How the 2016 Bargain Shares Portfolio fared

For more on this year's Bargain Shares portfolio from Simon listen in to an exclusive interview with Simon in this week's free Companies & Markets podcast.

BOWLEVEN (BLVN)

Aim: African-focused oil & gas explorer

Share price: 27.75p

Bid-offer spread: 27.5-27.75p

Market value: £88.8m

Website: bowleven.com

Bowleven (BLVN:27.75p), the African-focused oil and gas exploration group, made it into my Bargain Shares Portfolio last year and is a solid holding this year, too, even after the share price gained 45 per cent in the past 12 months. If anything the investment case has strengthened as the oil price has doubled to $56 (£45) a barrel since hitting multiyear lows in January 2016. A full analysis of the investment case is outlined in my 2017 Bargain Shares Portfolio.

JURIDICA (JIL)

Aim: Capital provider for corporate legal claims

Shares price: 21.5p

Bid-offer spread: 20-21.5p

Market value: £23.8m

Website: juridicainvestments.com

The second-best performer last year was Juridica (JIL:21.5p), which specialises in backing corporate legal cases in the US with its own capital in return for taking a share of the financial rewards in the event of a positive outcome.

Juridica is in the process of winding down its portfolio and returning cash to shareholders so, given the wide share price discount to book value, and the potential for hefty cash returns, the risk:reward ratio looked very favourable when I included the shares in my 2016 Bargain Shares Portfolio. Since then, the company paid out an 8p-a-share dividend in June and a further 32p a share in late September at a cost of $47m (£37.6m) from the net proceeds from the settlement of the company’s final two antitrust and competition litigation cases ('Bargain Shares updates', 15 Apr 2016). This means that if you followed my advice to buy the shares at 41.2p a year ago you will have almost recovered your initial capital, and still hold shares that you can sell in the market at 20p each.

Admittedly, it hasn’t all been plain sailing, which is why the 44 per cent total annual return on the holding is only half the gain recorded at the half-year stage. That’s because Juridica booked an unrealised loss of $23.8m in its half-year results last September, of which $18.7m related to a change in the valuation method applied to its outstanding cases. This downgrade reflects the monetisation of Juridica’s remaining investments over a shorter timeframe following the board’s request to its investment managers to complete the run-off of the portfolio in 2017. It was a substantial impairment in relation to the company’s net asset value (NAV)of $126m at the start of 2016 and one that prompted the share price to fall from 70p to 50p after those half-year results (before the payment of the 32p-a-share dividend), reducing the paper gain on the holding. However, having run through Juridica’s investment portfolio, I believe it’s worth holding on to the shares for a number of reasons.

Firstly, using the current exchange rate of £1:$1.25, down from $1.343 at the time of the half-year results, and after factoring in the payment of the 32p-a-share dividend, I estimate that Juridica’s pro-forma book value is around $38.2m, a sum equating to 27.6p a share including cash of 8p a share. This means the shares are trading about a quarter below book value. Importantly, there could be upside to the remaining investments. That’s because the $16.5m valuation of Juridica’s five outstanding litigation investments, a sum worth 12p a share, includes reserves retained by Fields Law Firm PLLC, the counterparty to the company’s aforementioned antitrust investment. The net proceeds of $46m received by Juridica from the first of those two antitrust cases, and which was subsequently returned to shareholders as a cash dividend at the end of September, was well below the $69.1m gross proceeds actually settled on the claim.

Under the terms of the investment agreement, gross proceeds generated from the investment are received and held by Fields Law Firm PLLC, the counterparty to the company’s investment. Deducted from the gross proceeds are taxes and reserves required for certain contingencies. The $23.2m in reserves held by the counterparty to Juridica’s investment were larger than its investment managers had anticipated. However, they believe “additional net proceeds will be released prior to 31 December 2017”. I expect clarification on the likely level of net proceeds to be released to Juridica in the forthcoming full-year results in March.

Secondly, following an appeal on one litigation case last year, the investment managers believe there is a possibility of a new award on damages without the need for a further trial; a patent case is expected to generate further cash proceeds; and another case where damages were awarded in Juridica’s clients’ favour, but were less than it was anticipating, may go to a further trial on damages. This means that the $16.5m aggregate valuation of Juridica’s five outstanding litigation investments, worth 12p a share, could well have valuation upside when realised. Add to that the cash pile, and the current share price not only has substantial asset backing, but is not adequately reflecting the potential for investment realisations above their downgraded carrying values. I would therefore continue to hold the shares for further cash returns.

