The company is currently undertaking a strategic review of its operations in order to maximise the potential from its investment portfolio and instil a far higher degree of financial discipline. The first step has been to significantly deleverage GLI Finance's balance sheet, a process that led to a capital raise with Somerston, the details of which I outlined at the start of this year ('GLI shelves fundraise and chief executive', 6 January 2016), and which has seen GLI Finance's borrowings halved to £14.86m. 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.
GLI Finance also owes £20.79m on the zero dividend preference (ZDP) shares it issued to the vendors of Sancus, an offshore alternative secured lending business, which makes loans to Channel Islands-based entrepreneurs, SMEs, high net worth individuals and professionals.
Importantly, the Somerston capital raise and disposal of part of GLI Finance's stake in GLI Alternative Finance (GLAF: 97.5p), the Aim-traded fund in which GLI Finance still retains 25.3m shares, or 47.99 per cent of the share capital, means that the interest rate on a new £14.86m syndicated loan has been lowered from 11 per cent to 8.75 per cent. Mr Whelan plans to refinance the debt again later this year with a view to getting the interest rate down to 7 per cent. That's important because the average annual interest rate charged on £56.2m-worth of loans GLI has made to and through the aforementioned platforms, an investment that accounts for 38 per cent of its £147m investment portfolio, is around 8 per cent, so it's paramount in getting the interest rate charged on GLI Finance's own debt below its cost of capital.
Mr Whelan also says that as part of the ongoing review, platform loans that fail to meet GLI's strategic objectives will be run off with proceeds from maturity or realisation used to support equity investments in the other platform companies. Bearing this in mind, the board will allocate capital where it has the highest opportunity for value creation for shareholders.
He is also taking a highly disciplined approach to the company's platform equity investments, which are held in the balance sheet at £57.8m in order to focus on those with the greatest potential to reap the gains for shareholders. He has so far identified certain platforms in which GLI 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 taken a seat on the board of each of these businesses, which will be prioritised platforms in the future. As a result, expect disposals of investments during the course of this year that failed to make the cut. Mr Whelan is tight-lipped on precise details, but he has good reason to be in light of the negotiation process to extract the best prices for shareholders.
Focus on cash flow underpins sustainable dividend
Of course, one of the reasons why the shares are priced 25 per cent below the net asset value (NAV) of 42.7p is because the company was forced to write down the value of some of its portfolio last year. NAV per share declined from 51p at the end of 2014. It also reflects operating expenses that were out of line with the business. Bearing this in mind, Mr Whelan plans to cut £1m from overheads this year.
He has also made sure that all the loans held are now either generating income for the platform company through which they were made, or producing cash flow for the benefit of GLI Finance's shareholders. That's important because in order to fund a 2.5p a share annual dividend to shareholders at a cash cost of £5.75m, cash flow from GLI's investments has to cover the company's annual running costs, and the interest charge on the syndicated loan and ZDPs (average weighted cost has been reduced to 6.85 per cent overall).
That payout certainly looks realistic given that the 25.3m shares held in GLI Alternative Finance is expected to earn an annual dividend of £2m; the investments in Sancus and BMS produced net profits of £1.5m and £1m, respectively, in 2015; and the loan book is now producing cash flow more aligned to the cash flow needs of GLI Finance. As a result, when the strategic review is concluded later this year, Mr Whelan believes the company will be in a shape to consider adopting a progressive policy in the future. The current cash position is "comfortable".
Incentivised to maximise returns
I would also point out that Mr Whelan was a founding shareholder of Sancus, so is well-acquainted with GLI Finance's platform of investments. GLI Finance acquired the operating companies of Sancus around 15 months ago 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 have a huge incentive to maximise the value in the company's portfolio of P2P platform investments given that they are massively underwater on their equity holdings in GLI Finance. In other words, they have 'skin in the game'.
It's of interest to note that there "is likely to be an opportunity" to realise more capital from GLI Finance's stake in GLI Alternative Finance as that company grows and other investors are brought on board.
