It was the combination of a regular income stream - the shares offer a dividend yield of 9.3 per cent - and potential for capital upside from a portfolio of investments in SME and peer-to-peer lending platforms that attracted me to the company in the first place. Despite the pull-back in the share price, the investment case remains fully intact in my view. Indeed, at the time of my last update three months ago, chairman Patrick Firth noted that: "GLI has started to see significant increased valuations to some of the mature businesses that we have acquired during the year."
The first-quarter trading update to end March 2015 adds substance to this claim as GLI's net asset value surged by more than 7 per cent to 54.56p in the three-month period. Only a fifth of that book value increase was down to favourable exchange rate movements - the company also has investments in the US - with the balance attributed to investment gains on the portfolio, reflecting significant operational progress being made by the investee companies.
In fact, in the trading update earlier this month, GLI's board note that several of the platforms GLI has invested in are trading ahead of its expectations, and "a number of strategic discussions are ongoing that could accelerate development of these platforms, the asset management aspirations of the company and potential of the business to exploit other areas of the SME finance segment."
A peerless investment
I still contend that this is a great niche of the finance market to be investing in right now given that the provision of finance to SMEs continues to be constrained not just in the UK, but globally; the major banks appear unwilling to provide finance to anything other than straightforward credit risks and are focusing on larger loan sizes rather than backing small companies. 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.
For instance, last month the company invested £1.25m in return for a 28.9 per cent stake in the ordinary shares and £0.75m of preference shares in SME credit broker, Funding Options. The business uses proprietary online technology to scan the alternative finance market for the most suitable funding options available and has helped UK SMEs to access tens of millions of pounds in funding from more than fifty alternative lenders in the past year. Funding Options has applied to HM Treasury for designation as a neutral platform, which would mean that SMEs rejected for bank finance can be referred to it.
Last year GLI invested in 10 new SME finance lending platforms, and has now made a further five investments in the first half of 2015 including €445,500 (£320,000) for a 9.9 per cent shareholding in MytripleA, the first fully regulated Spanish peer-to-peer lending platform that facilitates the provision of alternative financing for Spanish SMEs. GLI has also committed to sourcing funding for €10m of loans made through MytripleA, while other private investors have committed a further €4m for the same purpose. Chief executive of GLI, Geoff Miller, will be appointed to the board which is in line with the company's policy of having representation at board level in a number of its investee companies.
Lucrative fund launch imminent
GLI's board is also planning to launch a closed end alternative debt investment trust, GLI Alternative Finance, focusing on a loan portfolio diversified by geography, size of loan, type of lending and duration. The IPO could happen as early as next month. The plan here is to take advantage of GLI's insight into the lending platforms with whom it works and has representation at board level.
Bearing this in mind, the company will make available to the new trust a seed portfolio of its existing loan investments and which could account for around a fifth of the trust's assets at launch. It is targeting a £200m fund that will earn GLI management fees of 75 basis points on the first £100m managed, and 50 basis points on all assets above that, charged on the lower of net asset value or market capitalisation. This is a potentially luctrative income stream in relation to GLI's revenue of £6.9m from interest and dividends last fiscal year.
Importantly, the investment climate for such fund launches is clearly positive as P2P Global Investments (P2P: 1,072p), a company with a market capitalisation of £215m, has just announced a proposed £21.5m tap issue at a 7.3 per cent premium to spot net asset value per share via an accelerated bookbuild. The proceeds will be used to take advantage of new lending opportunities and is being raised ahead of a proposed 'C' share issue due to the time-specific nature of these opportunities. P2P has confirmed its intention to raise in excess of £250m through the 'C' share issue.
The bottom line is that with newsflow likely to remain very positive in the coming months, and GLI's portfolio now starting to produce investment gains as investments mature, then it's anomalous for GLI's shares to be trading inline with the book value of its investments. The share price is also supported by a hefty 1.25p a share quarterly dividend which the board have committed to. The company had a return on equity of 11.8 per cent in its last financial year and is aiming for a 10 to 15 per cent range, which seems a realistic target given that the blended interest rate on the loans GLI invests in is 11.1 per cent.
Trading on a bid offer spread of 53.5p to 54p, I remain a buyer of GLI's shares and have a fair value target price of 80p.
Heavyweight investors going hell for leather
I noted with interest that fund management group Downing, led by Judith Mackenzie, the Small Cap fund manager of the year at this month's prestigious London Stock Exchange supported Small Cap Awards, has just raised its stake in Aim-traded Pittards (PTD: 128p) from less than 2 per cent to 16.2 per cent. This share buying follows a placing by the maker of leather products to raise £5.6m net of expenses at 120p a share, a capital raise I commented on last month ('Break out loom for small cap wonder', 12 May 2015).
