Gamble of the week: Post a profit with this stamp collector

published 31 October 2011

The ultimate store of value is said to be gold. But another asset class that is vying for the title is stamps, a $10bn global market. The GB30 Rarities Index which tracks the value of Britain's 30 rarest stamps has delivered an annual return of 11% over the past 40 years. The only problem for investors is knowing which specialist varieties to snap-up and squirrel away.

If you're not a keen philatelist, another strategy is to invest in the experts, such as Stanley Gibbons, the market leader in the stamp-collecting market. It focuses on UK, Commonwealth and Chinese stamps, along with collectibles such as historical documents, rare autographs/coins and commemorative/military medals. Traditionally, the UK has generated the lion share of sales (presently 63%). But of late there has been strong interest from Asia, particularly China, where prices at recent auctions have broken all records. This overseas demand helped lift Stanley's pre-tax profits by 12% in the first half of the year, on sales up 25% to £15m.

Yet branching out internationally is only half of the firm's story. Another big opportunity is pulling in internet sales, which currently contribute only 4% towards the top line. The firm's management recognises the vast potential of this and are planning a major relaunch of the company's website before the end of the year.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Stanley Gibbons (AIM: SGI)

Meanwhile, given current inflation worries, the company could also soon experience an uptick in activity from investors seeking to diversify their wealth into physical chattels. Stamps are a classic non-correlated asset class', meaning prices are driven largely by rich collectors competing for the best items. "It's a mature hobby," says chief executive Michael Hall. "Our average customer is in his 50s, is worth around £10m and puts around £50,000 into stamps."

Another plus is the firm's tax rate. It remains at a very efficient 10%-11%, reflecting the amount of business that is derived from its recently enlarged Jersey office, which caters for high-net-worth individuals.

The City is forecasting 2011 turnover and adjusted earnings per share of £29.6m and 17.3p respectively, rising to £31.5m and 18.9p in 2012. With net cash of £0.7m, the shares trade on a miserly price/earnings ratio of ten and offer a 3.2% dividend yield. I value the group on a 12 times multiple, which in turn produces an intrinsic worth of more than 200p.

The key negatives to keep an eye on are foreign-exchange risks, tougher online competition and the threat of possible future regulation across the industry. House broker Peel Hunt has a target price of 215p.

Rating: SPECULATIVE BUY at 166p (market capitalisation £42m)

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.