Have you missed the boat on these ris­ing stars or is there still time to climb aboard?

Ex­cep­tional com­pa­nies can de­liver some ex­tra­or­di­nary long term re­turns

Shares - - CONTENTS DISCLAIMER -

Ahighly suc­cess­ful, yet un­named, fund man­ager, is quoted in full year re­sults (24 Jul) from floor­ing star turn Vic­to­ria (VCP:AIM) as de­liv­er­ing the fol­low­ing pearl of mar­kets-re­lated wis­dom:

‘[In­vest­ment is] not a well­be­haved ma­chine that cranks out re­turns to own­ers of all eq­ui­ties...In­stead quite ex­tra­or­di­nary re­turns flow from a tiny frac­tion of the com­pa­nies in ex­is­tence.’

This is cer­tainly the case on AIM, where the likes of on­line fash­ion phe­nom­e­non ASOS

(ASC:AIM), soft drinks star turn Fev­ertree Drinks (FEVR:AIM)

and lit­i­ga­tion fi­nance provider

Bur­ford Cap­i­tal (BUR:AIM)

have de­liv­ered share price gains be­yond the dreams of even the most op­ti­mistic IPO backers.

FLOOR­ING THE COM­PE­TI­TION

An­other ju­nior mar­ket listed stock that has given in­vestors a mag­i­cal ride is car­pets man­u­fac­turer-turned-in­no­va­tive floor­ing com­pany Vic­to­ria whose shares have ad­vanced more than ten-fold to 820p since Kiwi Ge­off Wild­ing took con­trol of the busi­ness in late 2012.

The lat­est re­sults con­firmed a fifth con­sec­u­tive year of un­der­ly­ing earn­ings per share (EPS), free cash flow and op­er­at­ing mar­gin growth, with sales up 28.6% to £424.8m in­clud­ing ac­qui­si­tions and un­der­ly­ing pre-tax profit leap­ing from £29.4m to £40.8m.

In his out­look state­ment ex­ec­u­tive chair­man Wild­ing says: ‘I of­ten hear non-share­hold­ers wor­ry­ing that they have “missed the boat” with Vic­to­ria - al­though I am at a to­tal loss to un­der­stand why they would think that.’

He con­tin­ues: ‘Our earn­ings per share growth has hap­pened for two rea­sons: firstly, or­ganic “self-help” ac­tions (re­duc­ing over­heads, bet­ter raw material

pro­cure­ment, more ef­fi­cient lo­gis­tics, lever­ag­ing the knowl­edge of our in­dus­try ex­pert se­nior man­age­ment to ra­tio­nalise our pro­duc­tion foot­print, etc.), and sec­ondly, earn­ings ac­cre­tive ac­qui­si­tions. And what on earth would make any­one think we will stop either ac­tiv­ity any time soon?’

WILD-ING, I THINK I LOVE YOU

Yes, the shares have per­formed phe­nom­e­nally well, but Vic­to­ria re­mains a com­pelling con­sol­i­da­tion story in a highly-frag­mented, grow­ing global floor­ing in­dus­try, with just 12% share of the UK car­pet mar­ket, around 15% of the Aus­tralian car­pet mar­ket and less than 1% of Europe’s ce­ramic mar­ket.

Under Wild­ing’s stew­ard­ship, Vic­to­ria has been scal­ing up through ac­qui­si­tions, last year com­plet­ing the takeovers of ce­ramic tile mak­ers Ceramiche Serra and Ker­aben, the lat­est in a line of earn­ings ac­cre­tive deals.

Rather than pay­ing a div­i­dend, Vic­to­ria is de­ploy­ing its free cash flow to­wards pay­ing down debt and ac­quir­ing other high qual­ity, earn­ings-ac­cre­tive floor­ing man­u­fac­tur­ers.

Wild­ing also in­sists that: ‘The mar­ket op­por­tu­nity we have be­fore us is ab­so­lutely enor­mous. There is around 1,700m sqm of floor­ing sold each year in Con­ti­nen­tal Europe, 300m sqm sold in the UK, and 180m sqm sold in Aus­trala­sia. Vic­to­ria sells circa 55m sqm of floor­ing (ex­clud­ing un­der­lay), in to­tal, across all three mar­kets.

‘The point I am em­pha­sis­ing is this: there is al­most un­lim­ited scope for growth - both or­gan­i­cally through in­creas­ing our mar­ket share and ex­pand­ing our prod­uct of­fer­ing, and, of course, through ac­qui­si­tion, for which we con­tinue to find many promis­ing and high qual­ity op­por­tu­ni­ties.

‘We could con­tinue mak­ing three-to-four ac­qui­si­tions a year for the rest of my (in­tended very long) life and not run out of good op­por­tu­ni­ties!’

With floor­ing in­dus­try ex­pert Philippe Hamers, CEO, at his side, Wild­ing es­chews ‘fail­ing turn­arounds’ and looks for fairly priced tar­gets with mod­ern, well-equipped fac­to­ries, com­mit­ted, tal­ented and hon­est man­age­ment and broad dis­tri­bu­tion chan­nels.

