Bargain Shares updates

It now looks like Inspired Capital (INSC: 20p), a company aiming to become a major force in lending to small- and medium-sized enterprises (SMEs), could go the same way as it has just received a cash bid from Bentley Park, a 17.1 per cent shareholder and a company owned by currency billionaire Joe Lewis. The 20p a share offer values the company's equity at £43.8m and represents a 25 per cent return on the 16p recommended buy in price when I included the shares in my 2015 Bargain shares portfolio.

I subsequently updated my view last month when the price had fallen to 14.25p following the departure of both its chief executive Brian Cole and chairman Matt Cooper ('Three value plays', 19 May 2015). Clearly there had been a boardroom rift and the fact that it now transpires that Bentley Park entered into bid talks within days of Mr Cole's and Mr Copper's exit sheds some light on those events.

Roger McDowell, senior non-executive director and former chairman of small-cap SME lender Ultimate Finance, a company Inspired acquired in September 2013, is the interim chairman, and Jeremy Coombes, chief operating officer and former chief executive of Ultimate Finance, is interim chief executive. Mr Coombes purchased 535,000 shares at 14p each shortly before Inspired received the bid approach from Bentley Park to take his stake to just under 2.9m shares, or 1.3 per cent of the issued share capital. That has proved a well timed purchase.

Bentley Park has stated that it intends to safeguard the employment rights of all employees, but may nominate new directors to the board. It would make sense to do so because with finance director David Blain departing at the end of July to take up the same position at quantum dot maker Nanoco (NANO: 110p), then the company will have lost three key board directors within a short period of time.

Decision time

The question for shareholders who followed my earlier advice is whether a cash offer pitched at a 7 per cent premium to book value is fair? True, it representx a healthy 40 per cent premium to Inspired Capital's share price immediately after news of the boardroom departures became public, but in my view it is still on the low side for a fast growing and profitable company operating in a favourable segment of the finance market. Inspired Capital reported adjusted pre-tax profits of £400,000 in fiscal 2014, reversing a loss of £400,000 in 2013, having increased client numbers by over a third to 1,323 and grown its loan book by 60 per cent to £66.9m. The latest loan book is £71.9m, up 53 per cent year-on-year, and the aim is to ramp up lending to £200m by 2016.

However, I also have to take into consideration the major change in the management structure. That's because the key reason I was attracted to the investment case was the track record of Mr Cooper, one of the founders of Capital One, the fifth-largest bank in the US, and Mr Cole, former head of Capital One's UK operations. Their exits nullify this major bull point which is why I downgraded my advice on the shares to hold last month. I believe other investors may be thinking the same way and will be happy to accept a cash offer to exit their investments. The only question is whether 20p a share is rich enough for the institutions who control the company's equity.

In terms of the shareholder base, Mr Cooper still owns 4.56m shares, or just over 2 per cent of the issued share capital, and Mr Blain owns 735,000, or 0.3 per cent. In addition, interim chairman Roger MacDowell has just shy of 3m shares, or 1.33 per cent. However, these holdings are small fry compared with the 26.5 per cent stake held by Henderson Global Investors, the 8.67 per cent shareholding of JP Morgan Asset Management and the interests of two investors: Professor Mark Ferguson (5.68 per cent), and Dr Sharon O'Kane (3.41 per cent), whose interests date back to Renovo plc, a biotech company that became a cash shell and subsequently became Inspired Capital.

The interesting point here is that both Henderson and JPMorgan could play hardball to get the cash offer increased. That's because Bentley Park needs at least 75 per cent of shareholders to accept its offer before it can delist the shares. I think some hard bargaining could be about to take place behind the scenes.

In the circumstances, I would sit tight for now to see whether Inspired Capital's institutional shareholders can eke out some more cash. You have nothing to lose.

Bargain Shares Portfolio Perfomance Table 2015

AB Dynamics placing

Inspired Capital is not the only constituent of my 2015 Bargain Shares Portfolio to make the news. AB Dynamics (ABDP: 232p), the designer, manufacturer and supplier of advanced testing systems and measurement products to the global automotive industry, has announced that Charles Stanley Stockbrokers placed 470,000 shares at 210p each on behalf of certain directors, founders and employees. This follows the exercise of options over 435,000 shares at 12.52p each by certain directors.

