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OPINION

Taking profits

Taking profits
February 25, 2015
Taking profits

Dialling out of Netcall

Bearing this in mind, I have been running my slide rule over Aim-traded Netcall (NET:72p), a small-cap business offering software to make telephone call handling more efficient. I last advised running profits a month ago after the shares had surged back to a 14-year high and hit my target price of 70p ahead of this week’s half-year results (‘Small cap tech wonders’, 19 January 2015). I can have no complaints whatsoever with this investment as the shares have risen by 450 per cent since I initiated coverage four years ago when the price was only 13p ('Queuebusters', 17 January 2011). The company has also paid out total dividends equating to 20 per cent of my buy in price.

But I now need to ascertain whether all the good news is in the price. The interim results were solid enough with the company’s robust cash generation yet again standing out. In fact, the net cash pile has risen by 30 per cent year on year to £13m, or the equivalent of 9.5p a share. Analyst Andrew Darley, head of equity research at broking house finnCap, expects net funds to rise by a further £600,000 by the June 2015 fiscal year-end and to underpin an 11 per cent hike in the payout to 1p a share. So assuming Netcall grows full-year underlying pre-tax profits by around £300,000 to £4.9m on revenues up 4 per cent to £17.6m, this means the shares are rated on a cash adjusted forward PE ratio of 22. Looking ahead a further 12 months and Mr Darley predicts both revenues and pre-tax profits will grow by 4 per cent in the financial year to end June 2016.

So although the business is rock solid, and recurring revenue generated form a customer base of over 700 clients now accounts for almost two thirds of annual turnover, in the absence of any value accretive acquisitions to prompt analyst earnings upgrades, I feel there are better investment opportunities elsewhere which offer a higher-growth profile over the next 18 months, and at an entry price below that of Netcall. Of course, the shares could yet hit finnCap’s target price of 80p, but I am happy to leave something on the table for someone else and take this profit with a view to buying back when the risk:reward ratio is more favourable. Take profits.

 

GLI Finance successful fundraise

I am clearly not the only one who has been impressed by the progress being made by Aim-traded small-cap specialist finance provider GLI Finance (GLIF:62.5p). In fact, the company has just raised £20m by placing 34.5m new shares at 58p each, or the equivalent of 20 per cent of its issued share capital. This represents a premium of almost 14 per cent to the company’s net asset value, highlighting the value other investors see in the potential of GLI’s portfolio of investments in peer-to-peer and small- and medium-sized enterprise (SME) lending platforms in the UK, Europe and the US.

Moreover, although the placing was pitched at a 7.4 per cent discount to the closing price on Friday, 20 February, shares in GLI Finance are little changed on the price at the time of my buy advice last week (‘Income shares with capital upside’, 18 February 2015). The proceeds from the placing will be used to fund further growth in the loan books of the platforms and for direct investment in loans originated by the platforms. The new capital will also be used to repay certain loans and to provide further equity investment for the 15 lending platforms GLI has invested in, enabling them to build their business development capabilities, introduce further new products and expand into new territories.

This aim of the new investments is to its boost the overall return on equity through growth in platform equity and for the return made to exceed the weighted average cost of GLI’s debt and zero dividend preference shares, currently 8.1 per cent. GLI’s board is also targeting growth in the company’s cash dividend cover through net interest generated by its loan portfolio and potential income earned from the launch of a new investment fund, details of which I outlined in last week’s article. In turn, this will ultimately reduce the need for GLI to continue to finance expansion of the platforms' loan books through ongoing equity issuance.

This seems a sensible use of funds to me and importantly will be value accretive for shareholders if GLI can meet its return on capital hurdle rate. On a bid-offer spread of 61.5p to 62.5p, I continue to rate the high yielding shares a buy and maintain my target price of 80p.