Mind + Machines (MMX)

Aim: Top level domain space

Share price: 9.75p

Bid-offer spread: 9.5-9.75p

Market value: £68.1m

Website: mindsandmachines.com

Mind + Machines (MMX:9.75p),

a service provider in the domain name industry and one focused on the new top-level domain (gTLD) space, issued a bullish portfolio update just before Christmas and one that fully vindicated my decision to include the shares, at 8p, in last year’s portfolio. Having slashed costs and trebled domains under management to 821,000 in the past 12 months, the company is set to report full-year cash profit of $3.7m when it releases its 2016 financial results in April, representing a significant turnaround on the hefty losses recorded in the previous year, and is now operating profitably on an ongoing basis. A key driver of this much improved performance has been the huge demand for the company’s .vip domain registrations in China, which have risen well above the 500,000 mark, having only launched in May last year, and without the need to resort to ‘freemium’ sales.

Bearing this in mind, Minds + Machines .vip top-level domain received official regulatory approval from the Chinese authorities at the end of last year, which means that all the owners of the individual .vip domain names can now apply for the relevant local licences to allow them to be hosted in China. This augurs well for Minds + Machines’ renewal rates and should support another wave of growth as registrars market the .vip domain to the local Chinese small- and medium-sized enterprises (SME) end market. Indeed, in the first 15 days after the regulatory approval, domain registrations surged by a further 26,000.

To support the ongoing development in China, a branch office is being opened in Xiamen, a recognised hub for the Chinese domain industry, in addition to one in Beijing. The importance of the Asian market should not be underestimated. Having had no exposure in the country at the start of last year, China-based revenue is on course to account for 59 per cent of the total last year. It’s not gone unnoticed, as Minds + Machines has attracted a major investment by Goldstream Capital Management, a company owned by Hony Capital, a leading Chinese private equity company. Goldstream invested £5.5m to acquire 42m shares priced at 13p last summer. At the same time, Minds + Machines returned £13m of its bumper cash pile to its shareholders through a tender offer at 13p a share, a capital return equating to 13 per cent of its issued share capital.

And the company has some very valuable other gTLDs. In the US, the transfer of its .boston geographic TLD has now completed the ICANN processes allowing the company, The Boston Globe and the city of Boston to start planning for a 2017 launch. Geographic TLDs form an important segment of Minds + Machines’ portfolio of 29 TLDs, which includes: .london, .miami and .bayern.

Moreover, growing interest in this segment of the domain industry has led to a move into profitability far sooner than I had envisaged when I advised buying the shares a year ago, a performance that also reflects substantial cost-cutting and streamlining of Minds + Machines into a pure-play registry business. However, the growing income potential of the portfolio is still woefully underpriced in the current valuation as I reckon that Minds + Machines retains net cash and trade receivables of around $23.3m, or 2.7p a share, and owns a conservatively valued portfolio of 29 TLDs that are in the books for $40.3m, or 4.6p a share. In other words, the shares are only trading on a modest premium to book value even though the board is successfully monetising the gTLD portfolio, and the business has made a sustainable move into profit. Buy.

VOLVERE (VLE)

Aim: Investment company

Share price: 530p

Bid-offer spread: 510-530p

Market value: £21m

Website: volvere.co.uk

The holding in Aim-traded investment company Volvere (VLE:530p)

has performed well in the past 12 months and is likely to continue to do so. Run by Jonathan and Nick Lander, who have the respective roles of chief executive and finance director, the founders of the company have proved adept at investing in distressed and undervalued businesses with a view to turning them around and exiting at a hefty profit. They have been mightily successful as Volvere’s book value per share has increased at a compound annual growth rate of 14.3 per cent since the company was formed 13 years ago.

It’s a pretty low-risk investment. That’s because Volvere has cash and marketable securities worth £18.5m for new investments, a sum worth 452p a share, and borrowings of £2.37m are very modest in relation to the profitability of its three investment holdings. These investments are very conservatively valued at £6.5m.

For example, the Landers have been working their magic on Impetus Automotive, a provider of consulting services to the automotive sector, including vehicle manufacturers, dealerships and national sales companies. It was a well-timed and shrewd acquisition as Impetus reported underlying operating profit of £522,000 on revenue of £8.1m in the first six months of 2016, a dramatic improvement on a trading loss of £43,000 in the second quarter of 2015. In fact, Impetus has generated underlying operating profit in excess of £1m since Volvere took control in 2015, an impressive return on the £1.3m Volvere paid for its 79 per cent stake.

