CPP came close to failing after running foul of the regulator in 2011. But it’s survived and secured a refinancing deal that’s given the group’s management time to rebuild the business.

Even after today’s sharp rise, CPP shares are worth 94% less than they were five years ago. But the firm’s latest figures show that it’s profitable on an underlying basis, and suggest that a comeback story could be on the cards

What’s new?

CPP said today that underlying operating profit is expected to be “materially ahead of the expectations detailed in the interim results.”

This improved performance is the result of tighter cost controls and operational gains in two key markets. The weaker pound is boosting profits from CPP’s European operations, while sales volumes in India have increased.

Is CPP really profitable?

Use of the words “underlying operating profit” is important. CPP reported an increased underlying operating profit of £3.65m during the first half. However, the group’s reported operating profit — after exceptional costs — was just £2.63m.

The group’s net cash balance of £29.5m isn’t as impressive as it sounds either. A total of £25.4m is restricted cash that’s held in CPP’s regulated entities. This money is available to use in the regulated businesses, but isn’t available to the wider group, or for distribution to shareholders. I estimate that CPP’s unrestricted net cash was just £4.1m at the end of June.

It’s also still making compensation payments to former customers. While costs have fallen this year, the group still expects to pay out a further £1.3m. Another one-off cost is a planned ‘divorce’ payment with its former IT supplier, which is still under negotiation.

In fairness, CPP does seem to be moving towards a position where the group’s medium-term future is secure. Its policy numbers rose for the first time since 2011 during the first half of the year, and its renewal rate was stable at 72.9%.

The group’s reported first-half post-tax profit of £2.29m was real, and suggests to me that the current market cap of £66.5m could be quite reasonable.

What are CPP shares worth?

At the time of writing, CPP shares are trading at 9.1p, 68% higher than they were one day ago. But how much are they really worth? Today’s statement didn’t provide any numbers to indicate how much profit the group expects to generate this year, so I’ve made some estimates.

First-half earnings came to 0.27p per share, after exceptional costs. Based on today’s guidance, I’ve assumed that this figure will rise by 10% during the second half. If it does, then full-year earnings could be 0.56p per share.

Based on these estimated earnings and a share price of 9.1p, my calculations suggest that CPP is trading on a 2016 forecast P/E of about 16. That seems reasonable to me.

Although this remains a risky buy, I believe CPP does offer the potential for significant gains.

Clearly, Premier Foods’ share price is highly volatile at the present time and partly because of this, it remains a relatively high-risk play. Furthermore, Premier Foods continues to have a highly leveraged balance sheet and with the prospect of interest rate rises eventually ahead, its profitability could come under a degree of pressure.

However, with Premier Foods trading on a price-to-earnings (P/E) ratio of just 5.6, it appears to have a sufficiently wide margin of safety to merit investment at the present time. While earnings growth of just 3% is forecast in each of the next two years, Premier Foods has a number of highly appealing brands and could deliver improved performance in the long run.

Too many questions for now

Also falling by more than 10% today are shares in CPP Group (LSE: CPP). The international assistance business released its full-year results for 2015 today. But this week has arguably been overshadowed by the requisition made by Schroder Investment Management (acting on behalf of clients who hold more than 5% of CPP Group’s shares), where it called for the replacement of CPP Group’s CEO, Chairman and two other Non-Executive Directors.

According to the company, if the requisition is successful then it will likely have a detrimental impact on the future strategy and performance of the business. And with the FCA stating that CPP Group must demonstrate that management practices and shareholder influence of the past no longer exist, it may be prudent to watch rather than buy CPP Group at the present time. That’s despite the company delivering a substantial improvement in profitability in 2015 versus the prior year, as well as a clear focus on new income generation and growth ambitions.

Wait and see

Meanwhile, shares in Intelligent Energy (LSE: IEH) have fallen by around 80% today after the energy technology company released a disappointing update. It stated that due to recent and unexpected developments in the discussions with various parties, Intelligent Energy will be unable to complete a funding process, in sufficient quanta, by the end of the current quarter. While this is disappointing, more worrying for the company’s shareholders is the fact that Intelligent Energy also states that there’s no certainty an appropriate funding plan can be implemented at all.

Clearly, this news has been negatively received by the market. While Intelligent Energy may still have a bright long-term future, the sheer volatility of its shares at the moment and the lack of clarity regarding its funding position mean that it may be prudent to await more news before considering the purchase of a slice of the company.

With Pinewood experiencing strong performance in revenues across its television, media and international divisions, it has raised its guidance for the current financial year. Furthermore, Pinewood has announced that it’s considering a sale of the company as it seeks to maximise its growth potential following the success of phase one of the Pinewood Studios Development Framework.

With the company’s shareholder registry being tightly held, Pinewood believes that its long-sought-after main market listing may prove elusive. Therefore, in order to potentially fund further development of the business, a review of its overall capital base and structure will now commence that could lead to a sale of the business.

Clearly, this is major news for investors in Pinewood and while its progress has been strong in recent months following its placing in April 2015, the company’s valuation appears to be rather excessive. For example, it trades on a price-to-earnings growth (PEG) ratio of 2.7, which indicates that there may be better options available elsewhere.

