It's easy to see why the company has attracted fresh capital from some shrewd City names. Indeed, since its inception in 2007, Oakley's realised investments have returned an aggregate gross money multiple of 2.6 times capital invested and generated an internal rate of return (IRR) of 45 per cent. Between 2009 and 2014, Oakley Capital's net asset value per share has increased by 85 per cent. However, this progress is yet to be reflected in the share price, which has been trading below end-December 2014 net asset value of around 200p. Clearly, the new investors can see a value opportunity and so can Oakley's board, which took the opportunity to repurchase 10.63m shares (8.3 per cent of its issued share capital) at an average price of 152.2p last month at a cost of £16.2m. So by my reckoning the company will have a pro-forma book value of £371m after the fundraising and the aforementioned share buybacks, or the equivalent of 189p a share.
True, existing shareholders will have seen some dilution as the new shares have been issued at a discount to the last reported book value. However, this has to be weighed up against the potential to generate even greater returns on co-investments alongside the returns on the Oakley funds. And of course with a larger market value the shares will now be on the radar of a greater number of institutions, too.
Expect positive newsflow to underpin re-rating
Importantly, there is a realistic prospect of decent newsflow emerging as the year progresses. Not only is the company cashed up for new investments, but I would expect further asset sales to release additional capital for new investments. In particular, I foresee the disposal of Oakley's financial interest (carrying value of £27.5m) in German business Verivox, a leading consumer energy and telecommunications price comparison website. In the second half last year, Oakley crystallised gains in excess of £50m on two of its largest holdings: Aim-traded telecoms provider Daisy Group and intergenia, a leading supplier of internet hosting solutions. These two disposals generated an impressive IRR of 71 per cent and 38 per cent, respectively.
And the latest investments made by Oakley certainly have potential to maintain its track record. These include a stake in Italy's largest car insurance broker and price comparison website, Facile.it; North Technology, the holding company of North Sails, a world leader in sailmaking with operations in 29 countries; and more recently Damovo II Sarl, a provider of information communication technology services, which is undertaking a European roll-up strategy led by the founder of Daisy Group, Matthew Riley.
In the circumstances, I feel my conservative price target of 180p is very achievable and I continue to rate Oakley shares a medium-term buy on a bid-offer spread of 164.5p-166p. Please note that I last updated my view when the price was 155p ('A triple play of chart breakouts', 11 February 2015), having included the shares in my 2013 Bargain Shares portfolio at 141p.
Bumper gains for First Property
Oakley is not the only small-cap company that has been punching above its weight. Aim-traded property fund manager First Property (FPO: 34p) has been taking advantage of the temporary change in UK planning rules that came into force in May 2013 to encourage the change of use of commercial office property to residential. Having banked a £3.9m profit within six months of purchasing two offices for £3.4m in July 2013, the company then launched a £41m fund in February last year with the sole purpose of exploiting these permitted development rights (PDR).
First Property invested £2m in equity in the fund and is entitled to 20 per cent of the gains made on the properties when they are sold. Having acquired eight properties at a cost of £32.4m, the fund sold six of these properties for £28.2m at the end of last year, which reaped a £1.9m profit for First Property. The company has now contracted to sell the two remaining properties, which will bring in a further profit share of £2.5m, of which £1.5m will fall in the financial year to end-March 2015. This means that the PDR fund has generated an aggregate profit of £16m on an un-geared investment of £30m since its launch in February 2014, or an IRR of almost 100 per cent. First Property's total share of this profit is £4.8m.
Admittedly, the current planning rules require property conversions from commercial to residential to be completed by May 2016, which will restrict the PDR fund's ability to make further purchases. But analyst Chris Thomas at broking house Arden Partners points out that the UK government is consulting about extending the current system, which could then provide further opportunities.
Solid recurring revenue stream
The one-off profits from these trading activities mean that Mr Thomas believes First Property will report a 21 per cent increase in pre-tax profits and EPS to £8m and 5.8p, respectively, in the 2015 fiscal year. But, more importantly, the transformation of the group in the past couple of years means that its recurring pre-tax profit has increased to £7.1m, accounting for virtually all of Mr Thomas's profit estimate of £7.3m on revenues of £18m for the fiscal year to end-March 2016.