The company also owns a security business generating £118,000 of annual profit. So, in effect, the combined book value of £1.7m for these two holdings equates to less than 1.5 times their annualised operating profit, a valuation that suggests the carrying value in Volvere’s accounts is far too modest. Furthermore, Volvere owns an 80 per cent shareholding in frozen pie and pasty maker Shire Foods, which is in the books at only £5m, or less than four times its underlying operating profit. True, higher raw material costs following sterling’s devaluation, and the decision of a customer to bring manufacturing in-house, are issues – but ones that are more than reflected in the modest valuation. I still take the view that the investment in Shire is worth double book value in a trade sale scenario.

I would also flag up that Volvere’s retained profit from the second half of last year will undoubtedly lift its NAV per share to another all-time high close to 600p. So, with the investment risk still skewed to the upside, and the company cashed up to make further value-enhancing acquisitions, I continue to rate Volvere’s shares a value buy.

OAKLEY CAPITAL INVESTMENTS (OCL)

Aim: Private equity investment company

Share price: 161p

Bid-offer spread: 158-161p

Market value: £323m

Website: oakleycapital.com

Shares in private equity investment company Oakley Capital Investments (OCL:161)

have made modest gains, but there is obvious value on offer here. Clearly, non-executive director Peter Dubens believes so as he splashed out almost £2.6m buying shares in his company in the final quarter of last year. He was not alone, as director Caroline Foulger invested £100,000 of cash making her maiden share purchase at the end of last year.

It’s not difficult to understand why the insiders are upbeat as Oakley has been realising significant value from its investments. Recent sales include a controlling stake in a leading German online dating site, Parship Elite, in a transaction that added 10p a share to Oakley’s end-June 2016 NAV of 215p. The holding in newly listed media group Time Out (TMO:138p), accounting for a fifth of its NAV, has recovered well over half its post-IPO losses since last summer, adding 4p to NAV per share. And the recently announced disposal by private equity firm Cinven of Host Europe, the largest privately owned hosting provider in Europe, to GoDaddy Inc (US:GDDY), the world’s largest cloud platform dedicated to small independent ventures, is worth noting. That’s because Oakley has a minority interest in Host Europe and the sale has effectively added just under 2p a share to the company’s NAV.

However, despite making massive returns on some of its investments, and in the process lifting NAV per share by around 15 per cent in the past 12 months, Oakley’s share price discount to NAV has actually widened from 27 per cent to 30 per cent since I recommended buying the shares. This compares with a historic average of 20 per cent for the fund since inception and a current discount of 24 per cent for the direct private equity peer group (ex-3i). That’s anomalous and can no longer be justified by the lack of a dividend as Oakley’s board has just paid out a maiden dividend of 4.5p a share in respect of the 2016 financial year, and expect a similar payout this year, too, so the shares now offer a respectable dividend yield of 3 per cent.

I would also flag up that Oakley’s investment team has been making some potentially lucrative new investments, including the purchase of a portfolio of European real estate websites. These businesses have several key features including strong underlying structural market growth in their segments, are asset-light, which supports strong cash conversion, and offer potential to accelerate performance through effective management, especially around marketing. I wouldn’t bet on Oakley hitting pay dirt again, but rated on a massive discount to book value the shares are worth buying.

BIOQUELL (BQE)

Main: Specialist microbiological control technologies

Share price: 133p

Bid-offer spread: 131-133p

Market value: £30.5m

Website: bioquellplc.com

Investors have banked profits in Andover-based Bioquell (BQE:133p), a provider of specialist microbiological control technologies to the international healthcare, life science and defence markets, after the company bought back half the share capital at 200p in June 2016, using up £40.8m of the cash proceeds received from selling TRaC, its specialist testing services business. The share price drift since the summer also reflects the subsequent failure of the board to sell the company’s bio-decontamination unit.

However, that’s not to say there isn’t value on offer, which the market is failing to acknowledge: analyst Chris Glasper at broker N+1 Singer believes Bioquell’s cash profit rose by 9 per cent to £3.7m last year to deliver a 50 per cent hike in adjusted pre-tax profit to £1.4m and EPS of 3.7p. A pre-close trading update released a few weeks ago confirms that the business is trading in line with these estimates. I would also point out that Bioquell derives about half of its bio-decontamination revenue in US dollars and a quarter in euros, so the hefty devaluation of sterling since last summer is providing a major currency tailwind.

