News that full-year earnings are set to exceed previous management expectations triggers a 22.7% rise in Sweett (CSG:AIM) to 46p. This is the second time in as many months that the quantity surveyor-to-property consultant has upgraded its outlook.
It is easy to see why investors have flocked to the small cap and the news justifies our 19p 'buy' stance in June, which means anyone following that trade would now be sitting on a 142% paper profit. We remain bullish on the stock.
There's a good argument to suggest the company was overly-cautious when it set previous targets. However, we'd rather see management be conservative - and then surprise to the upside - than be unrealistic about what the business is capable of achieving.
Speaking to Shares, chief executive officer Dean Webster says a three-year plan installed in 2012 expected 2% to 3% annual revenue growth from the UK. It is now doing 20% growth in the order book. There's excellent progress in Asia and the Middle East.
Chairman Michael Henderson today reveals a target for Sweett to be a £100 million turnover business with 7% to 8% profit margins by summer 2015. This is more bullish than implied by revised forecasts from stockbroker Westhouse. The small cap's last set of results (for the year to March 2013) showed £80.6 million revenue and £2.3 million operating profit.
Key to the three-year plan was a move into the energy and infrastructure sectors. This has worked well and the energy and rail operations, in particular, have grown over the past year. It is the market leader in healthcare and retail, the latter is certainly an improving area for the business.
It has a partnership in the US with New York-based project management consultant VVA. This has enabled Sweett to begin exploiting a new market - as well as tapping into a US customer base which it can help in other parts of the world. The joint venture has opened offices in Boston and Los Angeles and looks set for further expansion. Webster says that if group margins start to pick up and it can reduce debt then there could be a bigger push on the US. When asked if that meant acquiring VVA, he implies it would certainly be a consideration. For now, the US is about organic growth and leveraging relationships via its joint venture partner.
For further insight into the group's strategy, read our article from June and an earlier feature on value stocks from February where we highlighted Sweett's appeal.
Commenting on today's announcement, Westhouse analyst Kevin Fogarty says: 'We believe that the order book increase to £102.5m vs. £90.2m a year ago, and compared with c. £100m in April this year, helps corroborate recent indications of improving market conditions, and effective execution of the group?s three year strategic plan.'
Fogarty raises his price target to 58p and adds: 'Having increased our FY2014 and FY2015 forecasts on the back of July?s trading update we are raising our adj. PBT forecasts to £4.0m (from £3.5m previously) and £4.3m (from £4.0m previously), respectively. Consequently, our revised adj. EPS estimates for FY2014 and FY2015 are 4.4p (vs. 4.0p previously) and 4.9p (vs. 4.3p previously), respectively. In addition, we lower our FY2014 net debt estimate to £5.6m vs. £5.9m previously.
Stockbroker WH Ireland installs a new price target of 60p. It comments: 'Following this morning?s update, we look to raise our FY 2014E PBT expectation by £0.5m to £4.0m, resulting EPS of 4.3p (from 3.8p) and by £0.5m in FY 2015E to £4.3m, resulting in EPS of 5.0p (from 4.4p).'
