I flagged up a likely positive revaluation a few months ago when I also anticipated that the board would make a chunky cash distribution to shareholders ('Happy capital returns', 15 Apr 2014). In the event, LMS returned £40m to investors at the end of May through a tender offer process pitched bang inline with the company’s net asset value per share. The board have form here as they have returned chunks of cash through the same process since I initiated coverage when the price was 54.5p ('Capital returns', 11 Feb 2011).
I subsequently advised selling back a total of 17.4 per cent of your holdings through a tender offer at 84p at the end of 2012, and a further 17.2 per cent of your holdings last summer through a tender at 90p a share. The basic entitlement in the latest tender offer equates to 22.5 per cent of outstanding shareholdings. As a result if you followed the initial advice you will have recouped 42p of your initial 54.5p a share investment and still own shares representing 53 per cent of your original investment. Or put it another way, an investment in 10,000 shares in February 2011 at a cost of £5,450 plus dealing costs, will have returned £4,300 in capital returns plus you will still hold around 5,300 shares worth £4,500 with a carrying value of only £1,150. There were no selling costs incurred by shareholders in the tender offers, so this was a cost effective way of selling down holdings at the highest price possible.
But irrespective of whether you decided to follow my advice or not, and I have reiterated my buy recommendation on LMS Capital’s shares numerous times in the past three-and-a-half years, the lesson to be learnt here is simple: a company trading on a deep discount to book value, and with a policy in place to return capital to shareholders specifically by buying back shares at book value, can generate significant financial rewards for patient shareholders and at a relatively low capital risk.
Cash pile and liquid resources mitigates risk
That’s not to say that the bull-run in LMS shares is now over. By my reckoning about £37.6m of the company's book value of £136m is still in cash and quoted securities, the largest proportion is represented by LMS's holding of 1.845m shares in New York Stock Exchange quoted Weatherford International (WFT: NYQ - $22.40), one of the world's largest diversified upstream oilfield service companies with a market value of $17.3bn (£10.3bn). That stake is worth £24.5m at current exchange rates and accounts for 18 per cent of LMS’s net asset value.
Other quoted investments are worth in total £6m and cash on LMS’s balance sheet is around £7.6m. In other words, over 27 per cent of the company’s assets are liquid and easily realisable to account for 26p a share of the company’s net asset value of 94p. This significantly mitigate risk as all LMS’s other investments, worth 68p a share, are in effect only being attributed a value of 60p, or 12 per cent less than their book value.
In my view, a discount of that order is too deep considering there is a realistic chance of valuation uplifts on future disposals. My confidence also reflects the fact that LMS has a direct unquoted investment portfolio worth £44.5m and the team handling the divestments is well placed to realise value on these assets at the best price possible. This was clearly achieved with the recent sale of Updata, one of the UK's leading suppliers of IT network services. LMS's made an eye-catching internal rate of return of 52 per cent on that investment, or a total return of 5.3 times cash invested.
Of the unquoted investment portfolio, I am still keen on investment potential from US-based Nationwide Energy Partners, a specialist in the design, installation, operation and maintenance of private electric distribution systems for new housing communities. Nationwide Energy offers full-service account management of electric and water utilities, including sub-metering systems, meter reading, billings and collections. It is a high-growth operation generating double-digit revenue growth. LMS's shareholding was last valued at £9.5m.
Unquoted investments aside, LMS also has £62.4m invested in funds, most of which are minority stakes, consisting of US and UK buyout and venture capital funds and UK property. It's worth flagging up that the 10 largest investments now account for 71 per cent of the £136m portfolio, so should be easy to offload. That mitigates risk and transaction costs too.
So with the portfolio performing well, assets being sold for in excess of book value, and the board committed to returning cash to shareholders, it’s only reasonable to expect further gains towards my year-end target price of 95p. Priced on a bid-offer spread of 85p to 86p, LMS shares continue to rate a buy.
Please note that I will be updating my Bargain share portfolio next week following announcements from a number of companies
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