I calculate that pro-forma gearing is now the equivalent of 25 per cent of the enlarged shareholders funds, down from 42 per cent at the last financial year-end. Importantly, with the benefit of a strengthened balance sheet, and having purchased the freehold of its Yeovil facility, Pittards' board now have greater financial flexibility to develop its business, a fact that the directors are backing with their own money as they subscribed for 112,500 shares in the placing.
Moreover, now that the capital raise has been completed, house broker WH Ireland has reinstated its forecasts. Factoring in the reduction in rent on the Yeovil facility, interest savings on bank borrowings, and a one percentage point improvement in gross margin, analyst John Cummins upgraded his fiscal 2015 pre-tax profit estimate by £200,000 to £2m, bang inline with the prediction I made in last month's article. This represents a 25 per cent profit increase on fiscal 2014 and with the higher share count should produce EPS of 13.3p. True, earnings will be down on the 14.1p a share reported in fiscal 2014, reflecting dilution following the equity raise, but Mr Cummins makes the valid point that "should volumes remain robust at these levels, and foreign exchange rates favourable, we would anticipate upgrading our estimates as the year progresses."
I would agree and I feel that Pittards' shares are far too lowly rated on less than 10 times earnings estimates and priced 31 per cent below pro-forma book value of 186p a share. Judith Mackenzie at Downing and myself are not the only ones thinking this way as I note that fund manager Artemis has raised its stake in the company to just shy of 16 per cent having acquired 416,667 shares in the placing. Recently appointed non-executive director Stephen Yapp is getting in on the act, too, as he has just purchased 20,000 shares at 124p. Their leads are well worth following.
Trading on a bid-offer spread of 124p to 128p, inline with the level I included them in my Bargain shares portfolio for 2015, I rate Pittards' shares a buy.
Netplay TV insider buying
Shares in another constituent of my 2015 Bargain share portfolio, Aim-traded online gaming company Netplay TV (NPT:9.5p) has seen director share buying, too.
Andrew Lapping, a non-executive director, bought 175,000 shares at 8.4p each at the end of last week and now directly holds almost 1.3m shares in addition to 832,737 ordinary shares in his SIPP. The Hamilton Portfolio Limited and Northern Edge Limited, both companies of which Mr Lapping is a director, have interests in almost 1.7m shares between them which means that Mr Lapping has an aggregate beneficial interest of 3.79m shares representing 1.28 per cent of the issued share capital. Investors have taken note and the shares have edged up to around 9.5p, well above the 8.35p level at which I included them in this year's portfolio. The company paid a 0.33p a share final dividend earlier this month too.
It's worth noting that the company has just appointed Shore Capital as its nominated adviser and corporate broker. That could be significant in light of the fact that Netplay's board aim to use the company's net funds to make profitable and cash generative acquisitions. At the end of 2014, the company had a burgeoning cash pile of £12.1m - excluding player deposits - worth just over 4p a share, a sum equating to 42 per cent of the current share price. So although analysts forecast Netplay will report pre-tax profits of £2.7m on revenues of £26.1m this year to generate EPS of 0.9p, if the board use the cash pile wisely then we could be inline for some significant profit and earnings upgrades. But even without them the shares are still only rated on six times cash adjusted earnings and offer a solid 5.8 per cent dividend year based on last year's raised payout of 0.55p a share.
We will have to wait another few weeks for Netplay's second-quarter trading update, but with the company revealing in its full-year results in March that its strategy to enhance returns from existing customers through better retention rates and higher spending is working, and new player acquisition and marketing spend is more selective, then I believe we can expect a performance inline with analysts' estimates. Mr Lapping certainly would not have been buying if the company was underperforming.
Trading on a modest six times cash adjusted earnings, I continue to rate Netplay's shares a value buy on a bid-offer spread of 9p to 9.5p. From a technical perspective, a share price move above the February high of 10.75p would be confirmation that the multi-month base formation which started last autumn is finally complete. Buy.
Please note that I will update my view on Stanley Gibbons (SGI: 239p), the laggard in my 2015 Bargain shares portfolio as soon as the company issues its full-year results. The announcement is due in the near future.
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 58 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, target 135p to 140p ('Checking into an elegant investment', 15 June 2015)
■ First Property: Run profits at 45p; AB Dynamics: Run profits at 225p and target 250p; Inspired Capital: Sit tight at 20p (Bargain shares updates', 16 June 2015)
■ Trakm8: Run profits at 159p, new target 180p; Anite: Sit tight at 126.75p; Trifast: Run profits at 129p, target 140p; Record: Buy at 37p ('Small cap wonders', 17 June 2015)
■ Inland: Run profits at 71p, target 80p; KBC Advanced Technologies: Buy at 110p, target 165p; Caretech: Buy at 237p, target 300p ('Riding an earnings upgrade cycle', 18 June 2015)
■ Ensor: Buy at 97p, minimum target 125p ('Building up for a takeover', 22 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'
