STM closer to dividend list

Heavy director share buying late last year piqued our interest in STM. Then, shares in the AIM-listed expat pension provider were trading at 21p. Now, it's 52p. Money used to build the business over the past few years has been well spent and profits are rising fast. Earnings are tipped to almost double this year, yet the shares, which we said in March were "grossly undervalued", still have upside potential.

Broker finnCap certainly thinks so. "Given the visibility and longevity of revenue streams and prevailing market multiples, we raise our target price to 60p, reflecting a 12x PE [price/earnings] multiple for 2016 in a growing sector," says analyst Duncan Hall.

Already, STM has made more than half the anticipated profit for the full year, keeping it on track to hit annual targets. Adjusted pre-tax profit jumped by 40% in the six months ended 30 June to £1.4 million compared with finnCap estimates of £2.7 million for the 12 months. "We're comfortable with where we are," finance director Therese Neish told Interactive Investor Tuesday. A 23% increase in adjusted cash profit to £1.6 million is also half finnCap's year forecast of £3.2 million.

STM's pensions division grew revenue by 16% to £4.5 million, driven largely by income from the Malta business which has benefited from new business in the Middle East. Revenue at the much smaller Life division was up over half to £0.75 million, and the second half is tipped to be even better. There's also promising operational gearing, with new products more easily sold to the existing client base. New offices in South Africa, South East Asia and the Middle East are chipping in too.

And the conversion of a large chunk of convertible loan notes will slash finance costs as well as demonstrating confidence in the business. STM repaid £0.7 million of notes and £1.5 million were converted by noteholders into ordinary shares. And there are now more well-known names on the shareholder list, including fund manager Miton which owns about 18% of the company.

STM also ended the period with £7.1 million of cash. Yes, about half of that is tied up for regulatory reasons, and there are also working capital requirements. But with no plans to buy anything and a share buyback unlikely, "logic says a dividend is an option," we're told. "It's very much on the agenda," says chief executive Colin Porter. "It's just a question of timing and formula."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.