reversal day at the end of
a fifth wave, this is when prices make a new high and then close is in the lower third of the day’s range. This is a bearish pattern, so chances are the US index has turned down. For this reason and given the state of the markets it is increasingly likely that the trend in the FTSE 100 has turned down too and the high at 7122.7 on 27 April will remain intact. The FTSE 100 turned down before the S&P 500 because it is the leading index. The S&P 500 should follow. April 27th is a key date, Remember that date, it was nine days after my forecast at the UK Investor Show. The pattern on the FTSE 100 is an ending diagonal [1,2,3,4,5] in the fifth wave of a long term advance. The support line drawn from the bottom of wave 2 and 4 has been broken, the pattern is complete. This line is now acting as resistance, currently at 7037. The next move should be down.
UK Investor Magazine — 14 — June 2015
tip of the month
IS Solutions at a 60p offer By Tom Winnifrith
Y
ou know that I am bearish about the market but there are still pockets of value. Warren Buffett’s average annual return is 23%. Those who promise to shoot the lights out with a share tip usually disappoint. My approach is more cautious and so my targetted return here is ..23% INVESTMENT CASE: Having reached more than 70p in March 2014, shares in IT systems integrator, IS Solutions (ISL) have fallen back to a current 60p offer price, capitalising the company at £21 million. The shares rose from 46p on the back of a December announcement of the successful conclusion of negotiations for “a major Analytics contract” and that “the business also has a number of exciting opportunities within its pipeline; this together with recent business wins and a number of projects coming back on stream bodes well for the future”, but are thus far little changed in 2015 having commenced the year at 54.25p. This looks to fail to reflect continuing positive progress and the shares are a buy. OPERATIONS: Focusing on portals, analytics and enterprise content management, IS Solutions is a specialist in bringing together components from various technology providers to create unified systems. Early this year it added through acquisition the ‘big data’ analytics capabilities of previously long-standing trading partner, Speed-Trap Holdings Ltd – noting that this will “provide the company with access to additional routes to market, new geographies and a high quality customer base”. MANAGEMENT INCENTIVE: With a background in
computer engineering and systems distribution, Managing Director John Lythall is a co-founder of the company and retains a 6.45% shareholding. His remuneration in 2013 totalled £143k. Last month the company announced Peter Simmonds had been appointed to the board and is to become Chairman after a short handover period. Simmonds has more than 20 years experience at senior management and board level and was recently CEO for over six years at fellow software & computer services group Dotdigital – which has performed very well since joining AIM at 7.875p in March 2011. He soon acquired his first shares in IS – spending nearly £50,000 at 54.5p per share. In total, the board hold a more than 26% stake. FINANCIALS: For the 2014 calendar year, the company reported a pre-tax profit of £0.98 million on revenue approaching 6% higher than in 2013, of £10.35 million, generating earnings per share of 3.17p, up from a prior year 3.14p. After particularly a £0.64 million net working capital outflow and £0.28 million paid out in dividends, there was a £0.11 million increase in net debt to £0.28 million. However, the net current asset position increased by £0.36 million to £2.05 million, with non-current liabilities reduced by £0.11 million to £0.43 million. The company particularly emphasised “a strong return to profit in the second six months” – with this period producing a pre-tax profit of £1.30 million on revenue of £6.93 million as the company secured a major contract
UK Investor Magazine — 15 — June 2015
after cancelled and delayed contracts hit first half performance. Post the year-end the company completed the acquisition of Speed-Trap Holdings Ltd, which included £1.3 million of cash consideration. It noted an anticipated break-even result on revenue of £2.3 million for this business in 2014, moving into profit in the current year. RISKS: There is the inherent risk of competition in this sector and the first half of 2014 highlighted the risk of contract cancellations and delays. However, the second half of the year showed a swift recovery. There is also risk in any acquisition and that of Speed-Trap saw the company into a more significant net debt position. However, the overall balance sheet looks in decent shape, the prospects for increasing profitability look good and the acquisition risk should be significantly mitigated by the company having been a trading partner of Speed-Trap for more than 10 years and IS Managing Director John Lythall having held a non-ex-
ecutive director role at Speed-Trap. Indeed IS has already updated that “the integration of the two businesses has gone well, and almost complete”. VALUATION: The March results statement noted “strong underlying demand from our Analytics sector which together with recent contract wins puts us in a good position for the 2015 financial year”. There are forecasts for current year earnings per share of 4.5p, with the company also “confident that we will resume our progressive dividend policy” following the Speed-Trap acquisition – 1.60p per share paid for 2013. At a current 60p offer price, this suggests a possible price/ earnings multiple of sub 13x and dividend yield of circa 3%. Given the growth outlook, these look attractive parameters and the shares are a buy. Target price to sell 72p. That is 20% capital gain plus 3% yield a 23% targetted return.
