Bargain Shares updates

For those unfamiliar with this particular balance sheet approach to investing, the strategy is fairly simple: to invest in companies where the true worth of the assets is not reflected in the share price, usually for some temporary reason, but where we can reasonably expect that it will be in due course. As investment guru Warren Buffett is fond of saying, "price is what you pay, value is what you get". So to make sure that the shares I select offer value for the loyal followers of my portfolios, I base my investment approach on the ideas of Benjamin Graham, the grandfather of value investing, and the writings of his seminal book The Intelligent Investor. First published in 1949, the book remains a must-read on the subject.

And this investment strategy has undoubtedly stood the test of time, having beaten the FTSE All-Share index in 13 out of the 16 years in which I have run my annual Bargain Shares portfolios. During that time, they've generated an average return of 22.7 per cent in the first 12-month holding period, compared with an average increase of 4 per cent for the FTSE All-Share. This long-term outperformance has been in no small part down to the stellar performance of the unloved and undervalued small-cap shares I have managed to uncover over the years.

The good news is that the 10 shares I selected in early February are now showing a total return of 10.8 per cent in their first six-month holding period, handsomely outperforming the benchmark FTSE All-Share index, which is currently down by 0.5 per cent.

Merger and acquisition (M&A) activity has played its part in this success, as has been the case in many instances over the years as predators run their rule over my undervalued asset-backed companies. Indeed, the best performing share in this year's portfolio, a finance provider to small and medium-sized enterprises (SME), Inspired Capital (INSC: 21.5p), has received not one, but two cash bids from Bentley Park, a major shareholder and a company owned by currency billionaire Joe Lewis.

The latest recommended cash offer of 21.5p a share values the equity at £47.1m and represents a 35 per cent premium to the company's share price before it entered into a takeover situation. It has done the trick as Bentley Park now owns or has received acceptances from shareholders controlling 93.1 per cent of the share capital and the offer has just gone unconditional. If you haven't done so already, I would accept the cash offer and crystallise the 34 per cent gain on the holding.

Bargain Shares Portfolio performance 2015

Inflows underpin Record

Currency manager Record (REC: 40p) looks very well placed to grow its higher-margin dynamic hedging and currency for return mandates in light of the volatility we are seeing in foreign exchange markets.

In a first-quarter trading update, chief executive James Wood-Collins noted that he has not been surprised to see elevated levels of interest in both currency risk management and currency for return opportunities from institutional investors and their advisers given "the continued expectation of divergent monetary policy from the world's leading central banks (US Federal Reserve, Bank of Japan, European Central Bank and Bank of England)) and heightened volatility". The Greek debt crisis has also raised awareness among the institutional investment community of currency-related issues, and led to a more supportive environment for Record's products and services. In the three-month period to end-June 2015, the company's assets under management equivalent (AUME) increased by $1.2bn to $56.6bn (£36.5bn), excluding a new mandate with six clients that is expected to be funded by the end of September.

Although analysts at Edison Investment Research predict that Record's revenues will increase from £20.2m to £22m in the 12 months to end-March 2016, they have taken a conservative approach and have not factored in any net new mandates nor performance fees into their forecasts. The revenue estimate is accounted for completely by management fees and is based on an average AUME of $56.2bn for the fiscal year, which is actually lower than the first-quarter outcome. But even on this conservative basis, Record's underlying pre-tax profit is still expected to increase from £7.5m to £8m to produce EPS of 2.88p, up from 2.66p in 2015, and support a maintained dividend of 1.65p a share.

Moreover, having raised the payout by 10 per cent last year, and given that Edison believes that the company's cash pile will grow from £30.1m to £33m by the end of March 2016, a sum worth almost 15p a share, then if Record starts winning new mandates I feel another dividend hike could be on the cards. In any case, with the shares being offered at 40p in the market, the dividend yield is attractive enough at 4 per cent, as is a cash-adjusted PE ratio of 9.

So having included Record's shares in my 2015 Bargain Shares portfolio at 34.3p, I continue to rate them an income buy offering decent prospects for capital upside, too. Buy.

Pittards set to leather in the profits

I feel investors are missing a trick with Aim-traded leather goods manufacturer Pittards (PTD: 128p), one of the laggards in this year's portfolio. The company is set to release its interim results next month and not only does it have easy comparatives to beat, but it's only reasonable to expect some underlying growth too given that analyst John Cummins at house broker WH Ireland expects the company to turn in pre-tax profit of £2m in 2015, up from £1.59m in 2014. But last year was one of two contrasting halves, with the company bouncing back from a weak first half in which it only reported pre-tax profits of £322,000 to turn in profits of £1.27m in the second half. In other words, assuming the second-half progress has been maintained into this year, and there is no reason to doubt that it has, then expect the interim headline numbers to show a surge in profits in a month's time.

