Driver Group - Driving Forward Confidently

http://www.driver-group.com/

Driver Group Logo
 
Finding companies with robust balance sheets, good growth potential, a good track record at a reasonable price is becoming increasingly difficult. The reason is that many fail the last check - many have departed from their undervalued state during the recent bull market. That does not mean that all income generating companies are bad value at the moment. Driver Group (LSE:DRV) is a very good example. Driver, which is a global consultancy business, has made excellent progress since 2011. That does mean that the current 126p share price is a country mile off the low of 14.5p in early 2011, but at the same time investors are not being made to pay for future profits in advance. With the global economy improving, and Driver noting a fast-paced improvement in its financial performance, the company seems a very promising medium/long term investment from the current level. Driver presently has 27.13m shares in issue which translates into a market cap of £33.64m at 124p. The company is unlikely to make investors a fortune overnight, but it is one of the better valued opportunities available at the moment.


Readers of the site will know that I usually am not fond of putting Buy tags shares that are high in their cycle. Exceptions can be made. There is no disputing that Driver is exceptionally high in its cycle, but on this occasion I am happy to waive that rule. As Hangar8 (LSE:HGR8) has proven, the market is in such a bullish phase that even if a stock is visibly high, there is potential for it to carry on higher. The shares have kept to a steep trend for a couple of years now, and given the fundamental performance of the group, there is no reason why that could not continue on. The rise has been backed up by increasing volumes plus there is plenty of support on the chart (dip buying). The only overhead resistance is at 136.5p which is the all-time high. However, given that the high was made several years ago, it is unlikely to be strong resistance. The rises to date have been fairly managed (there have been no obvious breakouts). A break above 136.5p could realistically prompt the price to break higher on breakout investors if nothing else. The overall chart position remains positive.

There are a number of major shareholdings with institutions controlling a significant proportion of the shares. Importantly, the holding is fairly well spread between the institutions, so if one decides to sell down it could probably be absorbed by one of the many others out there. Testament to the institutional interest was a share exchange that took place in July. Former Chairman, Stephen Driver and a couple of other investors wished to sell down their stake in Driver. Through the house broker, the combined 17.1% stake was transferred to both new and existing institutional shareholders at the prevailing market price. Furthermore, the transfer was oversubscribed so spillover purchasing may have occurred by those squeezed out of the placing.

Non-Exec Chairman Alan McClue commented: "We welcome the recent investment, interest and support for Driver demonstrated by the number of highly regarded institutional investors that have participated in this oversubscribed placing. We believe that our shareholders, both new and existing, have recognised that our strategy to grow the business will generate significant returns for all our shareholders."

Aside from that, the only other notable transaction was that from CEO David Webster who exercised 1.25m of options (750,000) which related to a long term incentive plan. The 500,000 ordinary shares were granted at a much lower level hence they were certainly not worth as much as they are now upon issue. The scale of dilution from these is therefore pronounced. There is a similar story for the 750,000 although these were linked to fundamental achievements which were met, thus deserved. Upon the exercise, Webster disposed of 750,000 to cover tax costs and release some cash, but his overall shareholding increased by 500,000 to 7.4% of the share capital.

As I noted earlier, Driver is a global consultancy business. Previously the focus has been solely on dispute resolution for the construction industry, although in recent years their focus has broadened.  Their services now stretch across a range of sectors including construction, civil engineering and energy. The broad categories of services below are provided from a range of wholly owned businesses including DIALES, a provider of expert witness services, who specifically specialise in support in arbitration and litigation.

- Strategic Project Management (e.g. assisting in the formation of Joint Ventures and providing transaction advisory services)
- Project Services (e.g. assisting with the development of cost plans)
- Commercial & Contract Services (e.g. assisting with feasibility studies and design management)
- Expert Services (e.g. dispute resolution and arbitration/litigation support)
- Corporate Services (e.g. aiding with insolvency and restructuring plans)

The geographical markets for the services have also expanded in number, in tandem with both organic and acquisitive growth. The nature of Driver's business means that it is easy to expand globally as some of the overheads can be directed through an existing base that can be situated and accessed globally. The company therefore has operations across the globe, although the main markets is Europe (specifically the UK). However, that is a changing trend with 62% of revenues now generated outside the UK.

Driver's growth has been fuelled by the acquisition of Trett Consulting in May 2012 (now Driver Trett). The takeover has allowed for Driver to expand their geographical reach into the Americas and Asia Pacific through new offices in Houston, Kuala Lumpur and Singapore. It also gave Driver exposure to new industries; oil & gas, shipping, petrochemicals and marine shipping. The takeover seems to have been aptly timed as it was only really near the start of an industry recovery. Thus the price paid was a lowly initial £2.2m net of Trett's cash balances. At the time Trett wasn't performing well with marginal EBITDA although it did have £12m in turnover. Since the acquisition the business has been restructured and turned around. Driver Trett has benefited from synergies such as shares overheads and ultimately it has meant the business has both been turned around, and it now a highly earnings enhanced part of the wider group.

The financials are what make Driver a really attractive proposition. Importantly, the company has a good recovery of overachieving. Since 2011 alone, there have been several trading statements that have results in line with expectations, with a similar number saying results will exceed expectations. All are positive and indicate growing momentum within the business.