Eurovestech buy back plans

It has been some time since I last looked at Eurovestech (EVT:8p), a small-cap pan-European development capital fund (www.eurovestech.co.uk). That’s partly because the shares have virtually flatlined since my last article (‘Kalibrate to fuel Eurovestech’, 27 November 2013). It’s also fair to say that the share price performance has been underwhelming since I first advised buying the shares at 9.3p in my 2012 Bargain Shares Portfolio when they were on the Alternative Investment Market (Aim).

Following the payment of a special dividend per share of 1.32p, the company moved its trading facility to the London Matched Markets Exchange (LMMX) share matching facility, formerly JP Jenkins (www.lmmx.co.uk) to save the £125,000 annual Aim listing costs. Unfortunately, the downside of this move is that the shares are now well below the radar of most small cap investors. The good news is that the company has finally acknowledged this and is looking to narrow the huge share price discount to its last reported net asset value of 13.4p a share.

The board certainly have the funds to do so because Eurovestech had net cash of £3m on its balance sheet at the end of June and listed investments worth £6.2m excluding its holding in Aim-traded Kalibrate Technologies (KLBT:100p), a fast-growing and profitable global leader of fuel pricing and retail network planning solutions. Since then the company has realised £3.2m by selling down shares in Kalibrate, but still retains a shareholding worth £3.8m. In other words, cash on the balance sheet, current listed investments and the remaining stake in Kalibrate account for £16.2m of Eurovestech’s book value of £45.5m. To put this sum into some perspective, and based on 339.5m shares in issue, the company only has a market capitalisation of £27.2m. In other words, all of Eurovestech’s private equity investments which have a combined book value of £29.3m are in effect being attributed a value of just £11m, or the equivalent of 62 per cent below the last reported book value of these investments.

 

A harsh valuation

That’s clearly ridiculous because Eurovestech owns a 14.9 per cent stake worth £20.2m in ToLuna, a leading online panel and survey technology company, providing digital data collection and consumer insight to research agencies, businesses and individuals. Operating from offices in Europe, North America and Asia Pacific, ToLuna has built one of the largest and most diverse qualified online panel communities in the world. ToLuna has also been growing through acquisition, having acquired Harris Interactive’s operations in France, Germany and the UK from Nielsen in the middle of last year in order to expand its existing footprint in the digital market research industry. Admittedly, it hasn’t all been plain sailing and ToLuna’s market remains very competitive, but even so that deep share price discount to book value is extreme to say the least.

Of course some discount is appropriate due to the fact that Eurovestech’s private equity investments are unlisted. It’s also worth flagging up that in the latest annual accounts, released late last month, Eurovestech decided to write-down the value of its 44.9 per cent shareholding in Maxifier, a company that helps publications maximise results of their advertising campaigns. This stake is now in Eurovestech’s books for £6.4m, or a third less than a year ago, reflecting lower expectations of projected revenue growth. Still even after taking this diminution of value into consideration there is no way that the Maxifier stake should in effect be priced at £2.4m in Eurovestech’s current market value, nor for that matter should the ToLuna shareholding be attributed a value of just £7.7m.

And this is why the board of Eurovestech plan to ask shareholders for permission at the forthcoming annual meeting to purchase the company’s own shares. The effect of a share buy-back programme will be to boost net asset value per share as long as the shares are trading at a discount to book value of 13.4p, and to provide much needed liquidity to shareholders who wish to sell. It should also boost the share price too.

In the circumstances, I still feel that my target price of 10p a share is realistic, albeit it has been an incredibly frustrating 14 months during which time Eurovestech’s shares have hardly moved at all. Still, with the prospect of a net asset value accretive share buy-back programme, then an overdue narrowing of the share price discount to book value looks firmly on the cards and I would continue to hold the shares if you followed my previous advice.

Please note that I have published seven investment columns since the start of last week and assessed the investment case on no fewer than 15 companies including a property developer and investor ('A bootiful investment', 19 February 2015) and a specialist in telematics software devices ('Zoning in on a profitable price move', 16 February 2015). All these seven articles 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'