This article first appeared on the Nifty Fifty website run by Tom Winnifrith, Steve Moore and Lucian Miers - sorry paying customers come first. To read Lucian’s next shorting idea this weekend and to catch the next value investment share tip from Tom & Steve out shortly click here.
Tom Winnifrith’s
5 mo de l por tf ol i o s : Growth Income Gold Recovery Penny Shares
S u b s c r i b e t o day
newsletters.advfn.com/tomwinnifrith UK Investor Magazine — 16 — June 2015
telecity’s epic last year ends with a takeover
Another reason to think thematically By Chris Bailey editor, financial orbit
UK
Investor Show attendees will know from the presentation I made there that I am a fan of Telecity (TCY) and its exposure, via its range of data centres, to the phenomenal growth in corporate data management requirements. Today was the beginning of the end of the Telecity journey as it was confirmed that its large US peer Equinix will be making a takeover offer half in cash and half in Equinix shares. The rationale for the deal is strikingly simple: as data requirements from corporations go ever more global, Telecity’s customers will now be able to access Equinix’s American and Asian infrastructure as well as in Europe benefiting from a denser, better network. Given synergies, economies of scale and stronger global balance my view would be that any investors with Telecity shares and a capability to hold Equinix stock should do just that. Valuation is not classically cheap…but there are not many companies out there with 10% plus annualised growth rates out there with strong certainty due to infrastructure and reputational barriers to entry. Old school investment thinking was all based on asset allocation, sector selection and stock picking.
I think much of this rigidity should be cast away and investors should think thematically. Strict sector allocations are increasingly being blurred and the differentiations between companies nominally in the same industry classification are getting ever wider in a world where information flow and corporate interests are ever more global. Additionally—and I hate to say this – economic growth is structurally slowing globally. Blame it on demographics or too much debt but unless you focus on the big growth themes or solid dividend yields, current equity valuations mean that most stocks out there are going to struggle to make you money. I said at the UK Investor Show that you should summarise your investment case for any company large or small in six bullet points and a couple of charts and if you have to question one of those aspects you should consider selling the stock. Cash flow, management credibility and shareholder remuneration should always be high on your list as check points for any stock. But also ask what global theme is providing a tailwind (or headwind) too. And being a global themes investor sounds far more beguiling than a plain old stock picker!
UK Investor Magazine — 17 — June 2015
company of the month
Adept Telecom
AdEPT Telecom plc is a provider of a range of voice and data telecommunications services to businesses and residential customers across the UK, with strategic relationships with tier-1 suppliers. It listed in February 2006 on AIM (at 140p per share) to help it grow via acquisition as it saw a fragmented business services provider sector presenting a consolidation opportunity and had developed scalable back-office systems. By Steve Moore.