Industry drivers are supportive, too. A new European standard comes into force in the near future which will require companies selling airborne disinfection systems to pass demanding microbial inactivation tests, including the inactivation of ‘hard-to-kill’ fungal spores. Experts anticipate that a number of nebuliser systems will be removed from the European market when the new standard comes into force. This presents an opportunity for Bioquell’s hydrogen peroxide vapour (HPV) technology products, which are highly effective at eradicating micro-organisms such as bacteria and viruses at room temperature. These products are already used by biopharmaceutical, biotechnology and research institutions to provide sterile equipment and eradicate ‘superbugs’ from hospitals.

I would also flag up a new standard relating to the “manufacture of cell-based healthcare products – control of microbial risks during processing”. This highlights the challenges associated with viral vectors used in the production of cell-based healthcare products and the advantages of using closed systems such as Bioquell’s QUBE over more common biological safety cabinets. Bioquell QUBE is an aseptic workstation incorporating HPV technology which can be used for: sterility testing; the production of toxic, intravenous oncology drugs; and the production of small-scale cell-based healthcare products.

Industry drivers aside, a restructuring of the company’s US salesforce, increased investment in digital marketing and the scope to cut costs in other areas are all supportive of N+1 Singer’s prediction that Bioquell can deliver cash profit and pre-tax profit of £4m and £1.9m, respectively, this year based on a modest £1.4m rise in revenue to £28.2m. Moreover, using a lower average share count post last summer’s tender offer, but excluding the earnings-accretive impact of a recently announced £2.5m share buyback programme, N+1 Singer expect EPS to soar from 3.7p in 2016 to 6.5p in 2017. But if the company uses £2.5m of its £8.8m year-end cash pile to repurchase 1.85m of the 22.9m shares in issue, and it has already purchased 940,000 shares at 135p each, then the reduced share count will have the effect of raising this year’s EPS estimate to over 7p.

In other words, there is potential for EPS to surge by 90 per cent this year and the company would still retain net funds worth 30p a share based on 21m shares in issue post the completed share buyback programme. For good measure, Mr Glasper at N+1 Singer is pencilling in a 1.8p-a-share payout when Bioquell announces its full-year results on Tuesday 7 March, rising to 2.5p a share in 2017, implying the prospective dividend yield is 1.9 per cent.

The bottom line is that the value embedded in Bioquell’s technology and the earnings upside from the proposed buyback programme, new legislation and products, a strong currency tailwind and operating margin improvements are not being adequately reflected in a cash-adjusted PE ratio of 15 for 2017. My fair value target price of 180p is equivalent to an enterprise value to cash profit multiple of eight times post the share buyback programme. Buy.

GRESHAM HOUSE STRATEGIC (GHS)

Aim: Investment company

Share price: 815p

Bid-offer spread: 795-815p

Market value: £30.1m

Website: ghsplc.com

When I included shares in Aim-traded investment company Gresham House Strategic (GHS:815p) in last year’s portfolio, the share price was trading 18 per cent below book value of 975p even though the company was cashed up to make new investments – net funds of £15.2m at the time equated to 42 per cent of the company’s NAV. Effectively, a listed investment portfolio worth £21m was being attributed a value of just £14m in the company’s market capitalisation of £29.5m. The fact that the share price is little changed is in no way a reflection of the subsequent investment performance.

In fact, NAV per share has risen by over 13 per cent to 1,103p, quite some achievement given that net funds still account for about 30 per cent of book value. It also means that once you strip out net cash from the share price, the company’s investment portfolio is effectively being valued on a 40 per cent discount to its underlying value, which is anomalous considering that the majority of the portfolio is tied up in four small-cap companies all of which I remain very favourable on.

These companies include Aim-traded technology company IMImobile (IMO:175p), a business that helps companies engage with their customers across all mobile devices by offering smart software products based on proprietary technology. Following upgrades, analysts expect IMImobile to report an 11 per cent rise in adjusted pre-tax profit to £9.4m in the 12 months to the end of March 2017, implying the shares are being rated on 15 times forward earnings. That’s hardly an exacting valuation for a “highly cash generative business with 95 per cent recurring revenues, and one operating in a sector benefiting from strong structural growth trends”, as Graham Bird, head of Investments, Gresham House Strategic, points out. He believes IMImobile is “attractively valued at a significant discount to its peer group with significant upside potential driven by continued organic growth and complemented by the potential to make further earnings-enhancing acquisitions.” I agree.