This recurring revenue is generated from six directly owned properties in Poland and Romania; five properties held in Poland by a managed fund in which First Property owns a 76 per cent shareholding; and four other funds. This quartet of funds includes a new mandate worth £125m from the Shipbuilding Industries Pension Scheme, announced in January, to establish and manage an unleveraged UK property investment fund (commercial and residential property) for a minimum of 10 years and targeting a minimum net return of 7 per cent. The company also manages a £93m UK commercial property fund, which is fully invested in 21 recession-resilient UK properties and generates an un-geared dividend yield of 6.3 per cent, has an occupancy ratio of 98.9 per cent and a weighted average unexpired lease term of over nine years. I would expect First Property to make more purchases of high-yielding properties to boost its recurring revenue as Arden estimates the company now has around £11.3m of cash available for investment.
But, as it stands, recurring revenue from these funds produces healthy EPS of 4.4p, which comfortably covers last year's dividend per share of 1.12p, the 1.19p payout forecast by Arden for the March 2015 year-end, and the 1.26p forecast for the March 2016 fiscal year. On this basis, the shares offer a well-covered prospective dividend yield of 3.8 per cent.
Trading on a modest premium to book value per share of 29p once you mark-to-market value the company's investments, and rated on 7.5 times recurring EPS for the March 2016 fiscal year, First Property's shares represent a decent income play on a bid-offer spread of 33.5p-34p and with capital upside to my medium-term target price of 38p-40p. Please note that I first recommended buying the shares at 18.5p in my 2011 Bargain Shares portfolio, and reiterated that advice at the start of this year (‘Buy into an earnings upgrade’, 8 January 2015).
Clear-cut cash flows
Aim-traded uPVC window company Safestyle (SFE: 180p) has reported a 10 per cent hike in fiscal 2014 pre-tax profits to £16.8m, much as predicted by analysts, and this has enabled the board to declare a final dividend of 9.3p covered 1.7 times by EPS of 16.5p, up from 14.8p in 2013. But it was the robust cash flow generation of the business that really caught the eye, with the company generating a cash inflow from operations of £15.6m before settling its corporation tax bill of £3.9m. This cash flow performance enabled Safestyle to not only spend £1.6m purchasing property, and pay out £6.7m in dividends to shareholders, but the company also increased its cash pile by a further £3.2m to £8.45m. That's the equivalent of 11p a share.
Analysts at brokerage N+1 Singer predict that this robust trend will be maintained and they have good reason to think that way, too. That's because the company continues to win market share from rivals, helped by its larger scale and ability to target potential customers in a more cost-effective way. In fact, data from industry body FENSA reveals that Safestyle increased its market share from 7.85 per cent to 8.48 per cent last year, the 10th consecutive year of growth and well on the way to its medium-term target of 10 per cent. Reflecting a strategic decision to focus on the more affluent market in southern England (sales in the region increased by 17 per cent last year), Safestyle installed 7 per cent more frames in over 57,000 homes and at a higher margin too.
Visible profitable opportunities
The southern market has been benefiting from the house price recovery more than other areas in the UK, so with unemployment low, and homeowners able to add value in a rising market by upgrading their old PVCu windows, then it's only reasonable to expect this positive sales trend to continue. Safestyle's board also sees the potential to tap into the conservatory refurbishment market, which could potentially be very lucrative. This niche market currently generates £150m a year in sales across the industry, but is set to expand as many of the conservatories installed in the 1980s and 1990s housing booms come to the end of their life. If Safestyle is able to replicate its current market share in this area within the next three to five years then this would imply an operating profit of around £7m on a margin of about 25 per cent from this activity alone. That figure is significant in relation to N+1 Singer's 2015 pre-tax profit estimate of £17.5m based on a modest 5 per cent increase in revenues to £143m.
