An 8% yield and chronically undervalued

Despite stockmarket volatility, Entu (UK) (ENTU), the Manchester-based supplier of home improvement and energy efficiency products, has begun trading on AIM. There’s been little fanfare, but the company promises a massive prospective dividend yield, and single-digit earnings multiples seems scant reward for forecast double-digit profit growth for at least the next three years.

As we predicted earlier this month, Entu shares were placed at 100p each. That raised £32.8 million for selling shareholders and valued the business at £65.6 million.

Brian Kennedy set up the company in 2008 with current chief executive Ian Blackhurst and finance boss Darren Cornwall. Kennedy is not involved in the day-to-day running of the business, but still owns 30% post-IPO worth £20 million. He already has a reputation as a shrewd businessman and owned double-glazing firm Everest for a time before selling it on. He's now the majority owner of the Sale Sharks rugby club and once tried to buy Rangers football club. Ian and Belinda Blackhurst each own 7.5% and Cornwall 5%.

Ian and Belinda Blackhurst will each own 7.5% of Entu post-float (£5 million each) and Cornwall will keep a 5% stake worth £3.3 million. If the shares take off, they'll be worth much more. We'll find out on 30 October.

Valuation

Entu is a new holding company of well-known regional brands like Zenith, Penicuik, Weatherseal, Staybrite Solar, Energy Hypermarket, Job Worth Doing and Europlas. Revenue grew by 4% to £95.5 million in the year ended 31 October 2013, although underlying cash profit dipped to £6.34 million. However, for the six months to April 2014, sales surged by almost a third to £57.9 million and profit doubled to £5.6 million.

But now we have estimates in from Edison, and the broker's forecasts are bullish. Its analysts expect a 25% surge in revenue for the year ended October 2014 to over £119 million, and for cash profit to rocket by almost two-thirds to £10.4 million, with a meaningful contribution from all four divisions. Expect profit to jump by 10% next year and over 11% in 2016, it says.

Blackhurst is understandably bullish. "We are absolutely confident in those numbers," he told Interactive Investor. "We are cash generative, asset light, have no debt, sufficient bank facilities, and now we have access to capital funds."

Edison's numbers factor in average earnings per share (EPS) growth of about 11% over the next two years. At a current offer price of 105p, Entu shares trade on a forward price/earnings (P/E) ratio of just 8.8, dropping to only 7.9 in 2015. An enterprise value-to-cash profits ratio of 5.9 then just 5 next year only reinforced the valuation argument.

That's a big discount to peers, too, including Safestyle, Norcros, Topps Tiles and Travis Perkins, which seems unfair given entu (UK) has no manufacturing, is UK and domestic only and has an installation capability. "We consider that Entu is coming to market priced on a one-third earnings multiple discount to this group (below Safestyle and Epwin and in line with Norcros) and a 100% yield premium."

And it's that yield which grabbed our attention recently. "Based on their expectations of current and future trading and track record of the business, for the year ending 31 October 2015 the directors intend to pay a dividend that equates to a dividend yield of 8% based on the placing price," said Entu in its Intention to Float document.

According to Edison, the dividend is cover about 1.7 times by earnings, and Entu is expected to end this year with £4.2 million of net cash, rising to £8.7 million in 2015. That alone is worth 6p and 13p a share, respectively.

Of course, Entu could use that cash to expand. It is historically an acquisitive business, normally buying a couple of companies a year. It's an incredibly fragmented market worth billions of pounds a year, and growing. "I see all areas of the business growing, not just replacement windows," said Blackhurst. "We'll have a more balanced portfolio as lots of new products come through."

If Entu fulfils its promise on both growth and the dividend, the company looks incredibly good value.

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.