Profit from LMS wind down
The board of investment company LMS Capital have requisitioned a shareholder meeting to approve an orderly wind-down of the company following an approach by chairman, Robert Rayne, and certain members of the Rayne concert party, who together represent 37 per cent of the company's share capital.
This is significant as LMS shares are not only trading 34 per cent below book value, but £30.5m of the company's net asset value (NAV) of £245m is already in cash and quoted holdings were last valued at £32.4m. These include a stake in New York Stock Exchange listed Weatherford International, worth £24m.
In addition, fund holdings account for £109m of the portfolio with the balance of £82.7m invested in unquoted investments. In other words, given the cash backing, the company can afford to take its time realising maximum value from the investment portfolio as in effect 23p a share of the portfolio is already in cash or listed shares that can be easily liquidated. So with the shares at 61p, the risk looks firmly to the upside because after stripping out cash and listed shares the fund and unquoted holdings, worth 70p a share, are being priced in at a bargain basement 38p.
That's not been lost on investors, as LMS shares have risen by 11 per cent compared with a 11 per cent fall in the FTSE All-Share index since I advised buying at 54.5p (Capital Returns, 14 February 2011). And it's only reasonable to expect them to continue to outperform as the company winds down and the value in the portfolio is crystallised for shareholders. So if you are willing to take a 12 view, there is ample scope to be rewarded here.
Netcall rings the right tune
Shares in Netcall, a small cap company offering software to make telephone call handling more efficient, have been ringing the right note and at 19p are closing in on my 23p target price. That's good news if you followed my advice to buy at 13p earlier this year (Queuebusters, 17 January 2011).
The reorganisation of the business following the acquisition of Telephonetics in July last year is now complete and has produced annualised net cost savings in excess of £1.8m. But this is not just about cost cutting as in the past year Netcall (AIM: NET) has enjoyed an impressive 25 per cent growth in business from new customers for its suite of products. These include QueueBuster, a service which gives telephone customers an alternative to waiting in lengthy call queues by offering them an automated call back.
Existing clients are staying loyal as recurring revenues now accounts for over two thirds of turnover and this revenue stream now exceeds the company's fixed cost base. Netcall is also cash generative, delivering over £2m of annual operating cashflow. In fact, net cash is now over £6.5m, or the equivalent of 5.5p a share, so it was no surprise to see the board declare a maiden dividend of 0.4p. The payout is well covered by adjusted EPS of 1.57p, up a third year-on-year, and there is scope for a progressive dividend policy as analysts expect EPS to rise to 1.8p in the 12 months to April 2012.
Those forecasts look achievable given that Netcall's boss Henrik Bang sees significant cross selling opportunities across the company's customer base of over 600 organisations in both the private and public sectors. These include blue chip clients such as BT, Cable & Wireless, Lloyds TSB, Orange and around two thirds of NHS Acute Trusts.
Trading on a 10 times earnings forecasts, and with the board announcing a buy back programme equivalent to 2.5 per cent of the shares in issue, I rate Netcall shares a buy.
Food for thought
Shares in small cap food producer Zetar (AIM: ZTR) are marking time at 230p, modestly above my advised buy-in price of 223p (Appetising returns, 25 July 2011), which is a resilient performance considering the Aim 100 index has fallen 20 per cent in the past three months.
Finance director Mark Stott certainly sees value as he purchased 8,000 shares at an average price of 250p last month. It looks a sound investment as the shares are trading on six times historic earnings, falling to 5.5 times analyst EPS estimates of 40.7p for the 12 months to April 2012. Moreover, they are priced a third below NAV which looks anomalous as there are no financial concerns to justify a discount. In fact, analysts expect net borrowings to fall from £14.9m to £9m by April 2012, which is well within the company's borrowing facilities of £44.2m, and will cut gearing to a modest 20 per cent. In turn this offers scope for interest savings to be redirected to raising the dividend. A 2.25p inaugural dividend will be paid next month.
There is a growth story here, too, as the plan is to boost the contribution from Zetar's higher margin brands to 45 per cent of the sales mix in the next four years. In my view, Zetar's shares should continue to outperform the market and I feel comfortable recommending them as a medium-term recovery buy.
Lights go out at PV Crystallox
It has been heavy going for my 2011 Bargain share portfolio, largely due to losses on holdings in Ambrian Capital and PV Crystalox Solar. The solar-wafer manufacturer has warned again of strong downward pressure on selling prices due to aggressive cost-cutting by larger Asian rivals and will now report a loss this year. Not surprisingly, sentiment is very weak and the shares have collapsed to 8p, capitalising the company at £32m, below its June 2011 net cash of £36m. True, trading losses will cut that cash pile and the shares could drift lower before a final base is formed. However, I wouldn't bail out at such a depressed level as the shares are being priced as option money and way below intrinsic value given that the company's NAV was £244m at the end of June.
■ Please note that Simon's next column will appear online on Monday, 21 November