A
s acquisitions followed, the shares initially performed ended’s 8.38p, a more than 12% increase on the comparative well – rising to over 200p. However, the acquisitions 2013 period. brought debt; results for the six months ended 30th SepAn April trading update for the year to 31st March 2015 nottember 2008 showing this having grown ed that adjusted pre-tax profit is again “exto £11.08 million (net), with liabilities pected to be ahead of the prior year and in £13.21 million more than current assets. Chairman Roger Wilson has line with market consensus expectation”, a As turmoil hit global financial and credit worked in the telecom industry £1.4 million reduction in net borrowings markets, the shares crashed towards 10p over the year despite particularly £2.14 for more than 20 years, with this as investors became indiscriminately million expended on acquisitions and a previous experience including as petrified of debt. proposed full-year dividend per share of the first Managing Director for However, the management team led by 2.5p, taking the total for the year to 4.75p Telewest Communications’ resiChief Executive Ian Fishwick unassumper share, up from a prior year 3p. dential consumer business in the ingly set about adjusting to the new finanWith now calmer financial and credit UK and Managing Director of the cial reality – reducing overheads, tightmarkets and having proven their ability ening credit management and focusing European Competitive Telecomto generate consistently strong free cash on developing organic sales, improving munications Association. flow, management are now again advanccustomer retention and generating cash ing the strategy “of consolidation of the and paying down debt. fragmented fixed line telecom market in They noted that together with increasing fixed monthly the UK”, continuing “to identify earnings enhancing acquisition revenues, a diverse customer base with the top ten customers opportunities”. accounting for approximately 11% of revenues, strong cash This is with April having also seen the company announce conversion with low capital investment requirements and three the signing of a 5 year, £15 million revolving credit facility year banking facilities recently agreed, the agreement with Barclays Bank on imcompany was confident of its position and proved terms to those in place under its that “we look forward to a period of providChief Executive Ian Fishwick previous facility and an announcement ing added investor value through deleverfounded the company and has in May of an initial £7 million and up to aging from continued strong operating cash £10.5 million acquisition of Centrix Ltd, been a chief executive or mangeneration”. a specialist provider of unified commuaging director in the telecoms The embedded table shows deleveraging nications and managed services. industry for more than 20 years, from continued strong operating cash genThe shares are now at 175p but, ahead including as a managing director eration is exactly what they delivered – with of the results announcement for the at Telewest Communications net debt reduced to £2.96 million and total company’s year ended 31st March 2015 managing Telewest North West, liabilities over current assets to £4.51 milwhich is expected in early July, the vallion by 31st March 2014, whilst the number Telewest London and South East uation continues to look relatively unof shares in issue was just little more than and Cable London. In that time he demanding, including a dividend yield 4% higher than the 21,067,443 following has completed more than 30 teleof still more than 2.5% and particularly the 2006 AIM listing. with the proven cash generation and excoms mergers and acquisitions. The table also shows adjusted earnings perienced management who have shown per share having increased every year from their ability to adapt to both telecoms 2010 – with the first half of the year just and financial market conditions. UK Investor Magazine — 18 — June 2015
the house view
The General Election matters not a jot Crack out the champagne, the Tories have won and can govern unhindered by those pesky Liberal Democrats! That seemed to be very much the view on 8th May but three weeks later what has really changed for Britain?
O
kay we admit, it was fun seeing Ed Milliband have to eat his victory speech and as for the loon Vince Cable losing his seat it was pure delight. The old fool can now go back to predicting 17 of the next four recessions as his full time job or maybe Rob Terry could offer Cable a job as a thank you for his valiant support while in office. But the time for gloating is over. Okay it was also tremendous fun seeing economic illiterate Ed Balls losing his seat. The fact is that the whole election was fought on one great big lie. The left claimed that the last Government had imposed austerity on Britain. The Right claimed that it was making great strides in balancing Britain’s books in a responsible manner. Both sides were lying. There has been no austerity. Government spending has increased year on year under the last Government and there are absolutely no signs that it will not be the same again this time around. As a result, in the last financial year the UK Government spent more than £100 billion more than it recouped via taxation. National debt stood at £1.56 trillion or just under 82% of GDP at the period end. The Government plans to eliminate the deficit in the current Parliament but like the projections offered by all parties at the Election that is predicated not on implementing real austerity but on economic growth trimming welfare payments and - more importantly - boosting tax receipts. Like all politicians those running the current Government are planning to spend today the assumed growth of tomorrow.