Wait and see?

Also rising sharply today are shares in CPP Group (LSE: CPP). However, despite their 6% increase today, they’re still down by 35% in the last three months as investor sentiment wanes, even though the company’s most recent update was relatively positive.

Certainly, CPP Group is undergoing a major transition and this brings a high degree of uncertainty and risk. But with the credit card insurer reporting an operating profit of around £2.2m in its interim results last year, it appears to be making progress towards becoming a more financially stable and resilient business. And with a debt restructuring having been implemented, the changes that CPP Group’s management are making indicate that it may be of interest to long-term, less risk-averse investors. However, it remains a very high risk and volatile stock and it may be prudent to await further news flow before buying.

Premium pizza

Also rising today are shares in Domino’s Pizza (LSE: DOM). They’re up by almost 10% despite there being no significant news flow released by the company. Clearly, Domino’s has had a superb year, with its shares outperforming the FTSE 100 by 56% during the last 12 months. With a recently announced joint venture in Germany as well as acquisitions having been made, it appears to be well-placed to continue to grow its bottom line at a rapid rate.

Clearly, Domino’s isn’t cheap, as evidenced by a price-to-earnings (P/E) ratio of 28.3. But with the company being expected to have increased its bottom line by 25% last year, it remains a top notch growth play. And with it having the scope to make further acquisitions, to diversify its menu to a greater extent and also benefit from relatively robust sales due to a high degree of customer loyalty, it still looks to be a strong buy for the long term.

In fact, Miton recorded net inflows of £436m for the year, with positive investment performance also contributing £278m to its increase in assets under management. And while the company states that it’s not immune from market headwinds, it believes it’s in a relatively strong position to take advantage of the opportunities that are likely to arise in a volatile market.

With Miton forecast to increase its earnings by 57% in 2016, its current price-to-earnings (P/E) ratio of 24.4 appears to indicate that there’s capital gain potential ahead. While a relatively small company and a risky buy, Miton could nevertheless prove to be a sound investment for the long haul.

On the up

Also making share price gains today is CPP Group (LSE: CPP), with the credit card insurer being up 10% despite releasing no significant news flow. Clearly, its shares are relatively volatile but as a business, CPP appears to be moving in the right direction after a challenging period.

In fact, its most recent half-year results highlighted that CPP is gradually turning its performance around. For example, it secured new equity funding and restructured the group’s debt in the first half of the year and this provides CPP with a more stable base through which to potentially improve profitability in the full year. This is being aided further by ongoing cost control which, at the halfway point of the year, contributed to an underlying operating profit of £2.2m versus breakeven in the previous year’s comparable period.

With CPP’s shares having risen by 93% in the last six months, investors appear to be bullish regarding its future. While it’s relatively high-risk, for long-term investors it could prove to be worth a closer look.

Having your cake?

Meanwhile, shares in Patisserie Holdings (LSE: CAKE) have slumped by over 4% today despite there being no news flow released by the company. A possible reason for the fall is a cautious outlook statement made by sector peer Restaurant Group. Its optimism for 2016 has regressed due to uncertainty regarding the EU referendum, the global economic outlook and recent data from consumer-focused businesses.

Clearly, the restaurant industry is benefitting from a rise in disposable incomes in real terms and looking ahead, Patisserie Holdings is forecast to post an increase in its bottom line of 24% in the current financial year. With its shares trading on a price-to-earnings growth (PEG) ratio of just 1.4, they appear to offer good value for money. As such, and while volatility may be high in the coming months, Patisserie Holdings could continue the rise that has seen its share price soar by 42% in the last year.

Since then, though, a capital raising, new management team and an improving wider economic outlook have combined to improve the company’s long term prospects. In fact, in its recent half year results CPP announced that it had delivered a profitable period and appeared to be moving in the right direction regarding its transformation strategy to increase sales and reduce costs.

Certainly, today’s 5% decline in its share price is a disappointment, as is the apparent profit taking which has taken place in the last month. However, with CPP having a relatively bright future, its shares could return to growth over the medium term. As with any business which is in the middle of a major transformation, though, CPP’s shares are likely to be relatively volatile.

Also offering a somewhat uncertain future is Game Digital (LSE: GMD). It is a retailer of computer games and, with the key Christmas trading period being just around the corner, its financial performance in the next few weeks will have a major impact upon its full-year performance.

Clearly, sellers of branded goods can find it difficult to differentiate themselves from rivals on qualities other than price. As such, this means that their businesses can have a narrower economic moat than other retailers which have their own brand or niche product offering which is difficult to replicate.

And, while Game Digital has a clear strategy to offer a selection of pre-owned games in an omni-channel format, develop a community of gamers and also increase its exposure to the growing world of digital content, it remains somewhat reliant upon being competitive on price. This could lead to margins coming under pressure if rivals cut prices or if the UK and Spanish economies endure a challenging period.

Although Game Digital’s price to earnings (P/E) ratio of 10.5 is highly appealing, its forecast fall in earnings of 1% next year indicates that the business continues to struggle. As such, there appear to be better options available elsewhere.

