Last year can only be described as disappointing for the Bargain Portfolio, following the bumper returns enjoyed between 2003 and 2006. True, I managed to outperform the FTSE All-Share index for the eighth year running, but the portfolio still dipped marginally into negative territory. And this was entirely down to the performance of Barratt Developments, which has plunged in value as jitters over the housing market and the fallout from the credit crunch have taken their toll.
The table below shows this clearly. However, as I explain in the main feature, investing based on asset value is a long-term game, so you will need to be patient. Barratt is still a solid company - it's just 68 per cent cheaper than it was this time last year!
| COMPANY | TIDM | MARKET | PRICE 09.02.07 | PRICE NOW | % RETURN |
|---|---|---|---|---|---|
| Aero Inventory | AI. | Aim | 380 | 580 | 52.6 |
| Quantica* | QTA | Aim | 33 | 47.5 | 43.9 |
| Trinity Capital | TRC | Aim | 87.5 | 98 | 12.0 |
| Trading Emissions | TRE | Aim | 135 | 128 | -5.2 |
| Pactolus Hungarian Property | PHU | Aim | 49.5 | 39.5 | -20.2 |
| Avarae Global Coins | AVR | Aim | 12.75 | 10.0 | -21.6 |
| Barratt Developments | BDEV | Main | 1,280 | 408 | -68.1 |
| Average | -0.9 | ||||
| FTSE All-share | 3,263 | 3,067 | -6.0 | ||
| Outperformance | 5.1 | ||||
| * Quantica was taken over at 47.5p a share in cash | |||||
The summaries below explain my thinking on each of the 2007 companies now. The links take you to a page containing more articles and financial data on the company in question.
Barratt was penalised for its acquisition of Wilson Bowden last spring, which marked the peak of the UK housing market. As a result, and with borrowings of £1.7bn at the end of last year, it has one of the most heavily geared balance sheets in the housebuilding sector, giving investors added cause for concern. That said, after the savage derating, the shares trade on less than half book value, yield 9 per cent and are rated on four times prospective earnings for the 12 months to June 2008. This is a recession rating that is factoring in a significant amount of bad news for the housing market that may not materialise. Indeed, the shares are so lowly rated that if the company stopped buying land altogether and built out its 113,000-plot land bank and returned the proceeds back to shareholders, it could easily return more cash per share than the current share price. That seems anomalous and, if you're still holding the shares, I would hold on to them for a recovery.
Shares in Aero Inventory surged by more than 50 per cent in the past year on the back of a strong operational performance and a number of significant contract wins. Sales for the first four months of the current financial year are up by more than 80 per cent, year on year, helped by a first-time contribution from a $1.6bn (£811m) contract with Australia's Qantas Airways to supply it with components such as pumps, fasteners and fuel gauges. Sector analysts at stockbroker Numis Securities have upgraded their forecasts for 2007-08 substantially on the back of a similar $1.2bn, 10-year deal that Aero Inventory won to manage and supply consumable aviation parts for Canada's ACTS Aero Technical Support & Services.
For the 12 months to 30 June 2008, brokers now expect the company to increase EPS by 25 per cent to around 50p a share and pay a dividend of 17p. So, with the shares at 580p, Aero Inventory hardly looks expensively rated on a forward PE ratio of 11.5 and offering a yield of 3 per cent. Buy.
There was also good news from small-cap recruitment firm Quantica, which succumbed to a 47.5p-a-share cash bid from rival Berkeley Scott last summer. The takeover valued Quantica at £28.3m and meant I banked a 43 per cent gain on the holding.
Investors are finally warming to Indian property fund Trikona Trinity Capital. The shares have climbed back to around the 100p mark at which the company floated in the spring of 2006. Having raised £250m from investors, the Aim-traded company has been in the ideal situation to cherry-pick a portfolio of assets with the focus on infrastructure projects.
Trinity has already posted some decent gains on the realisations from its investments. Its stake in a private development company that owns an operational 5-star hotel in Mumbai, as well as land to develop further hotels in Mumbai, Pune and Goa, was sold for 10 per cent above book value last month and generated a hefty 74 per cent return on the invested capital employed.
