VMJMurphy, absolutely agreed. As you say, this tip is in the public domain, so no harm in posting it now, if only to confirm made1686's opinion that WMK is now a screaming Buy:
Ruth Garrett
Sent : 02 January 2006 10:31:39
To :
Subject : On UK-AnaIyst.com on Monday: The New Year tip is from Tom Winnifrith of t1ps.com
Buy Watermark at 128.5p
Says Tom Winnifrith of www.t1ps.com
Give me a New Year's share tip" demands Monisha Varadan. Er...why? New Year's tips are a pointless exercise indulged in by once-a-year share tipsters on Fleet Street. "I don't care - write one anyway!" Well okay then but what to tip? If I am forced to make such a tip then I might as well go for a company in which I really believe and the evidence for this is that I own the stock in my SIPP. And hence I arrive at Watermark (WMK) - a stock that is about 30% (plus dividends) up on my original tip price but has - over the past year - been a pretty disappointing performer in share price terms. That is no bad thing.
Watermark is a simple business to understand. It provides well over 150 of the disposable products handed out by the transport industry to its customers. Plastic spoons, eye patches, headphones and all the other items that a modern airline has to provide are all in the range. Watermark has grown in two ways. Organically, it continues to pick up new airline customers to whom it can supply its 150 plus range of products. These are nearly all sourced from China so are cheap to produce, high volume goods. And inorganically it has made a series of acquisitions. Each time it buys a new company, producing a new product it can - at once - sell that product to all of its existing customers. Moreover the new company might service airlines not served by Watermark so the cross sell works both ways.
The airline industry clearly faces ongoing cost pressures. But this works to Watermark's advantage as it forces airlines to try and source consumable products from as few suppliers as possible. Thus companies such as Watermark can squeeze out single or few product companies. So that is one industry dynamic running Watermark's way. The second dynamic is the breakdown of monolithic flag carrying airlines with national monopolies. They are replaced by numerous smaller airlines each of which needs its own branded consumables. And the third dynamic is the continuing growth in the use of air travel. More passengers = more demand for Watermark's products. None of these dynamics is going to change in the near or medium term.
Sure, events such as 9/11 caused some temporary glitches but the strength of the Watermark proposition is that it remained significantly profitable even in the bad times. Watermark's business is occasionally deferred it is never destroyed. A strong management team lead by CEO John Caulcutt has delivered strong annual growth in profits more or less every year since the company joined AIM (at just 13p a share) in 1996.
Interim numbers came out in October and showed that Watermark remains a solid growth play. The business also remains highly cash generative and - despite having made a strong of acquisitions over the past few years - gearing is still only around 10%.
So what lies ahead?
There are two ways forward for Watermark. My preferred one as a shareholder is that it continues to grow its bottom line and at some stage a re-rating will follow. I would expect calendar 2005 pre-tax profits of £8 million rising to £8.9 million in 2006. That equates to earnings of 12p in the year just ended and 12.8p this time which will fund payouts of 2.15p and 2.4p respectively. Frankly Watermark could afford more. At 128.5p that puts Watermark on a current year PE (now that we are in 2006) of less than 10 for a company delivering consistent earnings growth, generating cash and with a strong balance sheet. So that is far too low. Assuming that earnings hit 14.5p in 2007 and that there is even a modest rerating (to a PE of 13 is not demanding) then this stock should be at 189p in a year's time.
The second scenario is that this company goes private. If the City accords Watermark such a lousy rating because of mis-placed fears about fuel costs, terror or whatever then it is hard to use paper for acquisitions. John Caulcutt is no fool and this has to be one of the better bets for an MBO in 2006, IF there is no significant re-rating. Even at, say, 155p a share the maths for an MBO looks pretty attractive. For an investor it is a win/win scenario either way and so my New Year tip for 2006 is Watermark.
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