The key point here is that the board still have substantial interests: founder and chairman Anthony Best owns 38.36 per cent of the share capital including his wife's holding of 6.07 per cent; Anne Middleton has a 9.96 per cent stake, having sold a small proportion (only 4 per cent) of her total holding; and managing director Tim Rogers retains a 1.69 per cent stake, having realised gains on 13 per cent of his holding. The overall selling is actually quite modest.

True, AB Dynamic's shares have now hit my 230p initial target price, having traded as high as 249p earlier this month and re-rated by a third in the four month period after I initiated coverage at 173p in early February. I rated them a buy at 207p when I updated the investment case a month ago ('Repeat buy signals', 19 May 2015). But there is still potential for further share price gains given that earnings estimates look on the conservative side to me in light of the 30 per cent profit growth reported in the first half, the company has a cash pile worth 42p a share which has to be factored into the valuation, and the cash adjusted prospective PE ratio is 14.5. True, the earnings multiple is no longer in bargain basement territory, but neither is it over extended.

In the circumstances, I would run your bumper profits and target a return to the 250p level of earlier this month.

Hot property

Shares in Aim-traded property fund manager First Property Group (FPO: 45p) surged to an all-time high following a robust set of full-year results at the end of last week, taking out the 20-year high of 41p in the process. They have also achieved my medium-term target price of 40p. I last advised running profits seven weeks ago when the price was 38p ('Running bumper profits', 21 Apr 2015), having initiated coverage at 18.5p in my 2011 Bargain Shares portfolio. Importantly, I have remained positive ever since and stood by that advice when the price was 32p at the start of this year ('Buy into an earnings upgrade', 8 Jan 2015).

It's hardly surprising that investors have reacted positively to the latest results release as the company reported an eye-catching 44 per cent rise in its adjusted book value per share to 35.75p in the 12 months to end March 2015, buoyed by a hefty property revaluation and record profits. The board rewarded shareholders with a 20 per cent hike in the full-year dividend to 1.35p a share. On this basis, First Property's shares trade on 1.25 times book value, offer a historic dividend yield of 3 per cent and are priced on 10 times recurring EPS of 4.6p for the 2016 fiscal year, according to analyst Chris Thomas at broking house Arden Partners.

The key take for me is the transformation in the company's recurring revenue base following the opportunistic acquisition of six high yielding properties in Poland and Romania from the USS Fprop Managed Property Fund – a fund on which First Property's management contract ends in August when USS Fprop winds itself up. Having purchased a combined £71.5m worth of property in these six deals, and which also led to a £10.6m valuation gain, the company's enlarged investment portfolio of €196m (£142m) now generates annualised pre-tax profits of €11.5m (£8.3m) after covering the interest charge on the £108m of non-recourse net debt. It also provides additional cashflow to service a healthy dividend and fund further acquisitions. In fact, First Property still has over £12m of cash available on its balance sheet to finance more property deals, of which around a quarter is held in its 76.2 per cent owned Eastern European subsidiary Fprop Opportunities.

The case for making more earnings accretive debt funded eastern European property purchases is well underpinned by the ultra-easy monetary policy being pursued by the European Central Bank (ECB) and which is driving investors up the risk curve is search of yield. That's because First Property can tap into low interest rate credit lines to fund its high yielding property purchases – the company's loan to value ratio is 75 per cent – and as a result make very high returns on its equity. For instance, the current portfolio is generating underlying pre-tax profits of £8.3m on equity of £34m, a return of 25 per cent.

Macro and monetary policy underpin investment case

Importantly, the macro environment remains positive to attract investment flows into this type of property and drive property yields down and capital values up. For instance, economic growth in Poland, Europe's sixth largest economy, accelerated to 3.4 cent in 2014 and is forecast to grow by the same amount in 2015 and 2016; rent levels for commercial property are generally sustainable, subject to location; and capital values are largely unchanged from their credit crunch lows and still offer yields of between 2 to 3 per cent more than equivalent property in Western Europe. It's worth noting too that Poland's banking sector is well capitalised and eager to lend against property at record low interest rates, so the domestic credit environment is supportive too.

Poland is also proving to be a major beneficiary of the ECB's quantitative easing programme which is boosting economic activity in Germany, a country that accounts for about 40 per cent of Poland's trade. Moreover, this massive money printing programme has depressed euro interest rates and the value of the euro too. That's important for First Property because most Polish commercial property transacts in Euros, so the weakness of the single currency has lowered the costs of property purchases for non-euro based investors which is supportive of investment demand.

