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Investment company watch

Investment company watch
April 25, 2017
Investment company watch

For example, private equity investment company Oakley Capital (OCL:155p) has just reported a 17.8 per cent net asset value (NAV) return for 2016 after adjusting for the payment of 4.5p a share of dividends. The company has not only been cashing in some huge returns on its portfolio, including a 145 per cent internal rate of return on its investment in leading online dating company Parship Elite, but has been making some potentially lucrative new investments, too.

These include the purchase of a portfolio of European real estate websites including Casa.it in Italy and atHome.lu in Luxembourg, thus building on Oakley's track record in the online consumer sector through its previous successful investments in Italy's largest car insurance broker and price comparison website, Facile.it, Parship Elite, and Verivox.de, a leading consumer energy and telecommunications price comparison website. Oakley is attracted to these business models because of the strong underlying structural market growth in these segments, their asset-light nature that leads to strong cash conversion, and the ability to accelerate performance through effective management, especially around marketing.

Clearly, managing partner Peter Dubens sees potential upside in the shares as he splashed out £2.5m in a buying spree in the final quarter of last year, and has spent a further £250,000 in the last month alone. He is not alone as Oakley directors Christopher Wetherhill, David Till and James Keyes have invested over £100,000 between them topping up their holdings. It's easy to see why the insiders see value as the shares are trading on an unwarranted 33 per cent discount to the company's end of December 2016 NAV of 231p, or 20 percentage points deeper than its peer group, even though Oakley's top four holdings account for a half of book value and there have been strong trading performances from all of them including Time Out (TMO:135p), international private schools business Educas, and Facile.it. Effectively, the discount on the equity portfolio is even deeper because the company's cash pile of £106m equates to a quarter of its NAV of £438m.

The valuation is even more anomalous given that in the past decade Oakley's NAV has posted compound annual growth rate of 10 per cent, the board has committed to paying a dividend, so the yield is around 3 per cent, and from my view at least there is obvious scope for further valuation uplifts. So, having included Oakley's shares in my 2016 Bargain Share Portfolio at 146.5p, and banked 4.5p a share of dividends since then, I have no hesitation reiterating the buy advice I gave when I updated the portfolio earlier this year ('How the 2016 Bargain Shares Portfolio has fared', 2 Feb 2017). Buy.

 

Crystal Amber hits pay dirt

Activist investment company Crystal Amber (CRS:240p) has just posted a record closing monthly NAV per share of 241p, up from 231p at the end of February. I last advised running profits at 232p ('Full house', 28 Feb 2017), having included the shares as one of the constituents of my 2015 Bargain Shares Portfolio when the price was 149.25p. The board have paid out dividends of 7.5p a share, too.

The reason for remaining positive is down to the upside potential in the company's three largest holdings: Hurricane Energy (HUR:57p), a company that is building up a huge resource base in a strategically important part of the North Sea; Grainger (GRI:248p), the UK's largest listed residential property owner and manager whose shares languish at a 26 per cent discount to EPRA NAV estimates even though the company has been selling off non-core assets and successfully executing its plan to invest £850m in the private rented sector (PRS) by 2020; and vehicle rental group Northgate (NTG:526p). Hurricane accounts for a third of Crystal Amber's NAV (excluding warrants it holds), albeit Crystal Amber's investment managers have sensibly top-sliced the holding to manage the portfolio's exposure to any one company, and the holdings in Grainger and Northgate each represent around 14 per cent of book value.

Bearing this in mind, I note that analyst Dougie Youngson at broker finnCap has just raised his target price on Hurricane Energy's shares from 91p to 130p following a capital markets day which highlighted that "the drilling programme has confirmed that Hurricane does indeed have a world-class portfolio of assets west of Shetland. The majority of the key questions relating to the geology and producibility of the Lancaster reservoir have now been answered.". Mr Youngson's valuation for Hurricane is on a risked NAV basis for the Lancaster and Halifax fields, and reflects a near doubling in the recoverable resource estimate for Lancaster to 593m barrels of oil, an uplift of approximately three times the 2014 Competent Person's Report volume.