Other investments in Gresham House Strategic’s portfolio include Quarto (QRT:318p), a global illustrated book publisher and distribution group in which it holds a 4.6 per cent stake. The company sells books across 45 countries and in 35 languages through a variety of traditional and non-traditional channels with 60 per cent of turnover generated from a backlist of more than 9,000 titles, so providing a stable revenue stream. I rated Quarto’s shares a buy at 261p when it reported half-year results last summer and they have performed very well since ('Small-cap value buys', 9 Aug 2016).

That’s not just because they were too lowly rated at the time, but investors are now acknowledging the potential for the board to create shareholder value by acquiring smaller niche operators at attractive multiples (between four and five times cash profit), and deliver growth by leveraging the distribution and purchasing base of a larger business. The integration of the most recent acquisition, the publishing assets of Becker & Mayer, is going well and has strengthened Quarto’s offering in North America and increased revenue from children’s publishing to 30 per cent of the mix. Also, the US accounts for 45 per cent of Quarto’s revenue, so it is providing a positive currency tailwind to profit.

After factoring in the full benefits of last year’s acquisitions, analyst Malcolm Morgan at broker Peel Hunt believes that Quarto can lift revenue by around 8 per cent to $210m in 2017 to deliver pre-tax profit of $17.1m, EPS of 58.2¢ and a payout of 17.1¢, implying the shares are rated on seven times forward earnings and offer a 4.3 per cent prospective dividend yield. Add to that the potential for further debt-funded earnings-accretive acquisitions and there should be more upside to come.

The same is true of the holding in fund manager Miton (MGR:36p), a company whose shares I recently rated a buy and upgraded my target price to 50p ('In the ascent', 23 Jan 2017). If achieved, this would place the shares on a cash-adjusted PE ratio of 12 for 2017, based on Peel Hunt’s forecasts, not an unreasonable valuation in my view.

I would also flag up Gresham House Strategic’s investment in Northbridge Industrial Services (NBI:140p), an industrial services and rental group. Northbridge primarily hires and sells specialist electrical testing and oil and gas equipment to a global customer base including companies in the marine, natural resources, power reliability, data storage and utility sectors. Gresham House Strategic holds 10.86 per cent of the issued share capital, having initially invested £1.5m at 75p a share as a cornerstone investor in a £4.5m placing last April and acted as the underwriter of a £1.1m open offer, a capital raise that degeared Northbridge’s balance sheet. It represented a cracking entry price pitched 40 per cent below tangible NAV and was based on an enterprise value to forecast cash profit multiple of less than five times. Even after soaring 90 per cent since Gresham House Strategic’s initial investment was made, I still see scope for Northbridge’s share price to rise further given the operational gearing effect on its profits from any recovery in demand from its end markets.

The 27 per cent share price discount to book value aside, Gresham House Strategic’s shareholders can expect a 15p-a-share capital return to be announced alongside the forthcoming full-year results, in line with the board’s policy to return half of net profit on investments back to shareholders. Buy.

GRESHAM HOUSE (GHE)

Aim: Fund manager

Share price: 305p

Bid-offer spread: 300-305p

Market value: £31.1m

Website: greshamhouse.com

Shares in Gresham House (GHE:305p), a specialist asset manager, have put in a flat performance, but this is at odds with the strong operational progress the company has been making. Subsidiary Gresham House Asset Management (GHAM) was appointed as external investment manager to investment company LMS Capital (LMS:50p) last summer and is adopting the same strategic public equity (SPE) investment strategies it has been successfully pursuing as investment manager of Gresham House Strategic (GHS:815p). LMS benefits from the investment upside in Gresham House through its 7.8 per cent stake in the company and can double this holding if it exercises call warrants with a strike price of 323p by their expiry in June 2018, while the income earned in management fees means that Gresham House now has annualised fee income above £4m. Add to that £750,000 of annual rental income from a legacy property in Speke, Liverpool, known as Southern Gateway, a fully let office and industrial complex that is being marketed for sale at £7.6m, and Gresham House’s revenue almost covers its annual administration costs of £4.8m. A move into profit this year, far sooner than analysts had envisaged, seems likely.

