A strong balance sheet and improving performance are going unrecognised.
Financial firms in general have been shunned by investors over the last couple of years for good reasons; ones we're all tired of hearing about. But the market's tendency to tar sectors with the same brush throws up opportunities, and investment bank Collins Stewart (LSE: CLST) might just be one of them.
If so, it certainly hasn't happened yet despite the company announcing upbeat final results for 2009 today. In fact, a smidgeon has been shaved off the share price which now stands at 75p valuing the finance group at £186m.
Collins Stewart covers such areas as institutional stock-broking, corporate finance advisory services, debt capital markets advice, wealth management and fund management.
The company has 700 employees across four main operating divisions: Advisory, Corporate Broking, Securities and Wealth Management. In fact, the company advised the Icelandic Government on the restructuring of the country's banking system, which must have been fun!
In exchange for a share purchase at today's price, investors are buying into a company that has rebounded well in testing conditions; swinging back into profit, and feeling confident enough to have picked up a new investment management business.
Turnaround
For the full year, the company managed to bring in a pre-tax profit of £18.4m compared with a pre-tax loss of £15.2m last year. It managed this by completely restructuring its business after its annus horribilis of 2008 -- with a new man at the helm since October 2008. Adjusted earnings per share were 4.7p and the final dividend was maintained at 1.3 p a share.
On the surface, this doesn't make the shares look a particularly good investment. A price-to-earnings ratio (P/E) of 16 and a yield of 3.4% -- albeit well covered -- don't exactly scream "buy me!". But maybe the potential for future performance and the balance sheet strength do.
The company now has usable cash and cash equivalents of a whopping £104m -- 42p per share. It intends to use this war chest in buying complementary businesses "...using our robust financial position to take advantage of opportunities to strengthen further our core businesses..." -- hence the purchase announced today of Corazon Capital, an investment management business based in Guernsey and Geneva
But this won't make much of a dent in the piggy bank for an initial payment of £1m in cash and a deferred payment of up to £6m in a share issue.
Can it continue?
We're told today that 2010 has started well with overall revenue a little ahead of the same period a year earlier. But income last year benefited from a more favourable US dollar exchange rate and some new business activities. Without this, revenue would actually have been almost 13% lower year-on-year.
The fact that the company still put in such a good bottom line performance in these conditions is reason enough for investor confidence under the still relatively new boss, as each of its business segments returned a profit. The company should also benefit from any pick up in M&A activity and a return of IPOs.
On balance
Ultimately, it's the money that matters for investors and the cash pile is a huge comfort. Take it away, and last year's P/E of seven against enterprise value is very tempting. This looks like it will fall further this year -- to around the 5.5-6 mark. This is too low. So the market clearly believes this won't happen, though there's nothing in today's results which suggests to me that the company won't put in a good performance this year.
Look back further to the good times, and the company looks crazily cheap against historic earnings. Such anomalies are to be welcomed.
In an ideal world, we'd see a much increased dividend and some decent director buying of the shares. If and when this does happen, though, you can bet the price will be a lot higher.
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