Eight of the nine resolutions put forward by Crown Ocean were passed, albeit by a slim majority, which resulted in all of Bowleven's board stepping down from their positions apart from incumbent chairman Bill Allen, who only held onto his position on the board by the slimmest of margins. Chief operating officer David Clarkson was spared the axe by Crown Ocean and is the only other remaining director from the previous board of directors. The two directors Crown Ocean put forward for a seat on the board were duly appointed.
The problem for Crown Ocean now is that "it has become clear that the incumbent chairman is reluctant to accept the verdict of shareholders over the future strategy of Bowleven or to recognise that it is no longer appropriate for current executives to continue to hold their pre-existing executive roles." So, the activist shareholder has requisitioned a second EGM to both remove Mr Allen as a director and appoint two further independent directors, Julien Balkany and Didier Lechartier.
It's only realistic to expect Crown Ocean to finally win the day as it would only have to buy another 2.5m of the 320m shares in issue, the number by which Mr Allen hung onto his position last week, and maintain support from other shareholders who voted for his removal last week for him to be fousted from the board second time around.
Of far more interest to me is that these developments pave the way for an accelerated disposal programme of the company's assets. It may not generate the maximum cash returns for shareholders, but there should be significant upside nonetheless given that Crown Capital's newly appointed directors have plans to return some of the company's $95m (£76.6m) cash pile, worth 24p a share, to shareholders, and the shareholders is looking to realise value from Bowleven's interest in the Etinde permit off the coast of Cameroon, which brought in partners Lukoil and New Age at the start of 2015 and left Bowleven with a valuable 20 per cent non-operated interest. The company is carried for $40m of net drilling on two appraisal wells, and is also due to receive a further $25m once the final investment decision is made. Etinde accounts for almost half of Bowleven's book value of 90p a share.
There is also value in the company's smaller Bomono project, off the coast of Cameroon, which the previous board agreed a farm-out on with Aim-traded Victoria Oil & Gas (VOG) only eight days before last week's EGM. If this deal proceeds, Bowleven will remain the operator of the asset, retain a 20 per cent working interest, receive £100,000 of shares in Victoria Oil & Gas, and the $6m capital cost of a gas pipeline will be paid for by Victoria Oil & Gas. The farm-out will realise near-term value from Bomono through commercial production of its gas deposit while at the same time tapping into its new partner's expertise of commercialising local onshore gas deposits using its established gas infrastructure and customer network.
Interestingly, only Victoria Oil & Gas has the option to terminate the farm-out agreement as a result of Bowleven's EGM and resultant changes to its board. Bearing this in mind, the new partner "continues to look forward to developing the Bomono project with Bowleven and will shortly be in contact with the board in this respect."
Admittedly, at this stage it's impossible to quantify the level of the likely cash return, but with Bowleven's shares trading 60 per cent below net asset value, and with net funds equating to two-thirds of the share price, then it's pretty obvious the value in the company's two main assets is not being fairly reflected in the market valuation right now.
So, having included Bowleven's shares in my 2016 Bargain Shares Portfolio at 18.9p, rated them a buy at 27.75p in this year's Bargain Shares Portfolio, and again at 33p ahead of last week's EGM ('Shareholder activism rules', 22 Feb 2017), I feel a realisation value of 50p a share is not unreasonable in a break-up scenario, representing a 40 per cent premium to the current price but a near 50 per cent discount to risked net asset value estimates. Buy.
Primed for take-off
Aircraft leasing company Avation (AVAP:220p) has confirmed that it received eight offers for all or parts of its portfolio of 22 ATR72 planes, and has decided that the optimal commercial outcome is a sale of a smaller portfolio of aircraft. The company is now in discussions with a single commercial lessor for the sale of six existing leased ATR 72 aircraft, and has executed a conditional letter of intent with the proposed purchaser, which has made a $3m cash deposit, refundable in the event of non-completion. The transaction is expected to close prior to the end of the second quarter with an economic closing date of 7 April 2017.
Although the directors will not specify the selling price while the sale process is being concluded, it has been pitched above book value and releases $31m in net proceeds after transaction costs and debt repayment. Reassuringly, and as finance director Richard Wolanski rightly points out during our communications on this matter, the "price achieved provides confidence that the realisable value of the ATR fleet is above book value and confirms the liquidity of this aircraft type given the amount of interest received throughout the process." He also notes out that "the transaction will allow Avation to optimise existing concentration risk and support diversification to new airline customers as capital is redeployed to new fleet assets."
That's worth noting as Avation's shares are priced on a 12 per cent discount to last reported net asset value per share of 310¢, or 250p at current exchange rates, and the profit realised on the above transaction plus the net profits accrued since the December 2016 half year-end will have bolstered the company's net asset value further. Analyst John Cummins at brokerage WH Ireland has raised his target price from 260p to 270p to reflect a "conservative 5 per cent premium to book value".
The share price is also well underpinned by the profitability of the fleet as Mr Cummins is pencilling in a 16 per cent rise in pre-tax profit to $21.5m to produce EPS of 32.6¢, around 26.3p at current exchange rates. A forward PE ratio of 8.4 is low compared with the ratings of rivals. And the board is well placed to reward shareholders with a decent full-year dividend, having declared an 8 per cent rise in the payout per share to 3.25¢ last year, although a special dividend is not being considered, says Mr Wolanski.