It was therefore very interesting to read the preliminary FY results for the year to the 30th September 2013. The headline figures were as below:
- Revenues up £10.98m to £37.24m
- Underlying profit before tax up by £1.3m to £3.07m
- Reported profit before tax at £2.59m after accounting for £482,000 of share options
- Profit after tax of £2.21m (benefited of lower tax rates in Omar, Qatar and the UAE)
- Basic EPS of 8.3p, underlying EPS of 10.2p
- Dividend increased to 1.5p/share (final 1p to be paid in March)
- Swing to net cash of £1.07m from net debt of £964k a year before. This was driven by operational cash generation of £2.2m

There were also a number of interesting numbers aside
from the headline figures. For example, there was
growth in all regions with revenues up 80% in Africa, 20% in the Americas, 203% in Asia Pacific, 22% in Europe, and 65% in the Middle East. The reasons for each rise differ - the European business was boosted by increased revenues from the civil engineering and infrastructure sectors, whereas the Middle East revenue was aided by increased demand for dispute resolution and expert witness demand services. Of course, you have to be careful as they each started from a different revenue base, but it underscores that Driver Group is very much a growth business thus should attract a valuation premium.

Using the headline figures, and the rest of the results, some interesting analysis can be done. First off, whilst the net cash if only £1.07m, the majority of the debt is non-current (i.e. it doesn't need to be paid within a year). That means that there is cash available minus current debts of over £2.0m which is much better. That is shown through the company having a current ratio of 1.73 which is acceptable, and a debt/equity ratio of 0.90 which is good and helps to point out that the debt is not an issue at all. As a fallback, Driver has undrawn borrowing facilities of £0.75m available if necessary.

Back to the EPS figures, the best number to use is the underlying diluted EPS (given the high price in the cycle) which stands at circa 9p. Obviously, until all options are exercised, it won't be quite that low, but it is better to calculate the base case in anticipation. At a 9p EPS, the PE ratio comes to 14 which is undemanding for a growth stock. Whilst there are no publicly available up to date forecasts available to private investors, it's not difficult to see that any meaningful continuation of the previous strong growth, will mean that there is significant potential upside. For example, a FY 2014 underlying post-tax profit of £2.7m (i.e. a £500,000 rise) would book a diluted EPS figure of ~9.3p meaning the company would be trading on a ~14x valuation. That is a conservative figure in my book and I fully expect a much larger post-tax profit to be booked, so for them to beat expectations. After all, underlying post-tax profits for the last year were up by £1.2m Y.O.Y.  If you look at their nearest listed AIM competitor, Cyril Sweett (LSE:CSG), Driver is a clear winner. Sweett is valued at just shy at around £38.6m currently, so above Driver. Yet Sweett's interim results show £7.1m of net debt, and only a marginal improvement of underlying profitability to £2.7m. Driver is undoubtedly the better option, but I'll leave you to compare if you wish. The dividend in each case is uninspiring - for Driver it's only 1.19%, but it's better than nothing.

Elsewhere in the final results, Driver noted that new offices had opened in Brisbane and Aberdeen to cater for the oil and gas industries, whilst an office had also been opened in Munich with a heavy engineering focus. An office in Hong Kong was also coming into action which extends their Asian offering.

Alan McClue, Non-Executive Chairman of Driver, commenting on the results said: "I am pleased to report on the Group's performance for the financial year 2012 / 2013; a year in which we materially outperformed market expectations and reached record levels in terms of revenue, profits and earnings per share. Throughout the year we continued the positive trends seen in 2011 / 2012, and our strong cash generation took us to a net cash position at the end of the year. This strength in trading, cash generation and continued optimism across the business allows us to recommend an increase in the final dividend."

Impressively, they also included that the performance in Q1 2014 was in line with expectations, and backed by an impressive performance in the Asia Pacific region. I wouldn't at all be surprised if over the next 6-12 months there are more high value contract wins in the region. Looking forward, the company's focus is to continue to develop their oil and gas and petrochemical offerings in addition to continuing to promote their full service suite to existing clients through cross-selling. Their joint focus is to continue to improve utilisation levels. In Europe that should be achieved solely through the cyclical change in the economy.

Investment in staff in both Asia and the Americas during 2013 is expected to yield returns during the current financial year as well. The investment meant that utilisation levels in both regions were skewed downwards and currently stand around 45%. As both regions are new ventures, they also reported a loss that totalled to around £1m - once those zones gain traction, there is the immediate opportunity for the bottom line to improve. An important point is that Asia only represents 4.5% of the group's revenues and the Americas only represent 2%. In the Americas, a senior management team has been hired to cope with expected growth. Now that the initial headway has been made, there should be a good opportunity to gain market share at a low cost. Africa also represents an opportunity for continued growth. Currently it only amounts to 10% of the group's revenue, but that was up 80% Y.O.Y. A base of blue chip clients has already been established. The risk of this growth is that there is a surge in debtors, but that does not seem to be a problem on the balance sheet as trade payables and trade receivables both grew at similar rates rather than receivables disproportionately. Acquisitive growth into certain service sectors is a possibility.

As you can tell, I'm bullish on Driver despite the historically high share price. The company sums up their outlook with the following statement:

"We are delighted, across the Group, by the way our current financial year has started and particularly in Asia Pacific which is showing early signs of benefiting from last year's investment. Europe and the Middle East continue with the momentum experienced as we exited our last financial year. We have visibility of our first quarter performance and our secure work beyond the first quarter together with a strong pipeline of opportunities ahead which gives the Board a high level of confidence in the outlook for the remainder of the financial year."

A relatively small, profitable company with strong cash generation, a track record of delivery and a confident outlook albeit that will be driven by the wider market. I have put a Buy tag on Driver Group at 124p with a medium to long term view.

2 comments:

  1. One of the weirdest charts I have ever seen...

    As usual an enlightening and useful write up el1te. great analysis

    CraigJ

    ReplyDelete
  2. I like how you cover a whole diversity of companies and not just one sector. The site is appreciated greatly by myself

    ReplyDelete