The bottom line is that First Property is not only well positioned to take advantage of further opportunistic property purchases in Eastern Europe, but with the benefit of a solid and rising recurring income stream, shareholders can expect their payout to rise too: Arden predicts a dividend per share of 1.4p in fiscal 2016, rising to 1.45p in 2017. Moreover, there is potential for more yield compression in the company's portfolio will lead to significant investment gains due to the 75 per cent loan to value ratio. Add to that some very profitable mandates on UK property funds – the company had £327m of assets under management at the end of March – and I would continue to run your bumper profits.

Please note that I am planning to publish articles on engineer Trifast (TRI: 125p), currency manager Record (REC: 37p) and Trakm8 (TRAK: 157p), a specialist in vehicle tracking software, in the coming days following today's announcements from these three companies.

MORE FROM SIMON THOMPSON...

At the end of April, I published an article with all of my share recommendations this year. Since then I have published articles on a further 45 companies:

■ Marwyn Value Investors: Buy at 220p, target price 260p ('Exploiting a value play', 5 May 2015)

■ Pure Wafer: Buy at 113p, target 140p to 150p; Paragon: Run profits at 440p, but buy on a confirmed breakout above the 445p and new target of 500p; 600 Group: Buy at 16.5p, target 24p; Fairpoint: Buy at 127p, target 190p; AB Dynamics: Buy at 207p, target 230p ('Repeat buy signals', 11 May 2015)

■ Globo: Buy at 56p, target 69.5p; Greenko: Hold at 70p; Pittards: Buy at 128p ('Breakout looms for mobile wonder', 12 May 2015)

■ Macau Property Opportunities: Buy at 214p; Dragon-Ukrainian Properties & Development: Hold at 28p; Raven Russia: Hold at 53p ('Overseas property plays', 13 May 2015)

■ Trakm8: Run profits at 135p; Redde: Buy at 120.75p, target 140p; STM: Run profits at 45p, but conditional buy on close of 48p and new target of 60p ('Smashing target prices', 14 May 2015)

■ Bilby: Buy at 75p, target 100p ('Buy to build' growth play, 18 May 2015)

■ Bioquell: Buy at 148p, target 170p to 185p; Somero Enterprises: Buy at 140p, target 185p; KBC Advanced Technologies: Buy at 109.5p, target 165p; Inspired Capital: Hold at 14.25p ('Three value plays', 19 May 2015)

■ Renew Holdings: Buy at 315p, target range 350p to 375p; Manx Telecom: Buy at 198p, target 210p ('Renewing old acquaintances', 20 May 2015)

■ Marwyn Value Investors: Buy at 228p, target 260p; Charlemagne Capital: Hold at 13.5p; Bloomsbury Publishing: Hold at 178p ('Lights, camera, action', 21 May 2015)

■ Anite: Buy at 91.5p, target 110p ('Testing a breakout', 26 May 2015)

■ Character Group: Buy at 415p, target 525p ('Playtime', 1 Jun 2015)

■ Tristel: Run profits at 96p; Pure Wafer: Buy at 123p, target range 140p to 150p; Crystal Amber: Buy at 153p ('Hitting target prices', 2 Jun 2015)

■ B.P. Marsh &Partners: Buy at 150p, target range 170p to 180p; Moss Bros: Buy at 110p, target range 120p to 130p; SeaEnergy: Sell at 15p ('Exploiting a valuation anomaly', 3 Jun 2015)

■ Globo: Buy at 59p, target 69.5p; London & Associated Properties: Buy at 38.5p; Greenko: Hold at 44p ('Catalysts for share price moves', 4 Jun 2015)

■ Burford Capital: Buy at 148p, target 190p ('Legal eagles', 8 Jun 2015)

■ Market strategy ('Financial Market Watch', 9 June 2015)

■ Software Radio Technology: Buy at 29.5p, target 40p to 43p; Tristel: Run profits at 92p; Creston: Buy at 136p, target 150p; Sanderson: Buy at 69p, target range 80p to 85p ('Blue sky potential', 10 June 2015)

■ 1pm: Buy at 67p, target 80p; Vislink: Buy at 58p, target 70p ('Small-cap growth stocks', 11 June 2015)

■ Elegant Hotels: Buy at 105p, targte 135p to 140p ('Checking into an elegant investment', 15 June 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'