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LPA Group - a buy

By Tom Winnifrith & Steve Moore | Wednesday 16 May 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

In January LPA Group (LPA) announced record results and in March updated that this year also “should present us with an excellent result. However, despite already being on a modest rating, the shares are down from 178.5p in February to a current 155p offer price and so…

Operations: The group manufactures LED lighting and electro-mechanical systems and is a distributor of engineered components. It is focussed on the transportation and the aerospace & defence markets and, based in the UK, has developed a successful export capability - with, on average, around a third of turnover being exported to fifty or so countries.

Management Incentive: Chief Executive Peter Pollock is a chartered accountant, with over fifty years industrial experience and joined the group in 1997. His remuneration last year was £241,000 and he has 760,000 shares. Chief Financial Officer Chris Buckenham is a chartered certified accountant with also finance director experience and joined LPA last year. Chairman Michael Rusch is also a significant shareholder.

Financials: Results for the company’s year ended 30th September 2017 showed on revenue up 5% on the prior year, at £22.5 million, an adjusted pre-tax profit of £1.8 million, generating earnings per share up 13% to 13.8p. After particularly £0.3 million of each of exceptional costs, new finance lease obligations and dividends paid, a £0.5 million net working capital outflow and £0.6 million of net investing spending more than depreciation (noting “a large capital expenditure program, in particular associated with the refurbishment of the new manufacturing facility in Normanton West Yorkshire”), net debt increased by £0.2 million to £2.8 million. However, net current assets were £0.5 million higher to £4.1 million and non-current liabilities just £0.2 million increased to £2.7 million. A 1.65p per share final dividend took the total for the year up 8% to 2.70p and the year-end order book was +20% to £21.6 million.

Risks: These include competitive markets and a significant dependence on the rail sector in general, and UK rail in particular – and this currently at levels, a March AGM statement saw the company note as, “not necessarily sustainable in the immediate future”. However, it also points to its R&D, its aviation, aerospace & defence markets and export expansion and that “the new major effort to give additional impetus to 'Digitising the Railway' will create more opportunities for us”. There is also the net debt (and a pension scheme) on the balance sheet, but overall that looks in a decent position.

Valuation: The AGM statement included that record levels of output “has been sustained during the first half of the financial year, and the order book for delivery during the remainder of the year should present us with an excellent result”. We thus look for earnings per share to head towards 15p and also further dividend progress and, despite the above noted outlook caution, also point to it stated “many opportunities for major future growth”.

This all compares to a current 155p offer price. We consider a 15x earnings multiple more appropriate – and thus target comfortably above 200p. At up to 165p, the shares are a buy.

This article first appeared on the Nifty Fifty website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website ahead of a new shorting piece from Lucian this week and for another TWO share tips from Tom & Steve that went live on Friday afternoon click HERE

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