Good actions: operationally oriented towards a strong recovery in profits

Advisory group Driver (DRV: 55p) announced a significant improvement in activity levels during the fourth quarter to September 30, 2021 and a positive start to fiscal 2021/22. The group offers its clients in the construction and engineering sectors specialized business management, planning, project management and dispute resolution services.

Driver’s activities in Europe and America continued to perform well, benefiting from new offices (Spain and United States), an increase in staff, restructuring and expert work undertaken by its subsidiary. high margin Diales. Equity Development analysts estimate that revenues in those territories rose 14% to reach £ 35.4million in the 12 months leading up to September 30, 2021, accounting for 71% of the group’s revenue. The research house also forecasts 12% revenue growth in Europe and America in fiscal year 2021/22.

Note 1: Simon advised to take profits on TMT Investments at 580c per share to cash in a 140% gain, dividend of 20c included (“Takeover bid, takeover bids and profit taking”, September 9, 2019), and a subsequently advised to repurchase the shares at 318c (“In Search of Salvage Purchases,” July 6, 2020).

Note 2: Simon advised to take profit on Futura Medical at 34 pence per share on Monday, October 14, 2019 (“Bargain stocks: golden opportunities”, October 14, 2019). The sell price is used in the performance table. Current share price 32p.

Note 3: Simon advised to sell Mercia Asset Management at 27.5pa share on Monday December 9, 2019 (“Equity taking and profits”, December 9, 2019). The sell price is used in the performance table.

Source: Opening price of the opening offer of the London Stock Exchange at 8:00 a.m. on Friday, February 1, 2019 and last offer prices or when Simon advised to exit the holding company.

Importantly, Driver’s problem regions, the Middle East and Asia-Pacific, returned to profitability in the fourth quarter, reducing their annual losses as countries emerged from lockdowns and operations shrank. benefited from restructuring and a lower cost base (exiting an expensive property lease in Abu Dubai generated £ 100,000 in savings, for example).

Admittedly, this is only the beginning, but it is clear from my objective that the group’s profits are strongly oriented operationally towards what could be a strong recovery and supported by pent-up demand and a shift to stronger activities. margin. Indeed, even if the gross margin of 26% only holds up, then with group turnover expected to rise from £ 50million to £ 53million in fiscal year 2021/22 and operating costs reduced from £ 0.5million to £ 10.6million, then operating profit is expected to drop from £ 2.1million to £ 3.3million as a higher proportion of incremental gross margin earned decreases to bottom line.

On that basis, expect adjusted earnings per share (EPS) to rise 62% to 4.7p and support a 16% higher dividend per share from 1.75p. Current net cash of £ 6.5million is expected to reach £ 7.4million (13.6pa share) by September 2022, reflecting annual free cash flow of 2.8million of pounds sterling (share of 5.2 pa). This implies that the stocks offer a potential free cash yield of 9.4%, are valued at a forward price-to-earnings (PE) ratio of 12, and that Driver’s business valuation is five times the estimate of term cash profits of £ 4.5million.

To put the rating into perspective, Driver’s peer group (Tetra Technologies, Sweco, Jacobs, AECOM, WSP Global and FTI Consulting) has an average PE ratio of 28 and is rated on a three times higher multiple of cash profit. in relation to the valuation of the company. Of course, a liquidity discount for small caps should be applied, but even if the group is only rated over 10 times the potential cash profit over the valuation of the company – a discount of almost 40 to cent relative to his larger peers – so he still supports a revaluation to the 100p target I set the last time I suggested buying the shares at 50p (‘Tap into an Inexpensive Basement Salvage Game ‘, June 8, 2021). Strong buy.

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