Connect Group – What a shocker, says Mr Market

PUBLISHED: Jan 24 2018 @ 10:13 | Comments (0) |

I bought into Connect Group (LSE:CNCT) in September at 104.6p. A couple of months later it declared good results for the year and a 6.7p final dividend. The shares rose to 120p, so it was looking like I’d made a return of 21% in three months.

Then BANG! On Tuesday the share prices collapses to 74p, when both a profit warning is announced as well the failure of the sale of the Book division.

So here we are presented with a classic test for the value investor: do we go along with Mr Market’s pessimistic view and sell with the rest? Or do we examine the underlying business and try to figure out whether we should be doing the opposite – buying some more?

For this decision information is needed. Right on cue, yesterday I travelled down to Swindon to attend Connect’s AGM. I, along with two other investors (who seemed very knowledgeable and experienced), was able to quiz the directors for over an hour. What they had to say put a broad smile on all our faces – there are still risks, but none of us are selling.

(Earlier Newsletters on Connect: 27^th September – 4^th October 2017)

What an income!

The first thing that strikes you about Connect is the size of the dividend. It was 9.8p last year. The share price is 74p – 74.8p (market capitalisation £183.4m). This means the dividend yield is 13%.

“Surely, this is unsustainable?” says Mr Market.

From what I heard yesterday, and what I know of the company more generally, it is not only sustainable but, with a fairly high probability, will be raised to 10p next year, and then raised again in the years after that. The remainder of this series of Newsletters will explain why I’m optimistic.

Year to end August	“Adjusted” earnings per share (p)	Statutory basic earnings per share (p)	Dividends (p)
2018	FinnCap estimate: 13.5	My estimate: 10	Expected: 10
2017	15.5	11.0	9.8
2016	16.2

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