With the current dire state of the markets, many a mooted takeover could fail to materialise. So avoid stocks such as this education services provider which, despite sensibly selling off its loss-making divisions to concentrate on more profitable interests,remains overvalued.
Turkey of the week: Nord Anglia Education (NAE), tipped as a BUY by The Daily Telegraph
Nord Anglia Education is a leading provider of education and training services in the UK and abroad. Last week it announced the £31.2m disposal of its children’s nurseries division, including brands such as Leapfrog and Petits Enfants. It acquired these assets through a series of deals worth £73m, completed three years ago. Although the loss of £40m makes this an expensive foray into the kindergarten sector, the exit does now allow Nord Anglia to repay its debts (£24.5m as at 31 January) and concentrate on faster-growing and more profitable interests.
First, there’s its International Education (IE) unit, which runs schools in central Europe, China and the Far East. These focus on delivering a high-quality British-style education to children from two to 18 years of age. Each school’s syllabus is based on the National Curriculum and adapted country by country to fit the different cultures and local conditions. At the interims in May, IE delivered first-half sales of £13.6m (up 36% on last year), and generated an operating profit margin of 23.5%. Pupil numbers rose by 700 to 3,200, with places set to increase to over 15,000 within three to five years.
Trading at its Learning Services (LS) unit is also booming. LS works for government departments (such as Ofsted), local authorities, schools and other public organisations to deliver education and training across the UK and overseas. First-half sales rose 28% to £19.7m as the division won substantial new contracts abroad, especially in the Middle East. Operating profit margins were again an impressive 17.3%.
However, for value investors the shares look far too rich because of speculation that Principle Capital, which already owns a 25% stake, may launch a takeover. Last year it was thought to have pitched an indicative bid of between 200p-210p per share. At 325p, Nord Anglia’s market capitalisation is around £130m, which seems heavy for a company generating only about £70m in revenues. The City is estimating earnings per share of 15.8p for this year, rising to 20.5p next – putting the shares on toppy p/e ratings of 20.5 and 15.7 respectively.
Finally, with the current dire state of the credit markets, I believe the likelihood of Principle Capital submitting a new, much higher bid, is remote – and so would value Nord Anglia at about 240p per share (or 25% below today’s price). Its next trading statement is due out in September.
Recommendation: TAKE PROFITS at 325p as the stock looks vulnerable
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments