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Monitoring SDM 15 November 2014

 

I think it is fair to say, that the majority of private investors tend to take Broker notes, with a large pinch of salt or caution.

From a personal perspective I tend to look out for what I consider too aggressive numbers being pencilled in, particularly when it comes to companies where there is a history of non or poor delivery.

With that in mind, like others, I tread a wary path in terms of taking a closer look or committing on buying a particular stock.

Throughout this year I have kept a close eye on STADIUM GROUP the North east based business focused on Electronic design and build solutions which continues to catch my eye.  

 

Perhaps the single most positive factor for me with this one, has been the movement into a more technological and higher margin focused area of business for the company as opposed to its more traditional and largely cyclical offering.

 

That diversification has been something of an ongoing process driven by both restructuring and cost savings within existing products, along with what would seem to be some shrewd and complimentary acquisitions.

 

Although the process continues, there has been enough evidence over the last year to suggest that the company’s repositioning of itself into an IP rich electronic technology business has the ability to deliver some solid returns which should translate into potentially significant earnings growth.

 

As reported in its last Interim results, the integrated service strategy has seen the order book within its technology products increase sharply growing by 50%. In that field Stadium is particularly pushing its power and display products.

 

Within the power element, sales increased by 52% to £2.8m and the company also cemented a design and supply agreement with a large global electronics operator, which should deliver benefits next year.

Perhaps the most potentially promising aspect of the new strategy comes in the form of (Stadium) United Wireless, which was purchased in July of this year for an initial £6m rising to £8m depending on performance.

 

This business is a specialist designer and producer of machine-machine wireless solutions which in its most recent financial year achieved revenues of £6m. The acquisition looks a sound fit which combining with Stadiums other offerings and routes to markets should strengthen prospects for the Group as a whole.

Stadiums products and end markets appear to be quite diverse, the power arm providing custom and standard supplies that include convertors, battery chargers and EMC filters, for medical, transportation and security.

 

While on the display side, there are human machine interfaces produced, which covers marine, aviation, rail and point of sale markets.

These, combined with other parts of the business, would seem to have the ability to extend into new areas for growth.

On the share price front, the performance has been an impressive one over the last year as prospects have improved, with uplift to a high of at one point, 97p.

 

In more recent weeks there has been a retrace to a current 85p which may be worth taking a close look at again.

Broker N+1 Singer upped its forecasts pretty significantly post the Interim results with the 2015 pre-tax profits raised by 31% to £4.2m against the 2014 expectations of £2.7m.

That, in a round about way, brings me back of course to the opening comments and as to how reliable Broker forecasts are and as to whether they are too aggressive.

 

From past personal experience, I have to say that N+1 Singer have been fairly consistent and near the mark or even spot on with a number of companies I have looked at, so I tend to view its numbers with less suspicion than some, although it is not immune from getting it wrong.

 

Interestingly Charles Stanley also covers Stadium and is opting for a pre-tax profit of £4.7m for next year with EPS of 11.4p, so although higher suggests that there is some underlying confidence in the forward picture.

For now though, I am going to ignore the latter, preferring to take N+1’s view. Its numbers would appear achievable on information available, given Stadium’s progress to date along with the management’s seemingly confident view ahead.

 

Pre tax profits in the first half of this year have already increased markedly, with the board reiterating its view of full year confidence based on an expected even stronger second half.

 

A strengthening order book and the early success of its integrated strategy would also appear to bode well.

Of course, we are all well aware of how tentative and fickle the global economy can be and it is worth remembering that profit warnings have been on the up, the last quarter the highest since 2008.

That said, I like the management at Stadium and its strategy, while a broad, growing and diverse spread of business and customers should hopefully see it on track to continue on the improving performance.

Looking at the numbers again, the expectation of EPS for 2015 of 10.98p sees the shares standing on a PER of under 8, which is at a significant discount to peers and suggests to me that they are worthy of monitoring.

The prospective dividend looks interesting too, where having raised the interim payment to 0.7p from a previous 0.45p N+1 expects a figure of 2.7p for next year which would represent a nice yield in conjunction with the ongoing growth prospects.

 

As with any other smaller company, slippage can see the shares hit hard and that is unfortunately part of the rub.

 Equally though, further delivery on prospects can deliver a marked increase in the share price and given the current lowly rating Stadium shares do remain interesting to me.

The market cap at present of £26.5m looks decent value too, with revenue of £53.7m expected for next year, against the full year 2014 anticipated £44.4m.

 

On the balance sheet it is worth noting that there remains a pension deficit which although reducing is expected to be static next year at £4.2m, while the company earlier this year arranged a new revolving credit facility with HSBC, which runs for five years.

 

That aside, it doesn’t seem excessively geared and interest cover should be comfortable too.

The major Institutional holders are AXA, Henderson and Miton and any activity from those or for that matter new investors rising above the threshold may be worth noting.     

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