Private equity also have a habit of getting in on the act as mature holdings are exited either through trade sales or IPOs on the equity market and new investments are snapped up to replenish portfolios. And this is exactly what's happening at the moment. Although the £47bn mega takeover of natural gas major BG Group (BG.:1154p) by oil and gas giant Royal Dutch Shell (RDSB:2,054p) grabbed the headlines late last week, a number of small-cap companies on my watchlist are being snapped up too. Following on from the takeovers of energy group Fortune Oil (FTO) and internet security software specialist Accumuli (ACM:29.5p), both of which I have covered in recent articles, Nationwide Accident Repair Services (NARS:97p), the largest dedicated provider of automotive crash repair services in the UK, has just received a 100p a share cash bid from private equity giant Carlyle.
The offer price represents an 18 per cent premium to the share price when I last reiterated my buy advice a month ago ('A six-shooter of small cap buys', 10 March 2015), and a 30 per cent premium to the price I recommended buying at when I initiated coverage ('Time to motor ahead', 18 February 2014). It's also within pennies of my 105p target price, so I can have no complaints on the valuation. Neither for that matter can the institutions who acquired the 25 per cent stake in Nationwide from insurer outsourcer Quindell (QPP:125p) six weeks ago.
Based on Westhouse Securities' 2015 pre-tax profit and EPS forecasts of £5.7m and 10.1p, respectively, the exit price represents 10 times post-tax earnings estimates. That may seem low, but Nationwide also had a defined benefit group pension deficit of £22m at the end of last year calculated under IAS 19 accounting rules. The company contributed £2.6m to the scheme in 2014 and is expected to maintain contributions at this level for at least the medium term. That pension deficit will put a ceiling on the exit multiple, hence my fair value target of 105p a share.
In aggregate, shareholders representing over 60 per cent of the issued share capital have already indicated they will vote in favour of the takeover which is being made through a scheme of arrangement, so it looks like a done deal to me. I would vote in favour too and take the 100p a share cash offer.
Netplay on the takeover trail
Shares in online gaming companies were massively derated last year largely due to investor concerns over the impact of the UK government's new point of consumption (POC) tax. However, these fears have been overdone, a point I made when I covered the fiscal 2014 results of 32Red (TTR:66p) ('Riding bumper profits', 25 February 2015). And it's clear to me that rival Netplay TV (NPT:9.5p) is faring far better than many had predicted.
True, adjusted pre-tax profits fell by a third to £3.2m in 2014, but this was bang inline with analysts' estimates and reflected the board's decision to rein in the level of marketing expenditure – average spend here declined from £3.4m in the third quarter to £2.7m in the fourth quarter - and adopt a more conservative strategy in the run up to the introduction of the new tax regime rather than take on uneconomic business. The aim to enhance returns from existing customers through better retention rates and higher spending is clearly working as the latest figures highlight: 28 per cent of players who have held accounts for at least 12 months now generate 55 per cent of Netplay's revenue, so the quality of income is improving. Investment in new player acquisition is more selective as is marketing spend. Importantly, the company has just signed a three-year deal with Channel 5 to extend its current agreement to 2018 and provide pre-midnight advertising and post mid-night teleshopping airtime for its Supercasino.com brand. The marketing deal also strengthens NetPlay's product offering and brand awareness.
Of course, the new POC tax still has an impact on the business. Levied at 15 per cent of gaming net revenue, Netplay incurred a £300,000 charge in the first month (December) under the new tax regime. However, it's a reflection of how the company has reorganised its business - restructuring costs were almost £0.8m last year - that even after factoring in the POC tax charge, analyst Johnathan Barrett at brokerage N+1 Singer still predicts that Netplay should be able to report pre-tax profits of £2.7m on revenues of £26.1m this year to generate EPS of 0.9p.
It also means that having just raised the dividend by 10 per cent to 0.55p a share, the £1.65m cost of the payout is covered 1.8 times by forecast annual cash profits of £3m. That payout looks solid and supports a near 6 per cent dividend yield. There is even scope for a dividend hike this year as the board are looking at bolt-on deals to make better use of a burgeoning cash pile of £12.1m - excluding player deposits - worth just over 4p a share. If all this cash is used to make acquisitions then expect massive earnings' upgrades given the low multiples currently being attributed to online gaming companies. For instance, I would expect a £12m acquisition to contribute operating profits north of £2m to N+1 Singer's current profit forecast. In turn, some of the extra profits can be distributed back to shareholders through dividend hikes.
Underpinned by a chunky dividend, rated on a miserly cash-adjusted PE ratio of five and on only 1.7 times book value, the valuation remains attractive in my view especially since Netplay's board aim to use the company's net funds to make profitable and cash generative acquisitions. So having seen Netplay TV's cash-rich shares rise from 8.35p when my 2015 Bargain share portfolio was launched on 6 February this year, I continue to see scope for a much higher share price and rate the Aim-traded shares an income buy on a bid-offer spread of 9p to 9.5p. Buy.
SeaEnergy profits set to surge
By marking shares in Aim-traded SeaEnergy (SEA:21.5p) down 14 per cent post full-year results last week, investors have overreacted to the £2.3m non-cash impairment charge taken on the company's legacy 18.72 per cent shareholding in Aim-traded Lansdowne Oil & Gas (LOGP:5.75p). We already knew this write-down would be taken to reflect the fall in Lansdowne's share price as SeaEnergy had already made this clear in a pre-close trading update, so it's hardly 'new' news. Of far greater importance is another announcement made on the same day from Lansdowne, and one clearly lost on some investors, that the company has put itself in play.
Lansdowne's board will now be pursuing a "corporate transaction such as a merger with, acquisition of or subscription for the company's securities by a third party, a sale of the business or a farm down or disposal of assets." In the event of any deal being done, I would expect a transaction to be executed at a significant premium to Lansdowne's share price given that the company has reached agreement on commercial terms with a proposed farm-in partner on its Barryroe asset offshore Ireland, in which it has a 20 per cent stake and operator Providence Resources (PVR:30p) has a 80 per cent interest.
True, this farm-in is subject to the proposed partner raising the required level of financing, and there is no certainty that it will be concluded. But with Lansdowne only having a market value of £9.3m, less than the £12m the company has invested in Barryroe, then it would clearly make sense for any farm-in partner to try to buy the company to gain its 20 per cent stake in Barryroe. SeaEnergy's holding of 30.1m Lansdowne shares has a current market value of £1.8m, or a sum representing 15 per cent of its own market value of £12m. Importantly, the company's board would like to realise value from this shareholding so is a willing seller at the right price.
R2S underpins earnings estimates
In any case, the main news in SeaEnergy's results is that its highly profitable R2S's core service business, offering a Visual Asset Management technology that produces 360 degree spherical photographs of locations and builds up three-dimensional (3D) models, continues to prosper. In fact, this business lifted both fiscal 2014 revenues and operating profit by around 12 per cent to £4.1m and £2.1m, respectively. Those profits covered central overheads of £2.06m and with the consulting business growing profits by 25 per cent to £180,000 on revenues of £1.3m, then the company made an overall underlying operating profit of £151,000, a marked turnaround from a loss of £370,000 in 2013.
It's worth flagging up too that SeEnergy's board have decided to concentrate on activities offering the best return on capital and will now exit its capital intensive ship management business. A disposal of that business will remove costs and lower working capital needs. On balance, it probably makes sense since the capital-light R2S business offers the best growth prospects and it's this business which underpins analysts' 2015 estimates. And those forecasts point to bumper growth: Ken Rumph of broking house Stifel expects SeaEnergy to increase operating profits more than six-fold to £1m this year on revenues of £7.5m to produce EPS of 1.5p. This means the shares are rated on little over 13 times forward earnings even though the odds of significant value being realised from the Lansdowne stake have improved markedly in the past week.
So although SeaEnergy's shares have fallen from the 25p level when I last updated the investment case after the company announced a R2S contract win with BP ('Catalysts for reratings', 25 February 2015), I feel the share price reaction to the asset write-down in last week's results represents a buying opportunity worth exploiting given the company is now profitable and continues to win new contracts. Stifel have a target price of 38p a share, but this excludes any value from the company's legacy assets which also includes its UK royalty interest in Block 21/8a, containing the Scolty discovery, in the North Sea. My own target price includes the legacy assets and is in the range 50p to 60p. Needless to say, I continue to rate SeaEnergy's shares a buy on a bid-offer spread of 20.5p to 21.5p.
Stanley Gibbons set for a profit surge
Investors are sensibly taking a considered view of the prospects for Stanley Gibbons (SGI:253p), the most famous name in stamps and a business now encompassing coins, collectables, antiques and auctions. In fact, even though the company's board has just revealed that "a number of anticipated high value sales within its retail business were not completed in the run up to the March year end, and so profits will be well below analyst estimates" the Aim-traded shares are only down a few pennies since my update three weeks ago ('Bargain shares updates', 25 March 2015).
Analyst Charles Hall at broking house Peel Hunt now predicts that pre-tax profits and EPS will be around £7.5m and 13.5p, respectively, in the fiscal year to end March 2015 rather than previous expectations of £11.2m and 20.2p. Still, that represents a 50 per cent profit hike on the 15 months to end March 2014, albeit this increase largely reflects the contribution from the acquisition of Noble Investments, the international rare coin, stamp dealer and auction house.
I also feel that investors are sensibly looking at the diversification of Stanley Gibbons' income streams. The imminent launch of new online collectables market place, marketplace.stanleygibbons.com, will make the business less exposed to high-value sales as the spread of business broadens and there is greater emphasis on auctions, commission business and online sales. Although the broking house is reviewing its fiscal 2016 estimates, Mr Hall "expects to see a significant profit improvement given the benefits of the Mallett acquisition as well as progress in growing the auction business." Peel Hunt had previously forecast pre-tax profit of £13.6m on revenue of £72m in the 12 months to March 2016 to produce EPS of 24.5p and a dividend per share of 8p. But even if the broker reins these estimates in a bit, as seems likely, the shares are hardly expensively rated for a company set to deliver a robust uplift in profits.
There is hidden value in the balance sheet too. Mr Hall notes that the company still has significant stock which is valued in the books at £57m, but is worth more than £150m at retail prices. To put this sum into some perspective, Stanley Gibbons has a market capitalisation of £117m, or 22 per cent below the retail value of its stock. Clearly, chairman Martin Bralsford sees value here as he has just splashed out £52,000 buying 22,000 shares in his company. His lead is well worth following. Buy.
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■ 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'
