Firstly, acting chief executive Andy Whelan who is also the chief executive of Sancus Holdings Limited, an offshore alternative secured lending business, which makes loans to Channel Islands-based entrepreneurs, SMEs, high net worth individuals and professionals, will take the position on the board of GLI Finance with immediate effect. He is also a founding shareholder of Sancus so is well acquainted with GLI Finance’s platform of investments. GLI Finance acquired the operating companies of Sancus in December 2014 by issuing the vendors with 34.1m new GLI Finance shares at 56.5p, and 20m zero dividend preference (ZDP) shares at 100p each, maturing in December 2019 at 130p. The vendors are showing a 47 per cent loss on their equity holdings in GLI Finance, so have a huge incentive to maximise the value in the company’s portfolio of P2P platform investments.
Secondly, following a strategic review, the board of GLI Finance have taken action to segregate the relationship between GLI Finance and GLI Alternative Finance (GLAF: 97.5p), the fund in which GLI Finance still retains 48 per cent of the issued share capital. To avoid a conflict of interest, in future GLI Finance will only lend to platforms, and GLAF will seek to lend through the platforms. GLI Asset Management, the manager of GLAF, will have a distinct board of directors and an independent non-executive chairman. Importantly, irrespective of whether or not GLI Finance is invested in a platform, this will have no bearing whatsoever on whether or not the manager makes loans through the platform. This is good corporate governance and should enable both companies to focus on value creation for shareholders without being put in a compromising position.
Also, GLI Finance presently holds a book of loans made through the platforms it has invested in. Following a review of these loans, the board believe that they do not meet GLI's strategic objectives and will be run off with proceeds from maturity or realisation used to support the company’s equity investments in the platform companies. Bearing this in mind, the board will allocate capital where it has the highest opportunity for value creation for shareholders. It has so far identified certain platforms in which it has equity stakes and that have strong management coupled with scalable electronic platforms such as Finexkap, The Credit Junction, LiftForward and Funding Options. Mr Whelan has joined the board of each of these businesses, which will be prioritised platforms in the future. The company will provide further information on the remainder of the platform portfolio as it works through the strategic review during the first half of 2016. However, the investment in FundingKnight has failed to meet the criteria, and GLI Finance will remain a passive investor and seek a long-term exit.
Thirdly, the company has written down certain investments in the platform portfolio, and has made a full provision of £5.47m against certain loans the company has made to these platforms. In future, no such loans will be made and the focus will be on recovery of loans. The downside is that this has resulted in a decline in GLI Finance’s net asset value per share from 52.3p to 42.8p in the final quarter last year. However, this excludes a sharp uplift in the value of the stake in LiftForward, a small business loan provider, from £4.2m to £5.8m, following the completion of a capital raise for the company since the 2015 financial year-end. That capital raise placed a valuation of $41.2m on LiftForward’s equity and the uplift is worth 0.7p a share to GLI Finance book value. The point being that the kitchen sinking of the accounts gives credibility to a realistic valuation of the investments, and the upward revaluation of the LiftForward stake shows that there is upside potential too.
Fourthly, post GLI Finance’s recent capital raise with Sommerton, the details of which I outlined last month (‘GLI shelves fundraise and chief executive’, 6 January 2016), GLI Finance’s debt has been halved to £15m. The company also owes £20.79m on the aforementioned ZDPs to the vendors of Sancus which means that gross borrowings equate to 36 per cent of the company’s current net asset value of around £100m. The average weighted cost of debt has been reduced to 7 per cent. Somerston is a privately owned group of companies based in Jersey and is primarily focused on real estate investment and private equity and venture capital.
Fifthly, a detailed breakdown of the cashflow of the company has given the board the confidence to commit to paying an annual dividend of not less than 2.5p a share in quarterly instalments. In addition, the board have provided details of the profitability of its two existing trading businesses, Sancus and BMS, noting that the Jersey operations of Sancus doubled net profits to £1.5m in 2015, and BMS made a net profit of £1m in 2015 and is forecasting further growth. The plan is for the free cashflow of these two businesses to service future dividends to GLI Finance, and for the loans GLI Finance has made to its platforms to be serviced quarterly in order to generate the cashflow needed to provide GLI Finance’s own shareholders with a reliable dividend stream of at least 2.5p a share annually.
Finally, the company will improve communications with its shareholders and provide regular updates on areas such as volume of loan origination, average size of loans, loan impairments, funding commitments and operating cashflow for platforms where GLI Finance has a majority equity stake. Instinctif Partners have been appointed as PR advisors too. Both these moves are welcome and should provide greater transparency for investors.
My own take is that these actions should put the company on a much firmer footing and investors are likely to have greater confidence that the 2.5p a share dividend is sustainable, while the kitchen sinking of the accounts means that there should be capital upside to the portfolio of GLI Finance’s platform investments.
Please note that I initiated coverage on the shares at 53.25p ('Funded for growth', 25 February 2014) since when the company has paid out total dividends of 9.38p a share which means that the holding has lost 25 per cent of its value on a total return basis. However, priced 30 per cent below proforma net asset value per share of 43.5p (after accounting for the LiftForward revaluation), and offering a dividend yield in excess of 8 per cent, I can see recovery potential in GLI Finance’s shares. On a bid-offer spread of 30p to 31p, they rate a buy.
Please note that I have written articles on three companies today, all of which are available on my IC home page and are listed below.
MORE FROM SIMON THOMPSON...
I have written articles on the following 72 companies since the start of this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)
■ 32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)
■ BP Marsh & Partners : Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)
■ Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)
■ Bloomsbury Publishing: Buy at 150p, target range 175p to 185p ('Book into a trading play', 11 February 2016)
■ PV Crystalox Solar: Speculative buy at 8.2p ('Lights brighten at PV Crystalox Solar', 11 February 2016)
■ Alpha Real Trust: Buy at 80p, target 105p ('High yield property play', 15 February 2016)
■ LMS Capital: Buy at 68p; Leaf Clean Energy: Await news on Invenergy; Eurovestech: Sell at 7p (‘Investment company watch’, 16 February 2016)
■ GLI Finance: Buy at 31p (‘GLI Finance review offers potential for gains’, 17 February 2016)
■ Trifast: Buy at 112p, target 140p (‘Engineered for a higher rating’, 17 February 2016)
■ 600 Group: Sell at 10p ('600 Group warns', 17 February 2016)
■ 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