Also, it's not as if the potential in some of GLI Finance's platform investments isn't being acknowledged. For instance, post the December year-end, the company's shareholding in LiftForward, a small business loan provider, has increased from £4.2m to £5.8m, following the completion of a capital raise for the company which placed a valuation of $41.2m (£29m) on LiftForward's equity. The uplift adds 0.7p a share to GLI Finance book value of 42.7p a share at the end of 2015. The major point being that the kitchen sinking in last year's accounts gives credibility to a realistic valuation of the investments, and the upward revaluation of the LiftForward stake shows that there is upside, too.
My own view is the actions undertaken by the new management team should put the company on a much firmer footing and investors are likely to have increasing confidence that the 2.5p a share dividend is sustainable. Add to that the likelihood of capital upside to the portfolio of GLI Finance's platform investments, and I continue to rate the shares a recovery buy on a 26 per cent below proforma NAV per share.
Interestingly, from a technical perspective, there was clear positive divergence on the chart last week with the share price testing last month's low, but the 14-day relative strength index far higher. The hammer bottom on the candlestick chart is also encouraging on that retest as the share price recovered all of the day's fall by the close, a strong sign that the bottom could be in place. Moreover, a close at 33p or above would signal a point & figure chart break-out.
Trading on a bid-offer spread of 32p to 32.5p, and with both the technical set-up and fundamentals favouring a higher price, I rate GLI Finance's high-yielding shares a recovery buy and my initial target price is January's high of 40.75p. 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. This means that the holding is 21 per cent under water on a total return basis. However, this should now detract from the fact that I see strong recovery potential in GLI Finance's shares to recoup those losses. Buy.
Please note that I have published 23 columns in the past fortnight, all of which are listed below.
MORE FROM SIMON THOMPSON...
I have written articles on the following companies recently:
■ Plethora Solutions: Take profits at HK$0.079 ('On the takeover trail', 14 Mar 2016)
■ Somero Enterprises: Buy at 150p; target 185p ('A solid buy', 15 Mar 2016)
■ 32Red: Run profits at 150p ('32Red in the money, 15 Mar 2016)
■ Communisis: Sell at 44p ('Patience running short at Communisis', 15 Mar 2016)
■ Global Energy Development: Sell at 27p ('Global Energy plays waiting game', 15 Mar 2016)
■ Raven Russia: Sell at 30p ('Raven Russia battens down the hatches', 15 Mar 2016)
■ Stadium: Buy at 122p, new target price 150p ('Switch on for bumper gains', 16 Mar 2016)
■ French Connection: Buy at 42.75p ('Return to profitability looms for chic operator', 16 Mar 2016)
■ Fairpoint: Run profits at 159p ('Fairpoints to make', 17 Mar 2016)
■ Netplay TV: Buy at 10p ('Netplay's shares spin higher', 21 Mar 2016)
■ Satellite Solutions Worldwide: Buy at 5.5p, target 9p to 10p ('Blue sky tech play', 21 Mar 2016)
■ Miton: Buy at 30.5p, new target 38p ('Riding earnings upgrades', 22 Mar 2016)
■ Inland: Run profits at 86p, new target 95p ('Valuation surge boosts Inland', 22 Mar 2016)
■ Pittards: Crystallise loss at 71p ('Subdued demand hits Pittards', 22 Mar 2016)
■ French Connection: Buy at 43p ('Stakebuilding gathers pace at French Connection', 22 Mar 2016)
■ Safestyle: Run profits at 276p ('Exploiting a window of opportunity', 23 Mar 2016)
■ PV Crystalox: Speculative buy at 10p ('Lights start to glow at PV Crystalox', 23 Mar 2016)
■ Arbuthnot Banking Group: Buy at 1340p ('Banking on a banking duo',23 Mar 2016)
■ Cenkos Securities: Sell at 130p ('Cenkos profits slide', 23 Mar 2016)
■ Burford Capital: Run profits at 256p ('Legal eagle flying high', 24 Mar 2016)
■ 1pm: Buy at 62p, target 82p ('1pm's smart bolt-on buy', 24 Mar 2016)
■ Bilby: Buy at 128p, target 175p; AB Dynamics: Run profits at 390p ('British success stories', 29 March 2016)
■ IS Solutions: Run profits at 157p, new target price 175p (‘Big data, big rating’, 30 March 2016)
■ GLI Finance: Recovery buy at 32.5p, initial target 40.75p (‘High yielding recovery buy’, 30 March 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