Despite these big gains, shares in Trikona still trade on a hefty 30 per cent discount to net asset value (NAV), which stood at 144p at the end of September. Given the breadth of the portfolio and the fact that the company is already showing an 82 per cent valuation uplift on its investments over the amount of capital committed, the deep share price discount to NAV looks far too harsh. The shares, which have risen 12 per cent in the past year, remain a buy.
Shares in Trading Emissions have been marking time lately despite news that the business is on track to achieve its goal of delivering a portfolio of 66m carbon credits between 2008 and 2012. The company's strategy is pretty simple: it exploits countries' need to reduce greenhouse gas emissions by capitalising on the investment market for certified emissions reduction credits (CERs) and emission reduction units. The aim is to create a portfolio of these carbon credits and make a profit through the price difference between the average buy-in price and the eventual sale price of the CERs.
And there is no doubt that Trading Emissions is making decent progress with building the portfolio - in a trading statement last month, the company noted that, on a risk-adjusted basis, contracted and delivered volumes now stand at 52.9m CERs compared with 51.5m in October and 42.7m in June. It is also growing net assets nicely, which stood at 148p a share at the end of June 2007. That places the shares on a 13 per cent discount to NAV which, given the long-term potential for carbon credits, looks unwarranted. So, despite the flat share price performance, the shares still rate a medium-term buy.
Pactolus Hungarian Property (PHU)
Pactolus has been making headway in creating a small residential letting investment property portfolio in the affluent districts of Budapest in Hungary. Most of the apartments are turn-of-the-last century two-bedroom dwellings with high ceilings, which were given to good party members during the Communist era. Once refurbished, they are being rented out to overseas blue-chip companies on two- to three-year leases. In the first half of last year, the company acquired a further 11 residential properties at a cost of €2m (£1.5m) for refurbishment to take the portfolio to 65 units.
The portfolio, which had a book value of €17.9m at the time of the first half results in September, is now cash positive on a month-on-month basis and was generating a rent roll of €78,000 a month at an average yield of 8.5 per cent. Since then, Pactolus has let two of the refurbished properties on gross yields of 8.2 per cent and re-let another four properties at rents 18 per cent higher than previously achieved.
The company has also recently agreed a €9m finance facility with Investec - to be repaid seven years after initial drawdown and carrying a rate of Euribor plus 1.6 per cent - which will be used to acquire further properties. In June, it raised £2.8m through a placing of shares at 60p to strengthen its balance sheet, having raised £9m at the same price when the company joined Aim in March 2006. However, those shareholders and anyone who followed my advice to buy at 49.5p a year ago, have yet to be rewarded, with shares in Pactolus falling to 39.5p - a massive 45 per cent below the last reported net asset value estimate of 71p a share (pre-deferred tax) - due to concerns over inflated property values. However, the selling looks overdone, especially as the company's portfolio is ungeared so shareholders are less exposed to movements in the underlying value of the company's assets than shareholders in other highly geared property plays are. I still rate the shares a medium-term buy.
Avarae is the only publicly traded specialist dedicated to investing in rare and high-quality coins - and the company has been coining it in, too, having raised £5m at 12.5p a share when it went public in May 2006 and a further £6m last August. The company's strategy is to hold coins for between two and five years before re-sale and the current portfolio, worth over £6m or 5.5p a share, consists of coins from 40 countries, with British coins forming the largest part of the collection. Net cash accounted for £5.3m (or 4.8p a share) of the company's net asset value of £11.4m at the end of September. Avarae is also keeping a close eye on overheads and administration costs are relatively low at £30,000 a month.
While Avarae and the manager of its portfolio, Noble Investments, report eager bidding at auctions, the company's share price has not been so buoyant and has fallen back to 10p a share from my recommended buy in price of 12.75p a year ago. Still, with growing worldwide demand for rare coins, fuelled by emerging investment markets in China, Russia and the Middle East, the shares continue to have long-term appeal. Trading in line with book value, patient shareholders should end up coining it in, too.