Furthermore, with the shares trading on little over 10 times current-year EPS estimates of 17.1p, and underpinned by a forward dividend yield of 5.4 per cent based on a 5 per cent hike in the payout to 9.8p a share, then I continue to see value here. It's worth noting, too, that after a strong start to the first quarter the company is up against easier comparatives in the second quarter, which skews the odds towards another bumper pre-close first-half trading update.
So having advised buying the shares ahead of the full-year numbers when the price was 165p ('Valuable points to make', 4 February 2015), I continue to rate Safestyle shares a medium-term buy on a bid-offer spread of 179.5p-180p. My fair value target price of 230p is the equivalent of 12 times fiscal 2015 earnings estimates, adjusted for a year-end projected cash pile of £17.2m, worth 22p a share. Please note that I initiated coverage on Safestyle at 138p ('Window of opportunity', 23 December 2013).
GLI Finance misunderstood
Shares in Aim-traded GLI Finance (GLIF: 57.5p), a speciality finance company that invests in peer-to-peer and small- and medium-sized enterprise (SME) lending platforms in the UK, Europe and the US, fell 6 per cent after the finance provider reported its fiscal 2014 results. In my mind, this negative reaction was entirely down to investors misinterpreting the financial results, and in particular the consolidated income and balance sheets. The company could have done a better job of explaining the accounting treatment in its financial statements, which would have avoided this confusion.
That's because GLI reported a statutory pre-tax loss of £12m for the 12-month trading period and a net asset value of 42.45p, down from 52.8p a year earlier, but on a company basis it actually delivered pre-tax profits of £6.68m and a net asset value of 51p, up from 50p in 2013. The reason for the huge disparity lies in the accounting rules and in particular the difference in accounting treatment of GLI's subsidiaries and associates in the group accounts versus fair value treatment of assets held in the company's financial statements. The board continues to believe that the performance of the net asset value at the company level, as opposed to the group consolidated level, is the more appropriate in assessing the performance of the underlying business. I completely agree, but I can see why some investors have been unnerved by a statutory loss of 9.6p a share wiping off the same amount of book value. On a company basis, GLI actually reported EPS of 4.7p and it's this figure which is most relevant, as is the 11.8 per cent positive return on equity.
Missing the point
Investors also seem to have missed some important points in the release. Firstly, chairman Patrick Firth points out that: "GLI has started to see significant increased valuations to some of the mature businesses that we have acquired during the year." For instance, the investment in Raiseworks, a peer-to-peer lender to SMEs based in the US, has markedly increased in value since GLI acquired a 50 per cent stake for £900,000 in December 2013. In fact, having raised its stake to 62.5 per cent last October, this investment now has a carrying value of £8m. A third-party provider has committed to providing $1bn (£670m) of lending capacity to Raiseworks, and GLI expects to write up to $2m of lending through Raiseworks' platform in the second quarter of this year. And this is not the only investment that is paying off, as the carrying value of the investment in FundingKnight, a SME finance provider using crowd funding, is double the £1.5m that GLI invested.
These valuation uplifts may seem large, but given that the provision of finance to SMEs globally continues to be constrained, this presents GLI's alternative finance platforms with multiple opportunities. It's also helpful that the major banks appear unable or unwilling to provide finance to anything other than extremely straightforward credit risks, and seek larger loan sizes as a way to optimise profitability and put the maximum amount of capital to work. In turn, this creates a business opportunity for GLI to exploit by investing in a diversified range of peer-to-peer and alternative finance platforms to tap into a captive SME finance market.
Indeed, the company invested in 10 new SME finance lending platforms last year, including UK Bond Network, the UK's first peer-to-peer bond platform; Ovamba, the Africa-focused alternative finance platform; and Sancus, an offshore secured lending business targeting Channel Island-based entrepreneurs, SMEs, high-net-worth individuals and professionals. I commented on the Sancus deal in depth at the time of the announcement ('Funded for growth', 19 November 2014). Since the December year-end GLI has invested in a further three enterprises: TradeRiver USA, a non-bank online funding company providing trade finance, both cross-border and in the US; MyTripleA, an emerging peer-to-peer lending platform operating in the Spanish market that facilitates alternative financing transactions between borrowers and lending investors; and The Open Energy Group, a financing platform for US commercial and small utility-scale solar power.
High-yield play with growth prospects
True, some of these investments will take time to come to fruition, but, in the meantime, GLI's board has already committed to maintaining the company's dividend per share of 5p during this transitional period as they expect the income stream from these alternative investments to be at least as high as the income received from the collateralised debt obligations (CDOs) which have now all been sold off.
In the circumstances, I feel that GLI's shares continue to offer a decent combination of income (8.7 per cent dividend yield) and potential for capital growth as I noted when I updated the investment case ('Income plays with capital upside', 18 February 2015), having initiated coverage at 53.5p ('Funded for growth', 25 February 2014). My medium-term target of 80p is not unreasonable and I maintain my buy recommendation.
MORE FROM SIMON THOMPSON...
Please note that since the start of March I have written articles on a total of 50 companies, all of which are available on my IC homepage... and are detailed in chronological order below with the relevant web links for ease of reference.
■ Non-Standard Finance: Buy at 103p ('A non-standard investment', 2 Mar 2015)
■ WH Ireland: Buy at 92p, target 140p ('A non-standard investment', 2 Mar 2015)
■ Software Radio Technology: Buy at 31.25p, target range 40p to 43p ('On the radar', 3 Mar 2015)
■ Vislink: Buy at 48.5p, target 60p ('Tapping into e-commerce profits', 4 Mar 2015)
■ Sanderson: Buy at 68p, target 80p to 85p ('Tapping into e-commerce profits', 4 Mar 2015)
■ Town Centre Securities: Run profits at 292p ('To bank profits or not?', 5 Mar 2015)
■ Sutton Harbour: Buy at 36.5p ('To bank profits or not?', 5 Mar 2015)
■ Housebuilders: Run profits on Persimmon, Bellway, Barratt Developments, Taylor Wimpey, Berkeley Group. Bank profits on Crest Nicholson, Bovis Homes, Galliford Try and Redrow. Buy Inland at 64p) ('Housebuilders: trading gains', 9 Mar 2015)
■ Walker Crips: Buy at 47p; Henry Boot: Buy at 232p; H&T: Buy at 179.5p; Nationwide Accident Repair Services: Buy at 85p; Communisis: Buy at 56p; Global Energy Development: Speculative buy at 44p ('Six-shooter of small-cap buys', 10 Mar 2015)
■ Stadium: Run profits at 123p; Pure Wafer: Hold at 42p ('Electrifying shares', 11 Mar 2015)
■ CareTech: Buy at 230p, target 300p ('Time to take care', 16 Mar 2015)
■ LMS Capital: Buy at 77.5p; Globo: Run profits at 55.5p; Trifast: Buy at 99p, target 140p ('Exploiting currency moves', 17 Mar 2015)
■KBC Advanced Technologies: Buy at 87p, target 165p; K3 Business Technology : Buy at 227p, target 275p; Fairpoint: Buy at 123p, target 190p ('Blow out results', 18 Mar 2015)
■ Charlemagne Capital: Buy at 10.75p; Bloomsbury Publishing: Hold at 155p ('Below the radar', 19 Mar 2015)
■ Redde: Buy at 108p, target 125p ('In the fast lane', 23 March 2015)
■ Pittards: Buy at 137p; Crystal Amber: Buy at 152p; Record: Buy at 35p; Arbuthnot Banking: Buy at 1,420p; Inspired Capital: Buy at 17p; Stanley Gibbons: Buy at 257p (‘Bargain shares updates 2015’, 23 March 2015)
■ Accumuli: Accept NCC offer; Getech: Buy at 49p, target 67p; Faroe Petroleum: Trading buy at 79.5p, target 94p (‘Buyouts and bumper profits’, 25 March 2015)
■ Moss Bros: Buy at 108p, target range 120p to 130p; Vislink: Buy at 47p, target 60p ('Suitable investments for growth', 26 March 2015)
■ 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'