Furthermore, Gresham House has rock-solid asset backing including property assets worth £9.9m; deferred consideration from Persimmon (PSN) of £5m on a land sale, of which £1.14m is due to be paid in March; a holding in GHS shares worth £6m; and a £4.3m initial investment in forestry asset manager Aitchesse. Strip out property and legacy assets from Gresham House’s market value of £31m and its fund management business, which now has assets under management of £375m, is being valued on less than three times annual management fee income. That’s a harsh valuation for a company that has won some lucrative mandates and whose new forestry fund attracted £15m of capital at first close three months ago. The aim is to increase the fund size to £50m by final close in the second half of this year.

My fair value target of around 400p for Gresham House’s shares is not unreasonable, and a likely move into profit this year is just the catalyst needed to spark an overdue share price re-rating. Buy.

WALKER CRIPS (WCW)

Main: Stockbroking, investment & wealth management

Share price: 40p

Bid-offer spread: 38.5-40p

Market value: £31.1m

Website:wcgplc.co.uk

Subdued trading in the run-up to and following the EU referendum, coupled with one-off costs as Walker Crips (WCW:40p) invested in staff and the development of its business, led to a sharp fall in the stockbroker and fund manager’s profit for the six months to the end of September 2016.

However, when the board released those results in mid-November, it also reported that revenue streams from both traditional investment management and structured products had “increased considerably since the end of September as the improvement in investor sentiment gathered pace”. Given that UK equity markets subsequently went on to hit new all-time highs, it’s only reasonable to expect this trend to have continued in the past three months, too. And that’s important because, despite the short-term setback, Walker Crips continues to build a valuable asset management operation which increased discretionary and advisory funds under management by 17 per cent from £2.3bn to £2.7bn between March and September last year, outstripping the 12 per cent rise in the FTSE 100 index during the same period, and now accounts for 56 per cent of the £4.8bn total assets under management and administration (AUMA).

Moreover, the ongoing expansion of the company’s client base, predominantly through the recruitment of new investment managers, was only partially reflected in first-half revenue due to a timing lag of new client assets transferring to the company from previous employers. The corresponding increases in revenue will benefit subsequent periods, including the second-half performance, suggesting that we can expect a sharp rise in Walker Crips’ AUMA when it releases its full-year results and also a decent uptick in management fee income.

The board maintained that half-year payout and the shares yield around 4.5 per cent based on the final dividend being held. With net funds of £5.9m accounting for 30 per cent of net assets of £20.2m, there is rock-solid asset backing which means that Walker Crips has significant cash available to develop its asset management operations further. Of course, investors will want to see a decent financial return being made on those growing businesses, but with a far better second-half performance likely, I feel that it’s worth holding on to the shares despite the underperformance.

FRENCH CONNECTION (FCCN)

Main: Clothing retailer

Share price: 33.75p

Bid-offer spread: 33-33.75p

Market value: £32.7m

Website: frenchconnection.com

Fashion retailer French Connection (FCCN:33.75p) is the laggard in last year’s portfolio, wiping 2.5 percentage points off its total return.

The key to a share price re-rating is the same as it was 12 months ago: whether the retailer’s senior management team can reduce losses on the retail side so that the company moves back into profit given that its wholesale and licence operations are hugely profitable. Progress here has been painfully slow. Indeed, although the retail side narrowed seasonal trading losses by almost £3m to £8.2m in the first half to the end of July 2016, operating profit on the wholesale side came under pressure in the same period, down from £5.5m to £3m. So, even after factoring in the much stronger seasonal second half, analysts expect the company to report a full-year loss of around £3.1m, albeit that’s a third better than in the previous year.

Investors are getting restless, including US hedge fund Gatemore Capital Management, which owns 8 per cent of the share capital, and has been pressurising 70-year old founder and 41.7 per cent shareholder Stephen Marks to relinquish his dual role as chairman and chief executive, and calling for the company to get rid of its dated FCUK logo, cut back on its product ranges and speed up the closure of certain stores. It has been joined by OTK, which controls 6 per cent of the share capital. WA Capital, the investment vehicle of Will Adderley, former chief executive and current deputy chairman of homewares retailer Dunelm (DNLM), is another notable major shareholder on the registrar, having built up an 8.16 per cent stake since the start of last year. Mr Adderley has yet to outline his intentions.

I feel that something is going to give here. Either Mr Marks will turn around the retail business, or shareholder activism will eventually ensue. Either way, I continue to see investment upside as the company’s current market capitalisation is 30 per cent below NAV of £48m, even through French Connection retains a cash-rich balance sheet, owns valuable property including a lease on its flagship Oxford Street store in London, and still has a very profitable wholesaling business. Speculative buy.

Bargain Shares Portfolio 2016 performance

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