Prospec­tive new in­vestors might also note that apart from ac­qui­si­tion-led growth, Vi­to­ria has scope to grow mar­gins and earn­ings within ex­ist­ing busi­nesses. Vic­to­ria achieved a record un­der­ly­ing EBITDA mar­gin of 15.2% last year, up 140 ba­sis points thanks to ef­fi­ciency mea­sures taken across the group, and Wild­ing and Hamers have a 19-20% re­turn on sales in sight on a three year view.

Still not con­vinced? Can­tor Fitzgerald, a buyer with a 960p price tar­get, fore­casts growth in pre-tax profit to £70.8m this year, build­ing to £75.1m and £79m in 2020 and 2021 re­spec­tively, al­though fur­ther ac­qui­si­tions would al­ter the pic­ture.

FEV­ERTREE’S GOT PLENTY OF FIZZ

Based on the cur­rent £35.91 share price, pre­mium car­bon­ated mix­ers mar­vel Fev­ertree Drinks is al­ready up nearly 26 fold on its 2014 134p is­sue price, so prospec­tive in­vestors can be for­given for as­sum­ing they’ve missed this par­tic­u­lar party.

Fev­ertree has ex­e­cuted its mar­ket op­por­tu­nity nigh-on flaw­lessly, lever­ag­ing first mover ad­van­tage in pre­mium mix­ers to ad­dress a mar­ket need. Yet while the posh tonic wa­ter-to-smoky gin­ger ale seller’s nose­bleed val­u­a­tion now means

Fev­ertree has ex­e­cuted its mar­ket op­por­tu­nity nigh-on flaw­lessly, lever­ag­ing first mover ad­van­tage in pre­mium mix­ers to ad­dress a mar­ket need

SGWS dis­trib­utes on be­half of Bac­ardi, Di­a­geo and Pernod Ri­card, com­pa­nies with strong spir­its brands that re­quire ac­com­pa­ny­ing pre­mium mix­ers, this looks an as­tute strate­gic move

fu­ture dis­ap­point­ments will be harshly pun­ished, man­age­ment has per­fected the art of un­der­promis­ing and over-de­liv­er­ing, guid­ing to­wards (24 Jul) full year profit ‘com­fort­ably ahead of ex­pec­ta­tions’ fol­low­ing a tasty first half per­for­mance.

Half-year rev­enue grew by a fore­cast-bust­ing 45% to £104.2m and Fev­ertree served up a 36% hike in pre-tax profit to £32.65m-plus as well as a 40% div­i­dend up­lift to 4.22p, un­der­pinned by a bulging net cash pile of £56.4m (2017: £40.5m) with which to in­vest in the fu­ture growth of this in­ter­na­tional busi­ness.

CEO Tim War­ril­low in­sists ‘our re­la­tion­ships with key cus­tomers and spir­its part­ners mean we are in­creas­ingly well po­si­tioned as the grow­ing move to pre­mi­u­mi­sa­tion and long mixed drinks con­tin­ues to de­velop across the globe.’

Fev­ertree took over di­rect con­trol of its US dis­trib­u­tor re­la­tion­ships on 1 June, see­ing a sig­nif­i­cant op­por­tu­nity across the pond for its ton­ics and a wider mixer range for dark spir­its, the lat­ter an in­creas­ingly im­por­tant com­po­nent of the long-term in­vest­ment case.

Fev­ertree has inked an agree­ment with South­ern Glazer’s Wine and Spir­its (SGWS), North Amer­ica’s big­gest wine and spir­its dis­trib­u­tor, to be its ex­clu­sive dis­tri­bu­tion part­ner in the on-trade chan­nel across 29 US states.

War­ril­low in­sists the tie-up ‘is a sig­nif­i­cant en­dorse­ment and pro­vides a strong plat­form for Fev­ertree US in 2019 and be­yond’. SGWS dis­trib­utes on be­half of Bac­ardi, Di­a­geo (DGE) and Pernod Ri­card, com­pa­nies with strong spir­its brands that re­quire ac­com­pa­ny­ing pre­mium mix­ers, this looks an as­tute strate­gic move.

With a ‘hold’ rat­ing on the stock due to its ‘ex­tremely pre­mium val­u­a­tion met­rics’, Shore Cap­i­tal scribe Phil Car­roll’s up­graded es­ti­mates for 2018 point to ad­justed pre-tax profit of £70.4m (2017: £56.4m), ris­ing to £83.5m and £97.4m in 2019 and 2020 re­spec­tively.

Based on es­ti­mated earn­ings of 49.5p this year, Fev­ertree trades on an eye-wa­ter­ing 72.5 times for­ward earn­ings, fall­ing to a still in­cred­i­bly frothy 61.4 times the 58.5p of EPS Car­roll has in his spread­sheet for next year.

Yet bulls will note that Shore Cap­i­tal ex­pects ‘the pre­mium mixer mar­ket to grow based on cur­rent con­sumer pre­mi­u­mi­sa­tion trends and for Fever-Tree to con­tinue to both drive this growth and be a ben­e­fi­ciary of it. The ul­ti­mate ques­tion is how big is the op­por­tu­nity and what is a fair val­u­a­tion for Fever-Tree? Part of the is­sue is that mar­ket ex­pec­ta­tions have been and will likely re­main overly pru­dent.’

The bro­ker­age adds: ‘Our view is that the com­pany is go­ing to con­tinue to grow strongly, maybe not at the per­cent­age lev­els his­tor­i­cally, but then if the US takes off it could be a pos­si­bil­ity.’ (JC)

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