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Bargain shares updates: 15 April 2016

Bargain shares updates: 15 April 2016
April 12, 2016
Bargain shares updates: 15 April 2016

I made that point in no uncertain terms in an online article last week when I pointed out that once you adjust for a 5p a share cash dividend made in the second half of last year, then the company's net asset value per share actually only declined to 80p at current exchange rates by the end of 2015, not far out of line with the end June 2015 figure of 86p ('Investors overreaction to Juridica', 4 April 2016). Admittedly, favourable exchange rates helped, but writedowns on the portfolio were largely made in the first half and I was fully aware of this fact when I recommended buying the shares in my 2016 Bargain Shares Portfolio.

Moreover, since its formation in December 2007, Juridica has generated cash proceeds of $222m (£156m) from 20 of the 30 investments made, of which 15 have been concluded, representing a return of 30 per cent-plus on its invested capital; and has paid out total dividends of 64p a share to shareholders, a sum equivalent to more than half of the gross capital it raised. It has therefore enjoyed a fair amount of success, a factor not reflected in the share price given that cash and receivables account for 21.5p a share of spot net asset value of 80p and Juridica's 15 outstanding cases were being attributed a value of 21p, or a massive 65 per cent discount to their book value when I commented last week.

And it's the potential for a successful conclusion in those remaining cases which skews the odds of generating a favourable outcome on an investment in the shares. Bearing this in mind, the company has just announced that it has reached settlement in a further two cases, one being a definitive settlement agreement and the second being a partial settlement agreement as this latter case is ongoing. Gross proceeds from the definitive settlement agreement are expected to be around $65m (£45.8m) and $800,000 (£563,000) from the partial settlement agreement. These amounts will be reduced by tax and other reserves and Juridica expects net proceeds from both settlements to be transferred to the company before the end of 2016.

To put these sums into some perspective, the two cases account for $55m of the $126m net asset value of the company at the end of 2015. In other words, once these settlements take place, the company's cash and receivables of 21p a share are set to more than treble to 63p (before accounting for tax and other reserves), meaning that almost 80 per cent of the last reported net asset value will be in cash. Moreover, the board will be distributing funds back to shareholders in the most appropriate way.

Juridica's shares rose sharply on the news, but at 53.5p are in effect still trading 15 per cent below pro forma cash after receipt of the two settlements, and a hefty 33 per cent below historic book value even though the aforementioned case settlements could boost end 2015 net asset value. That's anomalous and I continue to rate the shares a decent buy.

 

How Simon Thompson's 2016 Bargain Shares Portfolio is performing

CompanyTIDMOpening offer price on Friday, 5 Feb 2016 (p)Latest bid price on Monday, 11 Apr 2016 (p)Percentage change (%)
JuridicaJIL41.252.2526.8
BowlevenBLVN18.9321.513.5
Minds + MachinesMMX8912.5
BioquellBQE14916712.1
VolverreVLE41946511.0
Gresham HouseGHE312.5310-0.8
Walker CripsWCW44.943-4.2
Gresham House StrategicGHS796745-6.4
Oakley CapitalOCL146.5134-8.5
French ConnectionFCCN45.740.5-11.4
Average return4.5
FTSE All-Share324033994.9

 

Gresham House anomalously priced

Investors are being overly harsh in their valuation of Gresham House Strategic (GHS:760p), an Aim-traded investment company. In the first quarter to end March 2016, the company's net asset value edged up by one per cent to £36.8m, or 998p a share, a solid performance in light of the difficult market conditions. Net funds accounted for £15.1m, or 409p a share of book value, and the 22 per cent shareholding in Aim-traded technology company IMImobile (IMO:150p) is worth £15.6m, or 423p a share.

IMImobile helps companies engage with their customers across all mobile devices by offering smart software products based on proprietary technology that's increasingly in demand given the rapid take-up of smartphones and tablets, and improvements in network speeds. These strong trends were in evidence in IMImobile's pre-close trading update at the end of March, which highlighted double-digit growth in both revenue and gross profit in the 12 month period, and "a strong pipeline of opportunities", according to chief executive Jay Patel.

However, the cash-rich company is only rated on six times this year's likely cash profits to its enterprise value, a rating that fails in my view to adequately reflect growth prospects of the business. My colleague Alex Newman is equally convinced, having advised buying IMImobile's shares at the end of January at around the current price ('All eyes on IMImobile', 28 Jan 2016). And so too does ToscaFund Asset Management, which has built up a 27.8 per cent shareholding. Interestingly, ToscaFund was behind last year's takeovers of technology companies Daisy and Phoenix IT.

The point being that once you strip out net funds for the current share price, Gresham House Strategic's listed equity investments are in effect being priced on a 40 per cent discount to their open market value. That's anomalous considering that the balance of the portfolio is invested in four small-cap companies and is readily realisable. These include a £1.6m stake in small-cap fund manager Miton (MGR), and a £2.3m holding in publisher Quarto (QRT:245p). Furthermore, the company's investment advisers have been investing the cash pile wisely, having picked up a small stake in Be Heard Group (BHRD:4.1p), a digital marketing group that's in the process of making an earnings accretive acquisition. That holding is showing a paper gain of 27 per cent since last autumn.