So, with the proposed aircraft sale highlighting the value of Avation's fleet, and the company's equity modestly rated, this is highly supportive of a further rerating of the shares, which I first advised buying at 159p ('Get on board for blue-ky gains', 11 Sep 2014) and last reiterated that advice at 205p ('In the ascent', 20 Feb 2017). My target price of 250p is not only achievable, but is looking increasingly conservative. Buy.
Financed for bumper growth
Aim-traded finance house Private & Commercial Finance (PCF:27p) has raised £9.6m net proceeds in a placing of shares at 25p in order to maintain the regulatory level of capital and liquidity required to hold a new banking licence. The company announced in December that it will become the ninth company in the past year to receive a banking licence after its application was approved by the UK regulators, Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA). The fundraise is bang in line with the sum that chief executive Scott Maybury outlined to me at the time of the full-year results in early December ('On the money', 12 Dec 2016).
The net proceeds will be used to purchase high-quality liquid assets to maintain predetermined liquidity ratios for retail deposit taking and operate comfortably within the relevant regulatory capital regime. The placing equates to 23 per cent of the share capital and has been priced at a 5 per cent discount to the previous day's closing price. It's been well supported, too, both by new and existing investors, hardly surprising given that potential for value creation. Mr Maybury says "our shareholders recognise the potential increase in scale offered by the retail deposit-taking licence, with our targets set at a portfolio size of £350m after three years and £750m after five years, a significant increase on current levels of £120m."
He has a point as access to a retail deposit base offers Private & Commercial Finance the opportunity to fund higher-ticket items for businesses in particular, and increase the proportion of prime borrowers from the current blended rate of 29.3 per cent of the book. Less than 10 per cent of all borrowers are deemed sub-prime, with around 60 per cent classified as "near prime". In terms of the current loan book, around £70m has been lent to 8,500 retail customers with an average deal size of £11,500 at inception, of which 86 per cent finances second-hand motor vehicles, while the £52m business loan book has a loan size of around £26,000 and its 2,700 customers are generally raising finance for commercial vehicles and plant.
Furthermore, an operational update issued alongside the fundraising was pretty upbeat, highlighting that new business originations have increased by 11 per cent to £28m in the first five months of the current financial year, and the target to fully mobilise the bank is bang on track for delivery this summer. This suggests that the company's targeted loan book of around £140m by the end of 2017 financial year seems a sensible objective (September year-end), implying the £65m headroom on existing bank facilities will easily support lending on this scale without taking into account any fresh capital flows received when the company can accept retail deposits in the summer.
Importantly, minority shareholders are not being left out as they can participate in an open offer of 2m shares at 25p each and the directors and existing shareholders participating in the placing have agreed to free up their allocations in the open offer for other shareholders. It's worth taking up your allocations and applying for an excess entitlement as the shares are due a higher rating. That's because analysts are forecasting a 12.5 per cent hike in pre-tax profit to around £4.5m in the 12 months to the end of September 2017, and assuming loan growth ramps up as management anticipates, then analysts expect pre-tax profit to rise more than 50 per cent to £7.3m on net revenue of £77m in the 2018 financial year. On this basis, the shares are rated on 12 times fully diluted earnings for next year, hardly punchy for a fast-growing finance provider.
So, having recommended buying the shares at 24.5p ('A small-cap gem', 18 Apr 2016) and reiterated that advice at 30p at the end of last year ('On the money', 12 Dec 2016), I am comfortable with my target price range of 35p to 40p. Buy.
A royal investment
The Royal Borough of Windsor and Maidenhead has become a long-term strategic investor in specialist asset manager Gresham House (GHE:325p), having subscribed for 2.55m new shares at 325p each, representing 20 per cent of the enlarged issued share capital, and subject to a 24-month 'lock-in' agreement. The fund manager also announced that it's establishing a £300m fund, Gresham House British Strategic Investment Fund, to address the growing demand for alternatives and illiquid assets in a cost-effective manner which will facilitate structured co-investment. The Royal Borough of Windsor and Maidenhead will be a cornerstone investor in the fund.
It's also worth noting that Gresham House is "advancing its disposal of property assets with both the Southern Gateway site in Liverpool and the remaining land at Newton-le-Willows entering active marketing processes." These assets have a carrying value of £10m in the accounts and when this is realised, and taking into account the £8.3m new investment from The Royal Borough of Windsor and Maidenhead, Gresham House will be able to redeem its borrowings of £5.9m and be cashed up to make further investments. It has a rock-solid balance sheet in any case and one that includes a shareholding worth £6m in Aim-traded investment company Gresham House Strategic (GHS:820p); a £4.3m investment in forestry asset manager Aitchesse; and £4m of deferred consideration outstanding on previous land sales at Newton-le-Willows, Merseyside to housebuilder Persimmon (PSN:2,117p).
The point being that once the aforementioned legacy property is sold off, net cash and the listed shareholding in Gresham House Strategic will account for almost half of Gresham House's market capitalisation, meaning that its fast-growing fund management arm, which now has assets under management of £375m, is effectively being valued on three times annual management fee income. That's an anomalous valuation given that a move into profitability is highly likely this year.
So, having advised buying the shares at 312p in my 2016 Bargain Shares Portfolio ('How the 2016 Bargain Shares Portfolio fared, 3 Feb 2017), I strongly feel that my 400p a share target price is in order. Buy.
Finally, there have been a raft of results announcements from companies on my active watchlist including Burford Capital (BUR), Tiso Blackstar (TBGR), