However, in its reduced circumstances (it’s been demoted back to the second-tier FTSE 250) and at its depressed share price, Hikma is one of two turnaround stocks I’d buy before 2018.

Recent difficulties

A trading statement last week was indicative of its recent difficulties. It reported a good performance from its Injectables business, steady improvement from its Branded business, but cut its forecasts for Generics for the third time this year.

The company said that as a result of challenging market conditions impacting the US generics industry, it had experienced greater than expected price and volume erosion and that it expects these market conditions to persist in 2018. Also within Generics, it said it still hasn’t been able get the US Food and Drug Administration (FDA) to approve its generic version of GlaxoSmithKline‘s Advair.

Three reasons to buy

There are three reasons I rate Hikma a ‘buy’ before 2018. First, I reckon the subdued outlook for the Generics division is fully priced-in. Second, generic Advair could yet get the go-ahead, with the company having entered a dispute resolution process with the FDA, which it expects to complete in Q1 2018. Third, and most significantly, I calculate Hikma’s strong balance sheet gives it up to $1.5bn of firepower to pursue value-enhancing acquisitions, joint ventures or share buybacks. As such, I reckon the shares look cheap on current City earnings forecasts for 2018, which give a P/E of under 14.

Hidden value

In June, under its new chief executive, small-cap Molins (LSE: MLIN) announced the sale of its tobacco machinery division to focus on its higher-growth packaging machinery division. The shares were trading at 101.5p at the time and I calculated the fair value of the rejigged company as between 175p, based on my estimation of net asset value (NAV), and 197p, based on applying the same sales multiple at which the tobacco machinery division was sold to the forecast sales of the retained business.

The deal, and a subsequently announced sale of a Canadian property, didn’t complete before Molins’ half-year-end but there’s enough information in the half-year results to revise my fair value estimates. The sales-multiple-based value remains at 197p, but the NAV rises to 221p.

Balance sheet NAV at the half-year-end was £40.7m. So I remove book value of the Canadian property of £1.5m and tobacco machinery division assets of £38.6m and liabilities of £11.8m. Then I add net cash proceeds from the Canadian property sale of £5.9m, less £1m to adapt a new leased building, and net cash proceeds of £27.3m from the tobacco machinery division sale, of which £1.5m of warranty escrow goes into trade receivables and £2.7m into pension assets.

The result is a NAV of £44.6m, representing 221p a share. The shares are currently trading at around 140p. I reckon the value on offer here could attract wider attention when the company releases its annual results (with a clean balance sheet) in early 2018.

The post 2 turnaround stocks I’d consider buying before 2018 appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

But for those who reckon the economy is on steady ground, I reckon Virgin could be a great turnaround stock as it continues to grow profitably and its shares trade at only 0.7 times their book value, suggesting plenty of room for upward share price movement if investor sentiment turns positive again.

The company’s health was on full display in H1 results. Underlying pre-tax profits rose to £128.6m from £101.8m the year before as it brought in more retail deposits and promptly turned them into profitable mortgages and new credit card advances. The loans the company has been extending appear to be quite safe, as well as mortgages in arrears of three months or more at just 0.15%, below the industry average of 0.91%. Likewise, credit card arrears were a fraction of the industry average.

On top of making solid loans, the company’s management team is making good progress in cutting costs. Its cost-to-income ratio in H1 fell from 58.8% to 53.9% year-on-year (y/y), which helped boost return on equity (RoE) to an industry-beating 13.35 even as net interest margin remained low due to rock-bottom interest rates.

Unlike larger rivals, Virgin Money is also unencumbered by legacy bad assets or regulatory fines. This means as the company ramps up profitability it can afford to actually pay dividends. The company’s interim dividend was 1.9p and analysts are expecting a full-year payout of 5.84p against 36.79p in earnings per share. With a strong tier one capital ratio of 13.8% the bank’s balance sheet will allow for an ever greater portion of rising earnings to be paid out in dividends in the years to come.

Investors who reckon recent housing price weakness and tepid consumer confidence are only temporary may find a highly-discounted Virgin Money a great contrarian option today.

Slimming down to grow

A riskier turnaround option I’ve been eying up is Molins (LSE: MLIN), which produces packing machinery and equipment for the consumer goods and healthcare industries. The company has suffered from three straight years of falling earnings but its new management team has an ambitious plan to turn things around.

The first step was selling its tobacco packaging business for £30m. This will allow it to focus on the faster growing parts of its business that recorded £25m in revenue in the half year to June. The proceeds from the sale will go towards acquisitions and organic expansion that will allow it to cement its global footprint and land larger contracts with multi-national and local customers.

With the sale only completed on August 1, it’s still very early days, but initial signs of a turnaround are promising. In H1, underlying earnings per share were 3.1p, a vast improvement on the 4.2p loss recorded in the year prior. And with net debt down to just £1.1m even before the proceeds of the sale, the company will have plenty of financial flexibility to pursue deal-making. There’s still a lot of work to be done, but I’ll be keeping a close eye on Molins in the quarters to come.

The post 2 top turnaround stocks that could make you rich appeared first on The Twelfth Magpie.

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• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Big discount?

The sale of the division will considerably strengthen Molins’ balance sheet and cash-positive position (net cash at the last year-end was £0.8m). It will also enable the company to accelerate investment in its Packaging Machinery division and acquire complementary businesses.

The company had net assets of £35.4m at the last year-end and says that the £27.3m from the sale of the Instrumentation & Tobacco Machinery division is similar to the book value of the division’s net assets. Even after the rise in the shares to 101.5p, Molins’ market cap is just £20.5m — a 42% discount to net assets. Put another way, if the shares traded in line with net asset value, the price would be 175p.

Meanwhile, the company says it’s “confident that the Continuing Group’s sales in 2017 are likely to be significantly ahead of last year” and has implicitly guided on £51m. If we apply the 0.78 times sales multiple at which the Instrumentation & Tobacco Machinery division is being sold to the remaining Packaging Machinery division, we get a share price of 197p.

There are execution risks with Molins’ strategy to acquire complementary businesses and the company also has a significant pension deficit. The current deficit recovery plan involves payments of £1.8m a year (increasing by 2.1% a year) through to 2029. Nevertheless, the size of the discount of the share price to my fair-value calculations of 175p-197p persuades me that there is potential for significant gains for buyers of the stock today.

Stamps licked?

Shares of Stanley Gibbons (LSE: SGI) shot up 18% to 13.13p on Friday after it announced an unsolicited approach from private equity group Disruptive Capital regarding a possible offer. However, the shares have retreated to 11p today after a further announcement from the stamps and coins company and an announcement from Disruptive Capital.

Stanley Gibbons had a peak market cap of £179m just a few years ago but is currently valued by the market at just £19.7m after accounting shenanigans, difficult trading conditions, debt problems and an emergency fundraising. On the face of it, there could be value here, because the shares are trading at a discount of 56% to net asset value at the last balance sheet date (30 September) and at just 0.39 times trailing 12-month sales.

However, 30 September is a long time ago and sales were in decline at that time. More recently, the company reported little headroom on its borrowing facilities at 31 March, saying it was “utilising £17.2m out of its total facilities of £18.3m”.

In today’s announcement, Stanley Gibbons formally put itself up for sale, saying further investment is required. At the same time, Disruptive Capital announced it didn’t have key information “to evaluate whether or not to make an offer” and is not making one. Similarly, I think there’s currently insufficient information to evaluate whether the shares are good or poor value at their current level.

The post Could these small-cap ‘special situations’ help you retire early? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.