Since the company’s half year-end the US dollar has appreciated from £1=US$1.71 to £1=US$1.62 at the end of September and to £1=US$1.60 by close of play yesterday. The net effect of this has been to add £5.1m of unrealised currency gains to the company’s assets in the third quarter and lift LMS’s net asset value per share to by 3p to 97p.
True, a sharp fall last month in the share price of the company’s largest investment holding, New York Stock Exchange quoted Weatherford International (WFT: NYQ - $15.47), one of the world's largest diversified upstream oilfield service companies with a market value of $12.5bn (£7.8bn), has meant the market value of LMS’s holding has fallen from £23.6m at the end of September to £18m. This almost entirely wiped out those aforementioned third-quarter currency gains and I estimate the spot net asset value is now nearer £136m, or 94p a share. Still, that is 15 per cent more than LMS’s current share price and with the board actively pursuing a number of asset sales with a view to returning cash to shareholders, then such a share price discount looks unwarranted. The company returned £40m to shareholders earlier this year and currently has net cash of £7.4m on its balance sheet.
Moreover, and as I noted in my article earlier this week (‘Profiting from the end of QE’, 3 November 2014), it’s only realistic to expect further dollar appreciation as the US central bank moves to normalise interest rates. This is a major positive for the US dollar and one that is starting to gather momentum. Indeed, the Dixie - the US dollar index - smashed through the key 87 resistance level On Monday this week, prompting currency strategists to forecast the start of a major new upleg in the greenback. Given the Bank of Japan’s have just announced a radical new programme of QE, and the European Central Bank’s has now embarked on its latest round of asset backed bond purchases, then this prediction has legs in my view.
It’s also fair to assume that with the US economy’s recovery remaining robust, then this will lead to relative dollar strength against sterling too, even after factoring in the UK economic recovery and potential for normalisation of interest rates in the UK too. I made this point in my currency feature last month ('Normalisation is coming so plan ahead', 17 Oct 2014).
So with further dollar gains against sterling a real possibility, then LMS look set fair with a decent currency tailwind behind its investment portfolio given its hefty US bias. Add to that potential news flow on asset sales as the portfolio is sold off and it’s only reasonable to expect further share price gains towards my year-end target price of 95p. Please note that I last updated the investment case three months ago when the price was 86p (‘Reaping bumper cash returns’, 7 August 2014).
Trading on a bid-offer spread of 81.5p to 82p, I continue to rate LMS shares a buy.
Please note that I have published 40 investment columns since the start of October, including two today, all of which are available on my IC homepage...
■ Simon Thompson's 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 stockpicking'