One example is Tesco (LSE: TSCO), which has the potential to benefit from a shift in customer tastes over the coming years. Certainly, it has struggled to cope with the popularity of Aldi and Lidl in recent years, but no-frills, discount stores such as them have been around for decades – even when Tesco was in its pomp. In other words, it is a shift in customer attitudes towards food and its cost which has led to Tesco’s demise and, looking ahead, this could change as the UK economy goes from strength to strength and shoppers find their household budgets rising in real terms.

Although Tesco’s strategy has been lacking in recent years as it sought to become a ‘jack of all trades’, it is now focused on returning to its roots as a supermarket. With a sound strategy and its bottom line forecast to rise by 77% next year, its price to earnings growth (PEG) ratio of just 0.2 indicates that now is the right time to buy Tesco.

Clearly, the benefits of diversifying outside of the mining sector have been all too evident of late, with the likes of Anglo American (LSE: AAL) posting severe share price falls. In its case, a slump of 53% has been recorded in the last year alone with regard to its valuation but, looking ahead, it could easily make up such a large fall.

A key reason for this is its strategy of restructuring the business and, more specifically, selling off assets which offer relatively high risk and relatively low returns. This should help to rebalance the company’s asset base towards more profitable areas, and allow efficiencies to be more easily generated. And, while Anglo American is due to record a fall in its net profit of 49% this year and 19% next year, it remains highly profitable, yields 6.7% and trades on a price to book value (P/B) ratio of only 0.4. As such, gains of 20% are very achievable over the medium term.

Similarly, National Grid (LSE: NG) could see its share price rise by a fifth moving forward. Certainly, investor sentiment may be held back somewhat due to planned interest rate rises which could hurt investor sentiment in highly indebted companies such as National Grid. But, realistically, monetary policy is unlikely to tighten at a brisk pace – especially since the global economy continues to battle with deflation.

In fact, the outlook for National Grid could become more positive the worse the macroeconomic outlook becomes. That’s because it continues to be one of the most appealing defensive stocks in the FTSE 100 and, with it trading on a price to earnings (P/E) ratio of just 15.8, there is upward rerating potential at a time when many of its utility peers have much higher ratings. And, of course, National Grid’s beta of 0.78 means that in the short run its shares should offer a less volatile shareholder experience, too.

Meanwhile, credit card insurer CPP Group (LSE: CPP) continues its stunning performance since the turn of the year, with the company positing a double-digit gain today and making it a rise of 230% since the turn of the year. A key reason for this has been the company upgrading its guidance for 2016, with its half year results showing that encouraging progress has been made. And, with its transformation plan seemingly on-track, it would be unsurprising for its improved financial performance to continue over the medium term.

Certainly, it could be argued that profit taking will hold the company’s share price back after such strong gains but, after a successful debt restructuring and with CPP having a clear growth strategy, investor sentiment could warm sufficiently to add another 20% to its valuation.

CPP’s much higher reported operating profit of £20.7m may also have caught the eye of some investors. However, this figure includes a £18.9m non-cash credit relating to the settlement of deferred commission liabilities.

This isn’t a business profit, nor will it generate cash, but it does help to draw a line under the firm’s past problems.

Other highlights of this morning’s results were a further rise in renewal rates, which have risen from 69.5% at the mid-point of last year to 73.2% at the end of June.

Importantly, CPP also said that it had not made any fresh provision for compensation claims related to the mis-selling scandal which nearly caused the company to fold. CPP said that the remaining provision of £3.7m is expected to be enough to complete the remaining claims.

New financial strength?

CPP has been priced for failure for some time now, but the last eighteen months have seen significant changes. The firm has new management team and raised £20m at the start of 2015 by selling new shares. This enabled CPP to restructure its debts and settle various liabilities.

Today is the first chance investors have had to see CPP’s accounts since the refinancing took place.

As you’d expect, the balance sheet is much improved. At the end of June, the firm had net cash of £36.9m. Net assets are now £5.3m, up from -£30.9m at the end of December.

Administrative expenses of £20m were £4m lower than during the first half of last year, thanks to the closure of several UK offices and various other cost-cutting measures.

However, CPP’s operations are not yet generating positive cash flow. Net cash outflow from operating activities was £4.2m during the first half.

The future

CPP isn’t out of the woods yet. The firm’s UK business is declining steadily, due to restrictions on the sales of new products.

Revenue fell by 22% to £45m during the first half, while the number of live policies fell to 4.4m, down by 28% 6.1m at this point last year.

CPP is hoping to replace this lost business with new sales abroad. The group recently signed a contract to provide an automotive insurance product in Spain, and is developing a mobile phone protection business in India.

Other initiatives are underway in Turkey, Italy and China, but it’s clear that the firm has not yet achieved scale in any of these markets.

Is CPP a buy?

Using CPP’s underlying profit as a guide, I estimate that the firm might manage to generate earnings per share of about 0.5p for the full year. That puts the shares on a forecast P/E of 20 at the current share price of 10p.

Given the challenges still faced by CPP, that’s probably high enough, in my view.