I first made the case for investing in the company four months ago ('The spark for a re-rating', 10 July 2012) when the shares were trading at 9.5p. It proved a popular choice because within 10 trading days the share price had rallied by more than 30 per cent to a bid-offer spread of 12.25p-12.5p after hundreds of investors were attracted by the potential upside on offer. But having seen the share price drift back to a spread of 11p-11.25p, and given the asset disposals Spark Ventures has completed in the intervening period, the case to invest now is equally compelling. That's because Spark Ventures is in the process of selling off its investment portfolio and has a deadline of March 2014 to do so.
The board has not been slow to return cash to shareholders, either, having announced £16.4m, or 4.1p a share, of distributions in the past three years. It's also worth noting that, once adjusting for those cash returns, the company's net asset value (NAV) has risen by 66 per cent since October 2009 so the portfolio has performed pretty well, too.
Despite sitting on a cash-rich balance sheet and offering the prospect of an imminent cash return of "at least 2p a share", we can still buy shares in Spark Ventures 30 per cent below book value of 16p a share. To put that into perspective, this means the company is only capitalised at £46.1m so we are getting £19.5m of assets in the price for nothing. Moreover, adjust for the disposals in the past four months and I reckon Spark is now sitting on at least £19.3m of net cash, or the equivalent of 4.7p a share. In other words, strip out cash from the current share price of 11.25p, and assets worth 11.3p a share are being valued at 6.55p. Now that huge share price discount to asset value would be justified if the 14 remaining investments Spark currently holds (worth £47.4m) are of dubious quality. But this is obviously not the case.
Spark Ventures investment portfolio November 2012
| Portfolio company name | Pro forma value (£m) | Pro-forma value per share (p) |
|---|---|---|
| IMIMobile | 15.9 | 3.9 |
| Kobalt Music | 8.8 | 2.1 |
| Mind Candy | 3.2 | 0.8 |
| notonthehighstreet.com | 10.2 | 2.5 |
| OpenX | 2.5 | 0.6 |
| Firebox | 1.0 | 0.2 |
| DEM Solutions | 1.7 | 0.4 |
| Gambling Compliance | 1.8 | 0.4 |
| Aspex | 0.0 | |
| Academia | 0.9 | 0.2 |
| MBlox | 0.5 | 0.1 |
| Other Holdings < £500,000 | 1.0 | 0.2 |
| Total | 47.4 | 11.6 |
| Pro-forma cash or cash equivalents | ||
| Balance sheet cash 31 Mar 2012 | 7.0 | 1.7 |
| Aspex loan repayment | 1.0 | 0.2 |
| notonthehighstreet.com share sale | 0.8 | 0.2 |
| Kobalt share sale | 3.5 | 0.9 |
| Aspex share sale | 7.0 | 1.7 |
| Pro-forma total cash November 2012 | 19.3 | 4.7 |
| Liabilities | 1.1 | 0.3 |
| Pro-forma net assets | 65.6 | 16.0 |
For instance, the value of Spark's holding in the world's leading music publisher Kobalt has risen by 69 per cent to £12.3m in the past year alone. Spark realised £3.5m selling down its stake in June, but still retains a holding worth £8.8m in a company that controls a 14 per cent share in both the US billboard market and the UK singles publishing market. If that was not impressive enough, Spark's stake in London-based internet marketplace notonthehighstreet.com has surged from £4.5m to £11m since September 2011 using the valuation Fidelity Investments bought in at as part of a funding round in May. Spark boosted its cash pile by selling off £800,000 of its holding in notonthehighstreet.com at the time and retains a £10.2m stake to capitalise on further upside from a business that offers merchandise from around 2,000 specialised UK-based retailers.
The investment is even more compelling when you consider that Spark Ventures is a founder investor in Mind Candy, the company behind Moshi Monsters, a developer of skill-enhancing games designed to enable children to connect safely with each other in a social network. Moshi Monsters now has an overseas client base in over 180 countries, boasts over 50m registered players globally and has the best-selling children's magazine in the UK. Spark sold half its holding in Mind Candy for £3.1m in 2011, but retains a £3.2m investment (based on a £129m value placed on that business at the time) and owns a further stake worth around £1m through its holding in Firebox, an online seller of gadgets, toys and games.
So, by my reckoning, Spark's holdings in notonthehighstreet.com, Kobalt, Firebox and Mind Candy have a combined value of £23.2m, or 5.65p a share, which could be easily realised. Add to that the current cash pile of £19.3m, or 4.7p a share, and the current share price of 11.25p is almost fully backed by cash or these four realisable investments. That means £20m of investments in 10 other companies are in the price for free, including a £15.9m holding in IMImobile, a highly profitable provider of the technology infrastructure for mobile data, voice and video services to mobile telecom operators and media companies.
Spark Ventures' director shareholdings
| Director | Shareholding | Percentage of issued share capital |
|---|---|---|
| Michael Whitaker | 22,832,153 | 5.56% |
| Charles Berry | 287,968 | 0.07% |
| Helen Sinclair | 242,400 | 0.06% |
| Andrew Carruthers | 6,587,240 | 1.61% |
| Jay Patel | 1,329,194 | 0.32% |
| David Potter | 480,000 | 0.12% |
| Total | 31,758,955 | 7.74% |
It's worth noting, too, that the management team making the disposals are incentivised to obtain the best possible prices because they will receive 15 per cent of future distributions made to Spark shareholders once 11p a share has been paid out, falling to 5 per cent once 14p a share has been returned. It's also reassuring that non-executive director Michael Whitaker, who was previously founding chief executive of Spark, is one of the largest shareholders, with a 5.56 per cent stake.
Spark Ventures' major shareholders
| Shareholder | Shareholding | Percentage |
|---|---|---|
| M&G Investment Management | 86,366,122 | 21.02% |
| RWC Partners | 45,874,424 | 11.16% |
| Michael Whitaker | 22,832,153 | 5.56% |
| River & Mercantile Asset Management | 18,688,466 | 4.55% |
| Thomas Teichman | 16,434,138 | 4.00% |
| Lobbenberg Family | 16,350,000 | 3.98% |
| Ennismore Fund Management | 16,368,950 | 3.99% |
| Henderson Global Investors | 16,312,500 | 3.97% |
| Ingot Capital Management | 15,250,000 | 3.71% |
| Total | 256,576,753 | 61.94% |
So not only are management's and shareholders' interests aligned but, with the portfolio performing well and disposals surpassing expectations, a further distribution to shareholders of 14.25p per share, or £58.4m, looks a realistic, if not a conservative possibility over the next 15 months. That's after factoring in wind-up costs, management incentives and property liabilities. Needless to say I rate Spark Ventures' shares, at 11.25p, a medium-term value buy.
