Bargain shares updates: May 2016

As I reported when I updated the investment case when the price was 8.5p ('Bargain Shares updates', 4 May 2016), the key to a re-rating is driving up revenues from the company's valuable portfolio of 28 gTLDs. These include geographic domains: .london, .boston, .miami, .bayern; professional occupations: .law, .abogado, and .dds; consumer interests: .fashion, .wedding, .vip; lifestyle: .fit, .surf, .yoga; outdoor activities: .fishing, .garden, .horse; and generic names such as .work and .casa. These domains have a book value of $41.3m (£28.3m) in Minds + Machines latest accounts, a sum worth 3.75p a share. The company is also sitting on net cash of 3p a share. Clearly, if the business can move into profitability then the shares should be priced on a decent premium to book value of 7.1p a share.

It's therefore worth noting that the company has just reported a record-breaking launch of its .vip gTLD, which took more than 200,000 registrations within the first five days of launch, placing the domain in the top 20 of new gTLDs according to industry tracking site nTLDstats.com. Moreover, it has generated aggregate billings of $3.2m (£2.2m), or $100,000 more than the price the company paid for the gTLD in an auction in September 2014, thus highlighting the revenue potential from the portfolio. As part of the launch activity, Minds + Machines was invited to contribute six .vip premium names to Alibaba's Taobao online auction on 20 May. Within 24 hours these six domains fetched $146,000 in gross proceeds before auction fees and the company now plans to release further .vip premium inventory on a regular basis throughout the next 12 months through the auction channel.

Interestingly, more than 80 per cent of the .vip sales were to China, highlighting the potential to exploit the rapidly growing investment interest from Asian investors. In fact, according to Matthias Meyer-Schönherr, vice-president of business development at Sedo.com, the world's largest domain marketplace, Chinese investors now account for more than half of all the registered new gTLDs. He points out that China approaches the market from two sides: Beijing gets more influence by registering new extensions, and also by purchasing already registered, high-quality .com domains. Between 2013 and 2015 the number of domains purchased from within China increased by more than 400 per cent.

Mr Meyer-Schönherr also notes that "domain trading is a lucrative and future-oriented business". The company's figures back this up as the average sales price of premium new gTLDs on Sedo's marketplace is $1,500 (£1,030), or 25 times the average price paid to register a new domain. Given the prospect of achieving such a high return on investment, it's hardly surprising that there is growing interest in domain trading. And clearly Minds + Machines is reaping the benefits as it now has more than 500,000 domains under management, representing a 64 per cent increase since the start of 2016. Furthermore, following completion of a restructuring in the final quarter this year, details of which I outlined in my previous article, the company's fixed operational costs are set to fall by 50 per cent year on year to around £4m on an annualised basis.

So, with the company making progress towards a move into profitability, and the latest sales figures highlighting the obvious investment potential in its portfolio of gTLDs, I have no reason to alter my positive stance on the shares. Clearly, non-executive chairman Guy Elliott sees the potential as he snapped up another 200,000 shares earlier this month to take his holding to 22.7m shares, or 3 per cent of the issued share capital. So, too, does analyst Tintin Stormont at brokerage N+1 Singer, who "believes there is significant scope to deliver further shareholder value". Assuming 20-30 per cent annual billings growth over the next three years, and a cost base that grows by 8-12 per cent per year post restructuring, N+1 Singer has a 'discounted cash flow model' share price range of between 11p and 32p.

Needless to say I continue to rate the shares a buy on a bid-offer spread of 9.75p to 10p. Buy.

How Simon Thompson's 2016 Bargain Shares portfolio has fared

Dividend windfalls for Juridica shareholders

Shareholders in Juridica (JIL:61p), an Aim-traded company specialising in backing corporate legal cases with its own capital in return for taking a share of the financial awards in the event of a favourable outcome, are set to receive some bumper payouts. The board has just approved the payment of a dividend of 8p a share on Friday, 24 June 2016, and that's just for starters.

At current exchange rates, cash and receivables account for 21p a share of Juridica's net asset value of 79p at the end of 2015 and its 15 outstanding cases are in the books for 58p a share. Since then, and as I reported in an update six weeks ago ('Bargain shares updates', 15 April 2016), the company has reached settlement in two of those cases, which will bring in a total of $65.8m (£46.4m). Juridica now expects receipt of net proceeds from both settlements before the end of the third quarter when it's due to report its half-year results.

To put this sum into perspective, the two cases accounted for $55m of the $126m net asset value of the company at the end of 2015. In other words, the company's cash and receivables are set to treble to 62.5p a share (before accounting for tax and other reserves), meaning that the current share price is fully backed by cash. And, given the board intends to distribute funds back to shareholders, expect another hefty interim dividend to be declared in the forthcoming half-year results.

