The good news is that there is a realistic prospect of further cash returns, too, as I highlighted last week with my advice on Trading Emissions (TRE: 31p). Another company I have been keen on is Aim-traded investment company Spark Ventures (SPK: 11p).
I initially recommended buying the shares at 9.5p ('The spark for a re-rating', 10 Jul 2012) and repeated the advice four months later when the share price had drifted down to 11.25p (Time to spark a re-rating', 8 Nov 2012). Since then, the company has paid out 2.5p a share in 'B' and 'C' shares in January, so with the shares currently offered at 11p in the market we are doing well. There is the prospect of more gains to come, too.
Good news to come
That's because there should be more good news in six weeks time when Spark reports its full-year results to the end of March 2013. The company's board is "actively pursuing all avenues for the realisation of the remaining investments; trade sale, flotation or secondary and we are hopeful of further substantial realisations during 2013". That's worth noting because, adjust for the aforementioned cash return, and Spark had a pro-forma net asset value of 13.66p a share at the end of September 2012. Since then, markets have been buoyant, and some of Spark's companies have been tapping investors for funding which has led to upgrades in the carrying value of the holdings in investee companies.
Scope for valuation uplifts
For example, the carrying value of Spark's investment in California-based OpenX, a business based on an open source ad-serving platform, has doubled from £2.5m to £5m, based on a funding round with a new investor at the end of last year. Sales growth has been robust, with trailing 12-month revenue figures "significantly in excess of $100m and for the second year running revenues are over two and a half times the level for the equivalent period 12 months ago". The new funds raised are expected to fuel further growth at OpenX and I wouldn't be surprised to see a further valuation uplift in the forthcoming results.
The valuation of Spark's stake in Mind Candy, the company behind Moshimonsters, one of the world's leading developers of social multi-player children's games, also looks undervalued. In the 12 months to October 2012, Mind Candy's revenues were up 125 per cent and profits trebled over the previous year. However, Spark's investment in Mind Candy is still only being valued in its accounts at £3.1m, based on the price received when the company sold half of its stake two years ago. Given the robust profit growth since then, this valuation looks conservative.
The stake in Notonthehighstreet.com, an internet marketplace for over almost 3,000 specialised UK-based businesses selling a wide variety of unique products, also looks conservatively priced at £10.2m, the valuation used at the time of a funding round over a year ago. Notonthehighstreet has generated impressive growth in 2012 and revenue was roughly 70 per cent up on the prior year at the end of September. There is every reason to believe that the business enjoyed robust growth in the final quarter of 2012.
According to The IBM Digital Analytics Benchmark, UK online retail sales increased by 13.7 per cent in November 2012 compared with the same month in 2011. Of those sales, 18.8 percent were made using a mobile device. Online sales in December increased 16.4 per cent and mobile sales ended the month up 20.3 per cent. In other words, these are very strong growth trends and ones that will have undoubtedly benefited Notonthehighstreet.
Conservative valuation
Spark Ventures' share price is currently trading on a 20 per cent discount to the end of September 2012 net asset value. However, with scope for further cash returns and valuation uplifts on its £56m investment portfolio, the share price looks well underpinned.
It's also worth pointing out that the board "are conscious of the potential value of the ultimate quoted cash shell and the embedded tax losses and will be seeking to maximise the value of these where possible".
So, if you followed my earlier advice, I would hold on for the financial results and trading update in six weeks time.
Greenko shares waiting to power up
Shares in Greenko (GKO: 125p), the Indian developer, owner and operator of clean energy projects, have yet to make progress towards my 200p a share fair value target. In fact, having advised buying when they were priced on a bid-offer spread of 134p to 138.5p, the holding is currently down around 10 per cent ('Buy signal flashing green', 18 Mar 2013).
However, the investment case is firmly intact and I remain a buyer of the shares at 125p ahead of the company's full-year results to the end of March 2013, scheduled for release in mid-July.
Ramp up of capacity
My interest was sparked by news of a proposed £100m investment in Greenko Mauritius by an affiliate of the Government of Singapore Investment Corporation, one of the world's leading sovereign wealth funds. The shares are convertible on a one-for-one basis into ordinary shares in Greenko subject to final adjustment between 1 July 2015 and 30 June 2017. The initial investment is equivalent to a minimum of 19.5 per cent of Greenko's share capital on a fully diluted basis.
Importantly, the new funds will enable the company to ramp up the construction of its substantial power portfolio and take advantage of the attractive power opportunities in India. Greenko has added six new run-of-river hydro projects totalling 425 megawatts (MW) to its active development pipeline. Two of these are additions to the existing hydro cluster in Himachal Pradesh and a further four projects are being added to form a new regional cluster in Arunachal Pradesh, with site work expected to start at both locations in late 2013. With the £100m new funding in place, Greenko is now targeting approximately 2,000 MW of operating capacity in 2018, double the target for 2015.
Analysts at broker Arden Partners value the new capacity at €126m (£107m), which is significant considering Greenko's equity is currently being valued at £188m. However, if the above targets are met then we can realistically expect a sharp ramp up in Greenko's revenues and profits this financial year and next.
Robust earnings growth forecast
Analyst Adam Forsyth at Arden currently forecasts revenues of €42.8m and operating profits of €16.3m in the 12 months to March 2013, rising to €78.2m and €40.4m, respectively, in the current financial year to March 2014. The estimates for the 12 months to March 2015 are for revenues of €128m and operating profits of €78m.
On that basis, EPS rises from 4.5¢ in 2013, to 6.75¢ in 2014 and 16.2¢ in 2015. The point being is that if Greenko can hit these targets and treble revenues and boost profits five-fold over the next two financial years, then it is only reasonable to assume that the company's share price will start to reflect the upside which the Government of Singapore Investment Corporation clearly sees in the revenue generating potential of the power generation assets.
Technical analysis
Having traded between 100p and 140p between December 2011 and earlier this year, a break-out above the top of the range would complete the base formation. I still believe that this will happen.
In fact, although Greenko's share price peaked at 152p in the days after the announcement of the new funding, and has since drifted back to their 200-day average around 125p, this has unwound the 14-day RSI to a neutral position. In my view, a positive set of full-year results and an upbeat outlook statement would be enough to make up the lost ground. Trading on a bid-offer spread of 123p to 125p, I remain a buyer of Greenko's shares.
MORE FROM SIMON THOMPSON ONLINE...
I have written nine other articles in the past week or so, all of which are on my homepage and include the following companies or sector trades:
Housebuilders ('Seasonal stock picking strategies', 30 Apr 2013)
Daejan Holdings, Mountview Estates ('Hot property', 1 May 2013)
Aurora Russia, Thalassa ('Small-cap stock picks', 1 May 2013)
Town Centre Securities, Terrace Hill ('Hot property: take two', 2 May 2013)
Netplay TV ('A golden nugget', 2 May 2013)
Polo Resources, Heritage Oil, IQE ('Bargain shares update', 3 May 2013)
KBC Advanced Technologies ('Fuelled for growth', 6 May 2013)
Communisis ('Buy the triple top break-out', 7 May 2013)
Global Energy Development ('A share priced for a sharp re-rating', 8 May 2013)