Furthermore, 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 agree and I feel that Pittards' shares are far too lowly rated on 9.5 times earnings estimates and almost a third below pro-forma book value of 186p a share.

Trading on a bid-offer spread of 125p-128p, in line with the level at which I included them in my Bargain Shares portfolio for 2015, I rate Pittards' shares a buy.

Netplay rolls the dice

Aim-traded online gaming company Netplay TV (NPT: 9.5p), has put its burgeoning cash pile to good use by announcing the first of what is likely to be a series of value-enhancing acquisitions.

As I noted when I updated the investment case ('A triple play of small-cap buys', 23 Jun 2015), the company had just appointed Shore Capital as its nominated adviser and corporate broker, news of which looked significant at the time in light of the fact that Netplay's board plans to use the company's net funds of £12.1m, worth just over 4p a share, to make profitable and cash-generative acquisitions.

Last week the company announced the acquisition of Otherside, an online marketing, product development and technology company, for an initial cash consideration of £2.7m with a further £500,000 payable 12 months after completion. Founded in 2008, Otherside specialises in online marketing, display media and affiliation marketing. It is focused across a number of sectors, including gaming, underpinned by its proprietary online marketing platform.

It's a highly profitable business that generated cash profits of £600,000 on revenues of £2.6m in the 12 months to end-May 2015. After deducting amortisation and depreciation charges, pre-tax profits were £400,000 in the 12-month trading period. This means that the purchase price equates to a sensible 5.3 times cash profits. Equally important are the benefits the acquisition brings to Netplay.

Firstly, Otherside will provide Netplay with a robust media platform and specialist staff, enabling it to control and tailor its digital marketing strategies. Secondly, there should be benefits to be reaped within Netplay's existing gaming operations from additional traffic delivered to the company's existing brands. And thirdly, the deal enables NetPlay to diversify its revenue by maintaining Otherside's current income streams and growing this business by building on the success of the marketing company to date.

Analysts' estimates are currently under review, but I would expect the acquisition to contribute cash profits of around £200,000 to fiscal 2015 numbers and would be looking for the company to report cash profits of somewhere between £2.7m and £2.9m. Based on 296m shares in issue, Netplay TV has a market capitalisation of £28.1m and, after excluding player deposits, I reckon net funds will be around £10m post the acquisition. This means that the company's equity is in effect being valued on only six times cash profits after accounting for the cash pile. And with the full benefit from the acquisition to come next year, I would anticipate a sharp rise in cash profits for fiscal 2016. Moreover, I would expect further earnings-enhancing deals, too.

Offering a 5.8 per cent dividend yield based on last year's raised payout of 0.55p a share, and rated on six times cash-adjusted earnings, I rate Netplay TV's shares a buy on a bid-offer spread of 9.25p-9.5p, having included them in this year's portfolio at 8.35p.

Finally, I recently published an in-depth analysis on stamp and coin dealer Stanley Gibbons (SGI: 240p), the laggard in this year's portfolio ('A quartet of small-cap buys', 9 Jul 2015). Rated on less than 11 times underlying earnings estimates, and on a 37 per cent discount to book value after marking stocks to market value, I maintain my buy advice. I also updated Arbuthnot Banking Group (ARBB: 1550p) in the past few weeks ('Primed for major re-ratings', 22 Jul 2015) and have a sum-of-the-parts value close to 2,200p a share. Buy.

My next column will appear online at 12pm on Wednesday, 26 August.

MORE FROM SIMON THOMPSON...

I have published articles on the following companies in the past few weeks:

■ Fairpoint: Buy at 138p, target 190p; Creston: Run profits at 155p; Sanderson: Buy at 71p, target 80p to 85p; Renew Holdings: Buy at 340p, target 375p ('Break-outs looming', 4 August 2015)

■ Globo: Buy at 42.75p, target 69p; Cambria Automobiles: Run profits ('Short sellers in for shock treatment', 5 August 2015)

■ Cohort: Run profits at 357p, target 375p; Cineworld: Run profits at 530p; Paragon: Buy at 412p ('Acquisitive growth drives re-ratings', 6 August 2015)

■ PROACTIS: Buy at 93p, target 117p ('Procuring growth', 10 Aug 2015)

■ Town Centre Securities: Buy at 310p, target 350p ('Equity market watch', 11 August 2015)

■ Equity market strategy ('Equity market watch', 11 August 2015)

■ KBC Advanced Technologies: Buy at 122p, target 165p; Getech: Buy at 59p, target 80p (‘Fuelled for strong growth’, 12 August 2015)

■ Pure Wafer: Run profits at 162p, target 178p; Inland: Run profits at 71p, next target 80p; Macau Property Opportunities: Take profits at 189p (‘Bumper cash returns’, 13 August 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'