The company has changed significantly since I made that recommendation, but my target price of 80p remains intact. As part of a planned strategy GLI has exited the syndicated corporate loan market, having sold two of its collaterised loan obligations (CLOs) investments to newly listed Fair Oaks Income Fund (FAIR: $1.03) for a total consideration of $54.7m, satisfied in cash and shares, or £32.6m at current exchange rates. The company has also now sold off the balance of its CLO holdings.
So whereas at the end of March 2014, GLI’s CLO portfolio was worth $70m, or £41.6m, and accounted for 59 per cent of the company’s net asset value, now only 30 per cent of book value of £68.2m is accounted for CLO investments through that residual holding of 34.3m shares in Fair Oaks. At the end of June 2014, the shareholding in Fair Oaks was worth £19.8m, but a depreciation in sterling against the US dollar since has helped to add £1.3m to the value of the stake, or the equivalent of 1p per GLI share. So by my reckoning the current net asset value of GLI is around 49.5p, or little changed from 50p at the start of the year. The difference is largely accounted by a small loss on the sale of those other CLO investments.
In addition, GLI has paid out a 1.25p quarterly dividend in June and is scheduled to pay the same again on 18 September (ex-dividend: 30 July). It was prospects of a 5p a share dividend, and potential for capital growth from GLI’s exposure to the peer-to-peer and small- and medium-sized enterprise (SME) lending market in the UK, Europe and the US, that sparked my interest in the company in the first place.
Portfolio breakdown
Following a number of corporate transactions, the carrying value of GLI’s investments in its peer-to-peer platforms had risen to £16.7m at the end of June, up from £6.7m at the end of December. This reflected five acquisitions in the first half of this year and an increase in the book value of the existing portfolio. In addition, GLI has issued £23.9m of loans which were originated through its platforms, up from £14m at the end of December. The company’s cash pile of £6.1m is all earmarked for investments in the peer-to-peer and small- and medium-sized enterprise (SME) lending market.
In other words, once this cash sum is fully invested around 70 per cent of GLI’s net asset value will be in peer-to-peer lending, and only 30 per cent in the CLO market through the holding in Fair Oaks, a complete reversal of the business mix five months ago.
Importantly, it looks a sound strategic move too given the growth potential in these platforms. I gave a detailed outline of GLI's specific investments in my last update when the company's share price was around 60p (‘A peerless investment’, 22 May 2014). To date, GLI’s board has made 11 investments in this area, with the aim of targeting growth companies with potential to generate an annual return of between 10 to 15 per cent on equity across the economic cycle. It’s a good time to be exposed to this niche lending area because the increasing size of the alternative finance market means that the SME segment has entered the investment mainstream as a discrete asset class. In fact, institutional interest in alternative finance is taking off.
GLI looks well positioned to take advantage. Investments made this year include a £1m stake in Proplend, a UK secured peer-to-peer lender offering secured commercial loans on property; and a £1.25m shareholding (for 75 per cent of the equity) in a new UK joint venture with CRX, the owner of Finpoint, a business-to-business platform enabling institutions to buy loans directly from SMEs. Last year, GLI made a £2.8m investment in FundingKnight, a provider of SME finance through crowd funding from a broad base of investors. The largest investment to date is a £14.6m funding line for BMS Finance, a company that plans to offer loans of between two to three years to high growth SMEs, predominantly in the UK, who do not have a three-year track record.
As a result of its presence in this niche market lending area, GLI is now viewed as a preferred partner and is in discussions with a number of institutions on the provision of SME finance in their specific areas. The other benefit of GLI’s business model is that it offers opportunities for attracting funding from an enlarged investor group across all its different platforms.
Clearly, it will take time for some of these equity investments to reap rewards, the end game is either a trade sale or flotation to crystallise value in them. Therefore, it’s important that in the meantime the loans made by GLI, and the dividend income from the shareholding in Fair Oaks, can support GLI’s 5p a share dividend.
A stable income
To this end, it’s worth noting Fair Oaks investment policy. Namely, the investment objective of the company is to generate attractive, risk-adjusted returns, principally through income distributions, targeting a net total return of between 12 and 14 per cent per annum over the planned life of the fund.
The plan is to declare a dividend in its first year at least equal to 5 per cent of the $1 per share issue price; and in respect of each year thereafter, at a rate of three month US dollar Libor plus 6.75 per cent of the issue price. In other words, GLI’s investment of 34.2m shares in Fair Oaks at the $1 listing price is expected to produce a first year dividend of $1.7m (£1m), rising to around $2.3m (£1.4m) in the second year.
Reassuringly, Fair Oak’s revealed last week that half of the net IPO proceeds have been committed through the initial portfolio and its first acquisition. Miguel Ramos Fuentenebro, co-founder of Fair Oaks Capital, is “confident that the fund can deliver against its target of being fully invested within three to six months.” The portfolio offers a broadly diversified exposure to around 300 unique bank loan issuers with geographic exposure mainly in the US.
So based on 140m shares in issue, GLI would need to generate £7m of income to cover its current 5p a share dividend, of which 20 per cent of this payout will be derived from the investment in Fair Oaks alone. That means that its portfolio of peer-to-peer loans (worth around £30m once fully invested), and capital gains on peer-to-peer investments (currently worth £16.7m) will need to make an ungeared net return of around £5m a year for GLI to cover its current payout. That rate of return is at the lower end of GLI’s targeted annual return of between 10 to 15 per cent on equity.
In other words, assuming GLI can deliver, and it has made strong progress to date investing the £12m of cash raised from the sale of its CLO investments to Fair Oaks, the company not only offers potential for significant capital growth, but should continue to provide a decent income stream to shareholders. Furthermore, there is clear potential for capital gains in the Fair Oaks investment if that company delivers on its target for a net total return of between 12 and 14 per cent per annum over the planned life of the fund.
In the circumstances, I am comfortable reiterating my buy advice on GLI Finance’s high yielding shares which are currently priced on a bid offer spread of 53.5p to 55p and trade on a modest premium to my 49.5p a share estimate of current book value. Please note that the company is scheduled to release its half year results on Tuesday, 22 September 2014.
■ 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'
