Shares of York-based assistance services provider CPP Group (LSE: CPP) have risen by 68% today, at the time of writing. The trigger for this surge was a statement from the firm advising investors that profits will be “materially” higher than expected this year.
CPP came close to failing after running foul of the regulator in 2011. But it’s survived and secured a refinancing deal that’s given the group’s management time to rebuild the business.
Even after today’s sharp rise, CPP shares are worth 94% less than they were five years ago. But the firm’s latest figures show that it’s profitable on an underlying basis, and suggest that a comeback story could be on the cards
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What’s new?
CPP said today that underlying operating profit is expected to be “materially ahead of the expectations detailed in the interim results.”
This improved performance is the result of tighter cost controls and operational gains in two key markets. The weaker pound is boosting profits from CPP’s European operations, while sales volumes in India have increased.
Is CPP really profitable?
Use of the words “underlying operating profit” is important. CPP reported an increased underlying operating profit of £3.65m during the first half. However, the group’s reported operating profit — after exceptional costs — was just £2.63m.
The group’s net cash balance of £29.5m isn’t as impressive as it sounds either. A total of £25.4m is restricted cash that’s held in CPP’s regulated entities. This money is available to use in the regulated businesses, but isn’t available to the wider group, or for distribution to shareholders. I estimate that CPP’s unrestricted net cash was just £4.1m at the end of June.
It’s also still making compensation payments to former customers. While costs have fallen this year, the group still expects to pay out a further £1.3m. Another one-off cost is a planned ‘divorce’ payment with its former IT supplier, which is still under negotiation.
In fairness, CPP does seem to be moving towards a position where the group’s medium-term future is secure. Its policy numbers rose for the first time since 2011 during the first half of the year, and its renewal rate was stable at 72.9%.
The group’s reported first-half post-tax profit of £2.29m was real, and suggests to me that the current market cap of £66.5m could be quite reasonable.
What are CPP shares worth?
At the time of writing, CPP shares are trading at 9.1p, 68% higher than they were one day ago. But how much are they really worth? Today’s statement didn’t provide any numbers to indicate how much profit the group expects to generate this year, so I’ve made some estimates.
First-half earnings came to 0.27p per share, after exceptional costs. Based on today’s guidance, I’ve assumed that this figure will rise by 10% during the second half. If it does, then full-year earnings could be 0.56p per share.
Based on these estimated earnings and a share price of 9.1p, my calculations suggest that CPP is trading on a 2016 forecast P/E of about 16. That seems reasonable to me.
Although this remains a risky buy, I believe CPP does offer the potential for significant gains.