Furthermore, all of Juridica's other 13 legal cases, which have a combined book value of 17p a share, are now in effect in the price for free. That's anomalous given that Juridica has so far generated cash proceeds of $222m (£156m) from two-thirds of the 30 investments made since its formation, of which half have been concluded, representing a return of 30 per cent-plus on its invested capital. Admittedly, there is no guarantee that the remaining cases will reap similar healthy returns, but equally it seems harsh to attribute zero possibility of a successful outcome on any of them as implied by the current valuation.

So although Juridica's shares are now up 42 per cent since I included them in this year's portfolio, given the substantial cash backing and deep discount to book value they still rate a decent buy.

French Connection share price disconnected

The laggard in this year's portfolio is fashion retailer French Connection (FCCN:37p). On an offer-to-bid basis the shares are down a fifth since early February, albeit that the top five shareholders control almost 72.7 per cent of the equity, which limits the free float meaning the shares can drift on low trading volumes.

True, the company didn't issue a trading update at the annual general meeting on Thursday, 12 May 2016, but equally if there had been a change in the positive trading trends reported by management at the time of its full-year results in mid-March then the board would have needed to make a statement. The fact that it didn't need to is positive. Also, the business is up against very weak comparatives for the first half to end-July 2016, so I expect French Connection to report positive like-for-like sales in the current six-month trading period.

Moreover, with the cash pile worth £14m accounting for almost 40 per cent of French Connection's market value of £35.7m, then investors are valuing the equity on a tiny multiple of last year's annual sales of £164m, a valuation that will be a bargain if the board can execute a return to profitability. I am willing to back that possibility. There is also the hint of possible takeover activity as WA Capital, the investment vehicle of 44-year-old Will Adderley, deputy chairman of homewares retailer Dunelm (DNLM), has built up a 7.1 per cent stake in the company since the start of this year. I continue to rate French Connection's shares an asset-backed recovery buy.

Bloomsbury tales

A few months ago I recommended buying shares in Bloomsbury Publishing (BMY:158p) ahead of last week's full-year results ('Book into a trading play', 11 February 2016). At the time, I noted that the share price has traded between 140p and 185p since the autumn of 2013, rallying off support on no fewer than four occasions before hitting a glass ceiling as it approaches the upper end of the range.

The good news is that Bloomsbury's share price looks to have completed a base formation and a close at 160p or above would confirm both a swing and point-and-figure breakout on the charts, heightening the likelihood of a move back to the top of the trading range. The fundamentals are supportive as results for the 12 months to end-February 2016 were bang in line with analysts' forecasts and revealed an 8 per cent rise in pre-tax profits to £13m on revenues up 11 per cent to £123m, which delivered adjusted EPS of 15.2p and a raised dividend of 6.4p a share. This means the cash-rich shares are priced on 10 times historic earnings and offer an attractive 4 per cent dividend yield.

As always you need a catalyst for a high rating and Bloomsbury's board delivered just that in last week's results when they announced a strategic initiative, Bloomsbury 2020, to accelerate the growth of digital revenues and reposition the company from primarily a consumer publisher to a digital B2B publisher in the academic and professional information market. The aim of this initiative is to lift revenues from digital resource publishing to £15m by the 2021-22 financial year and deliver profits of £5m.

The increased range of digital products will include updating content from Bloomsbury's extensive backlists, as well as licensing in high-quality third-party intellectual property, and resource material from a wide range of international content providers. The plan is for the company to become the 'go-to scholarly partner' for copyright holders looking to reach higher education institutions around the world, but who lack the expertise and infrastructure to do so effectively. The worldwide market for academic libraries is worth $5bn (£3.4bn) and there are chunky margins to be earned on digital content, hence the 33 per cent operating margin targeted. Of course, there will be extra costs and these are forecast to peak at £2m in the 2017-18 financial year, but guidance is that all the cash invested will be recouped by the 2020-21 financial year.

It seems a sensible strategy to adopt as the company will forsake some short-term profit (about £1m in the current financial year) for long-term gain. Furthermore, by reorganising the business into consumer and non-consumer segments, this will simplify the organisational structure and facilitate digital expansion while continuing what is an enviable track record of publishing bestsellers in the adult and children's markets, areas that will remain an important part of the business. It's also a theme I feel that investors will warm to and, having included the shares in my 2014 Bargain Shares portfolio, I am comfortable keeping them on my buy list and have a target price range of between 175p and 185p. Buy.

Please note that I am working my way through a list of 16 corporate announcements from companies on my active watchlist released while I was on annual leave last week. I will endeavour to publish online updates as soon as possible. I have published two other columns today, both of which are available on my IC homepage.