Once again, it’s time to review how my tips have performed. I’m glad to report that as at 11 September 2006, 20 out of 28 of these tips are currently higher than their recommended prices, which has generated an average gain of 5.7%. This compares favourably with returns of 3.1%, 1.8% and 9.3% respectively for the FTSE 100, FTSE All-Share and Aim indices over the same period. The 16 companies I’ve consigned to the ‘turkey’ category have fallen a net average of a modest 0.1%. Of course, as I always point out, all stockpicks should be balanced against your own personal risk preferences and desired returns.
Tip of the week: Davenham (Aim: DAV, 334p), tipped as a BUY by The Sunday Telegraph and Panmure Gordon
If you’ve ever applied for a mortgage, then you’ve probably experienced one of two scenarios; either the major banks are falling over themselves to lend you money, or your application is rejected by their rigid credit-vetting procedures. What’s especially frustrating in the latter case is that there is minimal leeway for the bank manager to appraise specific circumstances. These problems are also encountered in the corporate world. For instance, if you’re a small, family-run business, then getting funding at reasonable rates can be a nightmare. This is where Davenham (DAV) steps in.
Davenham is a specialist lender to some 2,800 small companies in the UK and devotes substantial resources to tailoring loans to fit their clients’ needs. Importantly, Davenham also prices in the risk of interest rates hitting 10% to 20% a year. The financing is typically short term and ranges from £10,000 up to £4m for property transactions, machine purchases and working capital requirements.
Most of Davenham’s customers are based in the north of England, where the company was founded back in 1991. However, the directors believe that there are 80,000 target clients across the UK. Consequently, the company is aggressively expanding into other regions. In recent years, Davenham has opened new offices in Birmingham, Leeds, Liverpool, London and Newcastle.
So far so good, but what are the risks? Undoubtedly, the main concerns for investors are debt default and a slowing commercial property market. Default rates – although relatively high compared to those of mainstream banks – have been manageable at between 1.1% and 2.4% of loanbook over the past four years. With default rates currently at 1.8%, the business doesn’t appear to have been unduly affected by the recent relaxation in the country’s insolvency laws. However, in relation to commercial property (which represents 44% of sales), shareholders will need to monitor this market closely going forward, because if it softens and transaction volumes dive, then Davenham’s performance will suffer.
In terms of the full-year results to June 2006, Davenham increased its loanbook by 21% to £187m and turnover by 15% to £32.7m. Underlying earnings per share were 29p, which Panmure Gordon forecasts will improve to 34.5p. With a dividend of approximately 15p expected this year, the shares trade on a prospective p/e of ten and a yield of 4.4%. Last week, the board reiterated that “the outlook for 2007 was positive”.
Although not hugely undervalued in light of its exposure to the economic cycle and the recent 10% jump in the price, I would still rate the shares as good value up to a maximum of 350p.
Recommendation: BUY at 334p
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