Buy: OneSavings Bank
The shares look cheap on eight times this year’s earnings, in part reflecting the profitability of OSB’s low-cost operation, writes Ian Smith.
Less than a week after TSB received a knockout approach from Spanish bank Sabadell, shares in newly listed buy-to-let lender OneSavings Bank jumped by 14 per cent to a new high after it reported a more than doubling of pre-tax profit last year.
The loan book grew by 29 per cent to £3.9bn, enlivened by new business worth £1.5bn — up an impressive 84 per cent on 2013. This was led by an increase in buy-to-let mortgages.
Together with small business lending, buy-to-let now makes up more than half of OneSavings Bank’s gross loan book. Growth should be further boosted by the group’s admission to the Bank of England’s Funding for Lending Scheme, which was finalised late last year.
Chief executive Andy Golding presents his operation as a simple business built on reliable borrowers and low costs. Indeed, its cost-income ratio was reduced to 28 per cent last year (38 per cent in 2013). That’s extremely low against peers, with Virgin Money (VM) at 69 per cent and Close Brothers (CBG) at 61 per cent.
The ratio was helped by a 77 per cent surge in income to £125m. Mr Golding says low employee costs at the company’s India-based processing centre also allow it to be more cost-efficient than fully UK-based operations.
Broker RBC Capital Markets expects adjusted earnings per share of 27.8p this year, up from 24.4p in 2014, and year-end net tangible assets of 114p (98p in 2014).
Sell: Smiths Group
Despite a stronger than expected recovery for the medical unit, the overall outlook at Smiths Group still looks grim, writes Daniel Liberto.
Even after stripping out adverse currency movements and various one-off charges, revenue was flat and operating profit fell 3 per cent to £232m in what was another difficult six months of trading for Smiths Group.
The engineering conglomerate once again delivered mixed results, with its detection and interconnect divisions trailing the pack.
Designing sensors to identify explosives and drugs continues to be a tricky market for Smiths’ detection unit. Pricing pressures pushed adjusted operating profit down by 14 per cent in the first half. Demand for expensive, high-tech radars is still nowhere near post 9/11 levels, although management note that recent wins, such as the $125m (£85m) Abu Dhabi airport contract, have boosted the order book.
The interconnect division, which produces electrical components for wireless telecoms, aerospace and rail customers, also suffered. Delays in customer spending contributed to a 5 per cent slump in adjusted sales.
More positively, after years of stagnation caused by budget constraints in US healthcare, Smiths Medical delivered revenue and profit growth. The improvement mainly came courtesy of tight cost control, investment in infusion pumps and a better year for disposables.
Consistent performer John Crane also shrugged off concerns about the low oil price with a 1 per cent increase in underlying sales. A focus on less vulnerable after-market services was enough to offset troubled upstream oil markets on this occasion — although management did warn of future project delays.
Broker Numis Securities slashed its forecast for full-year adjusted pre-tax profit by 6 per cent to £440m, giving adjusted earnings per share of 80.8p (from £429m and 78.9p in 2013).
Sell: Pure Circle
The rising cost of raw materials will hit margins this year and management’s warning on sales growth raises concerns, writes Julia Bradshaw.
Demand for low-calorie beverages continued to buoy PureCircle in the first half. Cash profit rose by nearly a quarter to £6.4m as the gross margin rose from 12.3 to 14.5 per cent.
PureCircle manufactures low and zero-calorie all-natural sweeteners, blends and flavours derived from the stevia plant, a shrub native to Paraguay.
These sweeteners, which have gained regulatory approval in several countries, are used by some of the world’s biggest beverage names, including Coca-Cola and Pepsi, which rolled out a number of stevia-containing products in key markets in the first half.
As producers face mounting pressure to cut the calorific content of food and drink products, stevia is also being adopted by foodmakers in categories such as ketchups, yoghurts and confectionery — all of which bodes well for PureCircle.
Last year the Aim-listed group reported a maiden profit. To meet growing demand, PureCircle will use $43m (£29m) from a placing in November to expand production capacity and invest in product innovation for the next three years.
However, chief executive Magomet Malsagov cautioned that growth will come with a “lumpy sales profile” until market consumption smooths out, making it difficult to provide short-term earnings guidance.
Mr Malsagov added that stevia leaf supply has tightened due to rising demand. This will push up prices in the short term, increasing PureCircle’s cost of sales and hitting margins.
Stock screen: Highs and lows
Forget book value, price-earnings-growth ratios and dividend yield. It’s time to go for momentum and low price-to-sales stocks. At least that’s what this year’s strategy screen reckons, writes Algy Hall.
Reams of academic research into momentum investing backs the notion that it’s possible to beat the market by buying the best-performing shares from a past period. The strategy screen, which I devised two years ago, tries to apply the principle of momentum investing to selecting investment strategies. And, while it’s early days, so far the approach has been successful.
The screen had a fantastic run in its first year, and while the past 12 months have not been as stellar, it has once again outperformed the FTSE All-Share, producing a 5.2 per cent total return, compared with 4.8 per cent from the index. The cumulative total return now stands at 62.1 per cent, compared with 21.0 per cent.
The strategies the screen assesses are very basic and focus on a single factor. This year I have added a low price-to-sales (P/S) ratio strategy into the mix as P/S is considered by many to be a key indicator of value. The screen looks at the performance over the past three months of the fifth of the FTSE All-Share that look most attractive from the perspective of each of the nine strategies.
This year, the returns from the best-performing strategies have been so close that I’ve run two separate screens. Both demand that shares display high (top fifth) momentum and low (bottom fifth) P/S, as these were clearly the two top performing strategies of the last three months. But for a third factor, one screen asks for high earnings per share (EPS) growth while the other demands a low forward PE.
Between them, the screens have highlighted 19 stocks. Here are top three stocks based on highest momentum and the top three stocks based on lowest P/S, followed by others that passed each respective screen.
Evraz — The Russian steel company is exposed to sanctions and the slowing Russian economy, but there is plenty of scope for a recovery in the share price.
Trinity Mirror — The decline in print advertising and circulation now looks fairly stable, and is being offset by cost-cutting and investment in digital growth, while the company’s debt position was down to a better than expected £19m at the year-end.
TT Electronics — Shares tanked late last year after company warnings, but a programme of cost-cutting and refocusing is under way.
John Menzies — The group has been trying to offset the long-term decline in its core newspaper and magazine distribution operation by expanding into aviation services, but profits for the latter slumped in 2014.
Pendragon and Lookers — The new car market, where both groups generate about a third of sales, is very strong in the UK, buoyed by attractive financing and the strength of the pound. It also drives activity in the higher-margin markets for aftersales services and used cars.
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