There are many black swans that could de-rail those growth projections, Britons as a whole have too much personal debt via mortgages and other loans. The inevitable rise in interest rates will not only increase the cost of servicing the Government’s own debt (currently £45 billion a year) but could also impact consumer behaviour and thus economic growth adversely. As for our major expert market Europe, it is not exactly delivering robust economic growth is it. Throw in the effects of the strong pound against a weak Euro and Britain’s exporters could face a challenging few years. Again that could derail the prospects for growth. The reality is that no party was honest with the electorate about how we are all living beyond our means. For Britain to balance its books it really does need to see austerity which meas dramatic reform of the pension system, of welfare spending of how we fund the NHS black hole, of our bloated higher education system. These are the big ticket spending items for any Government but no politician dares to admit that we cannot afford to go on as we are. There is not a cat in hell’s chance of Britain balancing its budget by the end of this Parliament. At a debt to GDP ratio of 90% Country’s can easily tip into a death spiral which forces up the cost of borrowing so increasing the deficit and debt and it is hard to get out of such a spiral once you are in it. A Tory win was the least worst option for Britain but in reality it changes very little as no-one is really prepared to face up to the big elephants in the room.
UK Investor Magazine — 19 — June 2015
UK INVESTOR SHOW 2016 Sponsored by:
UK INVESTOR SHOW 2016 OW 2016 UK INVESTOR SHOW “Main stage presentations were great… particularly Mark Slater, Luke Johnson, panel discussions and of course the inimitable Tom Winnifrith." - PS
"As a long term investor, I found the shorting session fascinating and frightening." - DM
UK INVESTOR SHOW 2016 UKINVE INVESTOR SHOW 2016 OW UK2016 INVESTORS SHOW 2016 UK IN UKTickets INVESTOR SHOW 2016 half price until 7 June Book now Meet and speak to CEOs and board members from AIM & LSE companies 16 April 2016
Westminster, London
ukinvestorshow.com UK Investor Magazine — 20 — June 2015
UK Housing House
where have all the doomsayers gone?
By Tom Winnifrith
UK Investor Magazine — 21 — June 2015
U
ntil two or three years ago there were a myriad of websites producing very sensible data to demonstrate that UK house prices were set to crash. Looking at them now is like looking at one of those old Western ghost towns with tumbleweed blowing down mainstreet. The websites are still there but folks stopped updating them a long time ago as house prices just carried on climbing. The doomsayers have just given up. And who can blame them. House prices have continued to race away. One fifth of Britons made more from the, paper, gain on the value of their house in the past twelve months thany they generated from paid employment. One reads anecdotal evidence daily that the love affair wth housing is reaching ever greater levels - the Surrey flat snapped up by a crowdfunded buy to let investment group in less than an hour. The lines of folks flocking desperately to snap up new builds in locations that can only be described as marginal. Housing is now seen by many as THE one way bet. Humans are in many ways like goldfish - we have relatively short memory spans and are thus prone to believe that what has happened in recent times will continue forever. As such many people genuinely seem to believe that we will always enjoy low interest rates and that this will fuel further house price growth. The reality of course is rather different. The average UK house now costs c£197,000. The average UK household income is c£38,000. As such the house price to income ratio is now comfortably well over five. That is well above the long term mean of c3.5. And the ratio is at a level which historically has only been reached before a sharp correction in house prices. So might it be “different this time?” The bulls will argue that wages are now increasing at well above inflation levels ( 2.2% versus 0.1%). And they argue that in a low interest rate environment historic price to income metrics are irrelevant. They point to an underlying shortage of housing in the UK and expected population growth. Hmmmm. The reality is that there are well over a million empty properties in the UK. Okay many are in a poor condition on in places where folks are not queuing up to live. But perhaps a Tory Government might do something to force Local Councils to not sit on so many vacant homes? There are measures that can be taken to free up properties in a way that will easily cope with any growth in the population. Wages are indeed increasing at above inflation levels but at a slower pace than house prices are increasing and there is an awful lot of cacth up on that metric from the past few years. The fact is that housing is NOT becoming more affordable but less affordable. As for interest rates? They will clearly increase. The Bank of England recently forced mortgage lenders to consider the ability of prospective borrowers to service their loans if there was even a modest increase in base rates of 3%. That more stringent test resulted in a sharp fall in mortgage approvals. Which begs the question of how many borrowers who have been granted mortgages in recent years will struggle with a modest increase in base rates. The answer is a lot. Property is by definition an illiquid asset. When interest rates increase as they must surely do within a year not only will that choke off the supply of new buyers but it will also create forced sellers. And that brings us back to the house price/earnings ratio now being at levels which have always just preceeded a sharp correction in the past. Will it be different this time? No. UK Investor Magazine — 22 — June 2015
Steve Moore smug as he updates on his tips of the year
More gains to come from these ‘3 for 2015’?
A
t the end of 2014/beginning of 2015 many of the writers on the shareprophets.com website were asked for their top share selections for the year ahead. I provided three – which are reviewed in the following. Although they have performed well (for reference the AIM All-Share, which they are all in, is +10.1% year to date, 702-772.6 and the FTSE All-Share is +7.5%, 3,532.74-3,797.12), I continue to believe there is potential for further upside in each…
K3 BUSINESS TECHNOLOGY (KBT) OFFER PRICE: 225p CURRENT BID PRICE: 255p COMPANY DESCRIPTION: Provider of software, hosting and managed services to the retail,
manufacturing and distribution sectors. A member of Microsoft’s Global Independent Software Vendor programme and the first such Microsoft Dynamics AX partner for the fashion retail sector. From its Manchester head office and regional centres, the company supports more than 3,000 customers in over 30 countries. ANALYSIS: Shares in K3 reached more than 230p in 2011 before falling back, slipping to sub 100p in 2013 post an announcement that “due to the deferral in signing certain significant retail UK Investor Magazine — 23 — June 2015
deals, coupled with investment in the group’s Microsoft AX offering, K3 will generate pretax profits below current market forecasts”. There has though since been substantial progress made. I noted positive trading momentum in the piece at the end of 2014 and this was borne out in results for the six months to 31st December 2014. These showed an adjusted pre-tax profit of £3.56 million on revenue of £41.67 million, generating earnings per share of 8.4p, up from a 2013 comparative
7.7p, and seeing net debt reduced by £1.55 million to £12.07 million. They also saw the company emphasise “we continue to be confident of the exciting growth prospects available to us”. Subsequently K3 has announced a £1.75 million acquisition of Willow Starcom Ltd, a Greater Manchester-based provider of IT support services, with particular expertise in Microsoft products. It noted this “will be readily integrated at limited cost within K3’s existing hosting and managed services activities”. This latest move saw house broker to the company, finnCap, nudge up its pre-tax profit and earnings per share forecast for next year by 3% - it anticipating 19.5p in earnings per share for the year to 30th June 2015, now rising to 25.3p (on a pre-tax profit of £10 million) next year. With increasing own-IP benefitting margins and around half of revenues recurring in nature, finnCap is targeting a 330p share price here. This looks reasonable enough to me – and suggests still good upside from current levels.
