A portfolio designed to lower your Inheritance Tax bill
I am following up my recent article on how shares held in ISAs can be used as part of an inheritance tax (IHT) relief portfolio by suggesting some shares that could fit the bill.
These are profitable and cash generative businesses with good track records. These track records may be blemished at certain points, but what's important is that the longer-term trend is positive.
Crucially, many have international growth prospects and are not dependent on the UK economy.
These companies also have good management teams that have been in place for a number of years, although some long-standing bosses are handing over to new blood in planned successions.
Remember, the shares owned for at least two years by the date of death before they are free of any IHT charge.
Gooch & Housego (GHH)
Gooch & Housego (GHH) has a strong, international market position in the photonics sector and there a limited number of significant competitors in its main markets.
Industrials remains the largest division and there is plenty of growth to come from the aerospace and defence and life science markets.
Life sciences is the smallest of the main divisions and probably needs bulking up with acquisitions in the same way that the aerospace and defence division was expanded.
There are also medical and diagnostic collaborations that could provide longer-term growth if they produce commercial products.
Group trading is in line with expectations and there will be a second-half weighting to the year's figures.
There is exceptional demand for critical components for microelectronic manufacturing and this has offset any slowing in demand for high reliability fibre couplers. US tax changes will reduce the deferred tax in the balance sheet by £500,000 and cut the effective rate of tax to around 23%.
Dividends are growing steadily, although the yield is below 1%. The shares are trading on 23 times prospective earnings. That reflects the quality of the business.
Alliance Pharma (APH)
Alliance Pharma (APH) is a low risk business because it does not develop new drugs and treatments. Instead, Alliance buys existing products that are either mature and need little or no marketing spend, or where it believes that it can build on the product's existing sales base.
An example of the latter is the purchase of Vamousse from TyraTech at the end of 2017. The head lice treatment brand had a good base, particularly in the US, but there was a lack of cash to accelerate growth. Alliance has the expertise and finance to do that.
The fact that Vamousse was already generating revenues in the US enabled Alliance to set up an office there. The 2015 acquisition of the Sincliar Pharma dermatology business brought a European marketing network.
This means that Alliance can exploit its products in more countries than before.
Some products suffer dips in revenues but Alliance has a large portfolio of treatments so it can still grow organically. Last year, Alliance made an underlying pre-tax profit of £24 million on revenues of £103 million.
Around four-fifths of revenues come from what are described as bedrock brands or strong local brands.
The rest comes from three international star brands: anti-scar treatment Kelo-Cote, macula degeneration treatment MacuShield and Vamousse.
Cash flow is strong and it is reinvested in acquiring additional products.
There has been a consistent management team over the past decade, but founder and chief executive John Dawson is retiring and Peter Butterfield, who has been with the company since 2010, is taking on his role.
Johnson Service Group (JSG)
Having shed its dry cleaning business, Johnson Service Group (JSG) can concentrate on its growing workwear and linen rental business. Management has shown that it can make earnings enhancing acquisitions and then grow those businesses.
In 2017, revenues from continuing operations rose by 13% to £291 million, while underlying pre-tax profit improved from £33.8 million to £39.7 million.
The dividend is also growing. JSG increased the final dividend from 1.7p a share to 1.9p a share, taking the total for the year to 2.8p a share, up from 2.5p a share. That is covered three times by earnings.
Source: interactive investor Past performance is not a guide to future performance
The business has been split into workwear and HORECA (hotel, restaurants and catering) divisions. The latter produced the fastest growth, helped by acquisitions, but organic growth was still 6%.
Investec forecasts a 2018 pre-tax profit of £40.3m. The shares are trading on 15 times prospective 2018 earnings.
The management succession appears to be going to plan. Peter Egan has been appointed as chief operating officer and he will take over from Chris Sander as chief executive later this year.
AB Dynamics (ABDP)
AB Dynamics (ABDP) is an international business that designs and manufactures advanced testing and measurement products for the automotive sector.
Investment in new premises has increased capacity in order to satisfy increasing demand. Global spending on automotive development is increasing, although where that money is being spent has changed over the past decade.
AB is an international business and China is one of the biggest markets.
New autonomous vehicle technology will increase demand for AB's track testing technology. AB also has advance vehicle driving simulation technology which can help to reduce the development time for new models.
Founder Tony Best remains on the board, although he is no longer an executive. A new chief executive is being recruited.
Management has confirmed that this year's figures are "significantly ahead" of last year.
The shares are trading on around 30 times prospective earnings, even after the dip in the share price since the beginning of the year. The interim results will be published on 24 April.
Fulcrum Utility Services Ltd (FCRM)
Fulcrum (FCRM) installs gas pipelines and has moved into electricity and water connections to form a multi-utility connections provider. It also invests in gas pipeline and infrastructure assets and a new £20 million debt facility, combined with cash in the bank, will enable investment in these assets to grow more quickly.
Fulcrum recently gained a licence that enables it to buy electricity assets.
Fulcrum did not perform well when it first joined AIM, but its fortunes were turned around and it has become a highly profitable and cash generative business.
The chief executive that led the turnaround has left, but the finance director has stepped up to the role.
Source: interactive investor Past performance is not a guide to future performance
This year, Fulcrum made a major move in the electricity connections sector through the acquisition of Duanmis for £22 million in cash and shares.
Duanmis has around 4% of the electrical connections market and is a specialist in high voltage connections.
The latest acquisition is CDS Pipe Services, which enables Fulcrum to be directly involved in intermediate gas connections rather than subcontracting the business.
This acquisition cost £1.4 million.
Fulcrum is expected to report a 2017-18 profit of £7.7 million, rising to £11.2 million with a full contribution from the recent acquisitions.
The historic tax losses are running out so earnings per share growth will be slower than pre-tax profit growth. The shares are trading on 14 times prospective 2018-19 earnings and the forecast yield is more than 4%.
Rail optimisation and traffic data software Tracsis (TRCS) blotted its copybook just over a year ago with a profit caution rather than a profit warning and the share price slumped. Up until then it had been upgrades all the way.
The strength of the business is shown by the fact that a year later the share price was higher than prior to the trading statement, although it has fallen back recently.
The chief executive has been in place since the flotation more than a decade ago and the strategy has been consistent.
The scope of the business may have been widened but the combination of organic growth and add-on acquisitions remains the same.
The latest interims show an increase in revenues from £15.6 milion to £18.1 million, while underlying pre-tax profit moved ahead from £3.1 million to £3.83 million.
Tracsis has shown that it can generate £2 million-£3 million in cash every six months even after paying dividends and deferred consideration.
Larger acquisitions would take up more of the £18.5 million in the bank. Share issues are unlikely to be required for the size of acquisition made by Tracsis. The latest interim dividend has been raised by 17% to 0.7p a share.
This is well-covered but don't expect big jumps in the pay out. It is likely to continue to rise steadily.
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