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
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)