Clearly, everything needs to fall into place for Hurricane's share price to make further headway towards finnCap's upgraded target, and the next major news will be the final investment decision in the next few months ahead of planned first production in the first half of 2019. Capital expenditure for the Lancaster Early Production System is estimated at around $467m (£365m) and Hurricane is seeking to put together a funding package for the development which is likely to comprise new equity, debt and potentially a farm-out.

The point being that although Hurricane's shares have surged in the past year, there is potential for the rerating to continue especially as any farm-out would highlight the huge value in the company's assets. That's good news for Crystal Amber's shareholders given the fund's weighting to this holding. In the circumstances, I would run the 66 per cent profit on your holdings in Crystal Amber.

 

Upgrades for Record

Shares in currency manager Record (REC:42p) have fallen from a seven-year high of 47.5p in the past week although they are still ahead of the 40p level at which I recommended buying at last month ('Engineering reratings', 6 Mar 2017), and are well up on the 34.3p price at which I included them in my 2015 Bargain Shares Portfolio. The company has paid out total dividends of 3.37p a share, too.

I believe there are two reasons for this share price decline. Firstly, the company issued a fourth-quarter trading update last Friday ahead of the full-year results to the end of March 2017, which will be released on Friday 16 June 2017. There was no mention of the dividend in the release, but equally investors shouldn't have expected one at this point as the board will outline their intentions in the financial results in mid-June.

The payout is important because with the company debt-free and sitting on cash and money market instruments worth £36.2m on its balance sheet, a sum worth 16.3p a share, then there is a real prospect of a rise in the 1.65p annual payout. Indeed, the board has indicated that it "will give consideration to returning at least part of any excess of current year earnings per share (for the March 2017 year-end) over this payout to shareholders, potentially in the form of special dividends". Analysts Andrew Mitchell and Julian Roberts at Edison actually increased their EPS estimate by 7 per cent from 2.64p to 2.84p post the trading update and estimate the total dividend for the 2017 financial year could be now as high as 2.75p a share, including the half-year payout of 0.825p already paid, a final dividend of 0.825p and a special dividend of 1.1p, implying an attractive prospective dividend yield of 6.5 per cent.

Secondly, some investors may have been looking for a greater increase in Record's assets under management equivalent, but the rise from $56.6bn to $58.2bn in the first quarter this year is still the highest level in Record's history and represents a 10 per cent year-on-year increase in dollar terms. True, six clients reduced their hedging activity by $600m as previously announced, and there was a $900m outflow as a result of a multi-product client mandate being terminated, but let's not lose sight of the fact that analysts have been forced to upgrade estimates and now expect EPS to rise by 11 per cent to 2.84p for the year just ended. Moreover, Edison also upgraded their EPS estimate by 2 per cent to 3.03p for the new financial year, noting "Record reports a good level of interest from potential clients spread across product and geography. Supporting this are both an uncertain macro background and a continuing positive performance in the currency for return strategies".

The other point worth flagging up is that there has been a sharp pick-up in currency market volatility in light of the French and UK elections, which has seen the US dollar weaken against both the euro and sterling, something worth noting as this incentivises international clients to consider hedging their currency risk to protect the value of their assets. Market volatility, or the potential for sharp currency moves, is the key to attracting and retaining clients.

Trading on a cash-adjusted forward PE ratio of 8.6 for the new financial year, and with potential for the board to pay out almost all of the 2.84p of EPS forecast by analysts for the 2017 financial year as dividends, I think Record's shares have upside potential. Also, the pullback in the share price has unwound a heavily overbought position with the reading on the 14-day relative strength indicator (RSI) now only 30, down from a high of 70 a week ago. So, ahead of the forthcoming full-year results, I continue to rate Record's shares a buy.

MORE FROM SIMON THOMPSON...

A comprehensive list of all the investment columns I have written in 2017 is available here.

The archive of all the share recommendations I made in 2016 is available here

■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com for £14.99, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source. Simon has published an article outlining the content: 'Secrets to successful stock-picking'