It's highly profitable, too, as I estimate that the two companies will report combined pre-tax profits of £9m this financial year, rising to £10.3m in 2014. Clearly, the boards of both companies have had the same thought as Stanley Gibbons has made an indicative bid to acquire Noble Investments in a cash-and-shares offer valuing the shares at 255p apiece. Of this sum, 192.5p would be paid in cash and a further 62.5p in Stanley Gibbons' shares, the price of which would be the same as Stanley Gibbons' proposed £37m underwritten share placing to fund the cash element of the offer.
The merged entity would have a market value of around £134m, making it one of the top 100 companies on London's Alternative Investment Market (Aim). It would also have a rock-solid balance sheet with pro-forma almost £80m of net assets, including net cash of £17m, less fees relating to the takeover and placing. But that's a conservative figure as on a mark-to-market basis Stanley Gibbons' holdings of stamps, coins and memorabilia were worth £21.5m at the half-year stage, which would add over £23m to net asset value. And there is also hidden value in Noble's accounts.
For example, the London headquarters are in the books for £1.1m, whereas the market value of the property is nearer £3m. Inventories of coins acquired as part of the takeover of AH Baldwin seven years ago are significantly undervalued, too. Factor in annual price appreciation of 10 per cent since the acquisition and, if these stocks are marked to market value, this adds a further £1.8m to the company's book value. In other words, I reckon the true net asset value of the two companies is well over £100m, of which £17m is in cash.
Cash pile funding growth
Importantly, this cash pile provides the funding to drive growth in both businesses. For example, Stanley Gibbons has opened offices in Hong Kong and China in the past 18 months, both of which are highly profitable, in order to tap into the growing international interest in collectibles especially in the Far East. The company has also boosted the size of its investment sales office in the Channel Islands.
Stanley Gibbons may be 156 years old, but it is not stuck in some bygone age as management has been exploiting the opportunity to grow the business online. Total internet sales for the first half of this year represented 7 per cent of total revenue and a significant reorganisation of the e-commerce team has been completed, resulting in the creation of a dedicated online marketing team located in Jersey. The overseas expansion is ongoing and sales derived from outside of the UK represented 61 per cent of the total in the first half, up from 47 per cent in the same period of 2012.
Prospects look equally good for Noble Investments, which has been enjoying "a healthy flow of consignments of collectibles for auction during the remainder of 2013 and into 2014". Moreover, significant progress has been made integrating the Dreweatts and Bloomsbury Auctions businesses with Noble's other auction activities following the acquisition of The Fine Art Auction Group late last year. That deal took Noble into the wider collectables market to add to its expertise in coins and stamps. The company is also embracing the digital age and a new e-commerce-ready website will be launched shortly.
Valuation
As regular readers of my columns will know, I included Stanley Gibbons shares in my 2012 Bargain Share Portfolio at 178p, since when the price has risen to 303p and we have banked dividends of 13p. This gives a total return of 78 per cent in the past 19 months. For good measure, I also included Noble Investments' shares in my 2013 Bargain Share Portfolio at 199p, since when we have banked dividends of 2.5p a share. The return here is 21 per cent in seven months, far better than the return on the FTSE SmallCap or Aim indices.
How Simon Thompson's 2013 Bargain Shares Portfolio has performed
| Company | TIDM | Opening offer price on 8 February 2013 | Bid price on 16 September 2013 | Dividends paid (p) | Total return (%) |
|---|---|---|---|---|---|
| Inland Homes | INL | 23.5 | 43 | 0 | 83.0% |
| Terrace Hill | THG | 15.4 | 24.75 | 0 | 60.7% |
| Trifast (see note four) | TRI | 51.9 | 68 | 0.80 | 32.6% |
| Randall & Quilter (see note one) | RQIH | 113.3 | 145 | 5.00 | 32.4% |
| Fairpoint (see note two) | FRP | 98.25 | 124 | 3.55 | 29.8% |
| Noble Investments (see note three) | NBL | 199.4 | 240 | 2.50 | 21.6% |
| Oakley Capital Investments | OCL | 139.7 | 153 | 0 | 9.5% |
| Polo Resources | POL | 24.53 | 24.25 | 0 | -1.1% |
| Cairn Energy | CNE | 287.2 | 278 | 0 | -3.2% |
| Heritage Oil | HOIL | 202.3 | 194 | 0 | -4.1% |
| Average | 26.1% | ||||
| FTSE All-Share | 3275 | 3540 | 10.3% | ||
| FTSE Small Cap | 3659 | 4219 | 16.4% | ||
| FTSE Aim index | 742 | 786 | 6.0% | ||
1. Randall & Quilter returned 5p a share on 3 May 2013 to shareholders through the issue of 'L' and 'M' shares. 2. Fairpoint paid a final dividend of 3.55p a share on 20 June. 3. Noble Investments paid a dividend of 2.5p a share on 19 July. 4. Trifast pays a final dividend of 0.8p a share on 17 September (ex-div: 3 July). Latest prices correct at 9.45am on Monday, 16 September 2013. | |||||
Assuming the deal goes ahead, and the board of Noble has indicated that it is likely to unanimously recommend such an offer, based on the terms proposed there would be 44.3m shares in the merged entity assuming the aforementioned placing is priced around 300p a share. Using current analyst earnings estimates, the enlarged company is expected to make pre-tax profits of £10.3m in 2014 and that ignores any costs savings from merging the two businesses. So, by my calculations, the merged entity would generate net profits of £8.4m and adjusted EPS of between 19p to 20p. The cash pile equates to 38p a share.
This also means that Stanley Gibbons' shares are currently being priced on a forward PE ratio of 13 net of cash for 2014 factoring in the acquisition of Noble. That rating doesn't seem expensive to me given the growth opportunities in the alternative investment market and I maintain my positive stance on the shares. Also, with shares in Noble trading on a bid-offer spread of 240p to 245p, there is an arbitrage opportunity here to buy into Stanley Gibbons on the cheap. That's because once you deduct the 192.5p a share of cash from the proposed cash and shares bid for Noble, then the 62.5p paper element of the bid is being valued at only 52.5p, so in effect you are buying Stanley Gibbons' shares at a 16 per cent discount. I would use this discount as a cheap way of getting hold of Stanley Gibbons' shares.
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