VISLINK (VLK) OFFER PRICE: 38.5p CURRENT BID PRICE: 56p COMPANY DESCRIPTION: Automation software and wireless communications products and services-focused technology business. It serves two main markets; broadcast (e.g. the collection of live news, sport and entertainment events) and surveillance (e.g. defence, law enforcement) and employs more than 300 people with offices in
the UK, USA, UAE, Brazil and Singapore and manufacturing operations in the UK and USA. ANALYSIS: Vislink saw positive share price momentum into September last year hit by interim results which noted that “in our core markets of the US, the UK and Europe, our hardware business found market conditions challenging and we continued to witness longer decision making cycles”. However, the company added that it had “already begun to see some of these key orders convert post the period end”, that in Q2 the order book had “strengthened significantly” and that its “software strategy is on track, providing the group with improved margins, cash generation and visibility of earnings”. March-announced results for the 2014 calendar year showed an increased adjusted pre-tax profit of £7.06 million, though tax effects reduced earnings per share slightly from a prior year 4.2p to 4.1p. Additionally, net cash fell by £3.33 million to £0.38 million – though this after particularly £5 million of acquisition spending (after new shares issued), £1.47 million paid out in dividends and with the company noting that “inventory levels were unusually high at year end due to a number of projects which were fully or partially complete awaiting shipment in Q1 2015” and that “trade receivables included a significant debtor at the year end. The expected payment of which is due in H1 2015. There are no significant adverse trends in debtors”. With these, net current assets were a much healthier £14.78 million, with there £8.02 million of non-current liabilities. The results statement also noted that, though its “markets continue to be challenging”, the company is buoyed by its expanding higher-margin software offering and more efficient integrated communication division under new leadership. These see there forecasts for earnings per share to advance towards 5p this UK Investor Magazine — 24 — June 2015
year, with a 1.60p per share dividend – suggesting that, despite the share price re-rating so far in 2015, the rating and dividend yield remain quite attractive. I consider that 65p does not currently look an unreasonable target.
IMPELLAM (IPEL) OFFER PRICE: 510p CURRENT BID PRICE: 780p COMPANY DESCRIPTION: Specialist staffing and managed services provider based primarily in the UK and North America, with smaller operations in Australasia, Ireland and mainland Europe. It comprises Specialist staffing and managed services businesses in the UK and North America and Carlisle Support Services – with a focus on security and cleaning for the transport, retail and leisure sectors across the UK, Ireland and mainland Europe. The company reported with its results in March that it is the second largest recruitment business in the UK and 12th worldwide, with more than 2,500 Impellam people across over 234 locations. ANALYSIS: Positive in outlook and with increased growth forecast, shares in Impellam looked very cheap at little more than 500p towards the end of 2014. A January trading update and March results for the 53 weeks ended 2nd January 2015 have seen positive share price momentum. The January update noted that “full year trading will be in line with expectations with strong performance in the UK Specialist Staffing and Managed Services businesses, and the turnaround in performance of Carlisle Support Services offsetting under performance in North America”.
This was followed by the results statement showing an adjusted pre-tax profit of £34.6 million on revenue of £1.323 billion (+4.7% like-for-like on the prior year, gross profit £193.9 million - an unchanged margin of 14.7%), generating increased earnings per share of 65.9p. The company also then noted that it “expects improved margins going forward in all segments and particularly in the US where action was taken mid-way through 2014 to address under
performance”. This positive trading progress turning into positive share price progress saw Tom Winnifrith opt to take profits and sell from the Nifty Fifty portfolio in March. The shares initially continued their upwards progress but, having reached 840p earlier this month, have now slipped to current levels. There are forecasts for the current year pre-tax profit to rise to around £46 million, generating
UK Investor Magazine — 25 — June 2015
earnings per share of circa 75p. A balance sheet with £14.8 million of net debt at last year’s end looks comfortably manageable and the valuation still far from excessive. The cautious will likely have banked the significant quick-fire gain here, though there still looks to remain some further upside potential and I’d currently consider a circa 900p share price not an overly demanding valuation.