Needless to say, I have no hesitation reiterating my buy advice on Gresham House Strategic's shares which are offered in the market at a bargain basement price of 760p.

 

Minds+Machines

Minds + Machines (MMX:9.25p), an Aim-traded provider of services in all areas of the domain name industry, ranging from registry ownership to consumer sales, and in particular, new generic top-level domain (gTLD) space, has announced two outsourcing agreements that significantly transform the focus and cost base of the company.

Nominet, the operator of the .uk top level domain, will take over the back-end registry functions of up to 28 TLDs within Minds + Machines' portfolio whilst Uniregistry will be taking over the company's lossmaking, consumer-facing www.mindsandmachines.com branded registrar operation. At a stroke these outsourcing contracts transform Minds + Machines into a pure-play, high-value registry business with dramatically reduced overheads whilst at the same time ensuring customers and future customers are on leading platforms.

For instance, Nominet has more than 10.7m domains registered on its platform, a membership of 2,800, and an international network of registrars. It is anticipated that the technical operation for up to 28 top-level domains within Minds + Machines' portfolio, including. london and. work, will be transitioned to Nominet before the year-end with a concurrent downsizing of its in-house technical operations. The agreement with Uniregistry will see Minds + Machines' registrar transfer its customer accounts to Uniregistry's wholly-owned registrar, in return for a perpetual commission to Minds + Machines. The transition is expected to commence in the coming months with the associated downsizing of Minds + Machines' in-house registrar operations taking place over the same period.

Analyst Tintin Stormont at brokerage N+1 Singer believes that the outsourcing agreements have several benefits. Firstly, the Nominet agreement provides Minds + Machines with the flexibility to significantly scale the business on a solid economic footing and with the domains running on a world-class platform. Secondly, the Uniregistry agreement clarifies the company's position with the registrar channel, namely that is there to partner, not compete, while ensuring existing customers are migrated on to a strong platform. These initiatives should help develop and monetise the portfolio, and underpin a forecast move to break-even this year.

The directors are clearly confident as prior to entering a close period ahead of releasing full-year results on Wednesday, 27 April 2016, non-executive chairman Guy Elliott acquired 620,000 shares at 9p each to take his stake to 22.5m shares, or 2.97 per cent of the issued share capital. He was not alone as chief operating and finance officer Michael Salazar purchased 245,000 shares at the same price and is now interested in 1.875m shares. Mr Elliott also bought 230,000 shares at a price of 8.4p each shortly after my Bargain shares article was published on Friday, 5 February 2016.

So, with 40 per cent of Minds + Machines market capitalisation of £68m backed by net cash of £27m, and the company owning over $40m (£28.2m) of domains on its balance sheet, I still believe that the risk reward is favourable if the new management team can move the operating business to break-even as is being targeted and looks achievable. Buy.

 

Making a connection

The laggard so far this year is retailer French Connection (FCCN:42p). However, I have no reason to change my view that a move back towards profitability could be likely if the positive trading trends from the second half to end January 2016 can continue into the new financial year. We don't have long to wait to find out because the retailer is due to issue a trading update to shareholders at the annual general meeting on Thursday, 12 May 2016.

Bearing this in mind, at the time of the full-year results in mid-March wholesale orders for French Connection's Summer 16 collection were ahead of the same period in 2015, and the initial reaction from customers to the Winter 16 collection was "very positive". Also, the first half comparatives from last year are very soft, so it's only realistic for French Connection to report positive like-for-like sales at the first quarter trading update in four weeks time. I am clearly not the only one thinking this way as WA Capital, the investment vehicle of 44-year old Will Adderley, the son of Bill Adderley, founder of homewares retailer Dunelm, now controls 7.1 per cent of the share capital. Mr Adderley is deputy chairman of Dunelm and only started buying into this recovery situation at the start of the year.

The bottom line is that with the equity being valued on just 0.16 times annual sales once you adjust for the cash pile worth £14m, this could prove a chic investment if the board can successfully execute a return to profitability. I am willing to back them and continue to rate the shares a buy at 42p.

Finally, I have been casting my eye over the full-year results of small-cap broker Arden Partners (ARDN:28p), a company I included in my 2014 Bargain shares portfolio. The investment hasn't worked out which is mainly down to the difficult back drop, a point the board made at the annual meeting by stating "the trading environment for the broking sector remains extremely challenging and which, in recent months, has been exacerbated by global market volatility and low volumes". True, the company has "completed six corporate business transactions since the turn of its financial year and is active in working to deliver several other mandates". It's also only fair to flag up that the current share price is fully backed by net funds on the balance sheet. However, I just can't see a catalyst to spark a share price recovery and am crystallising the loss.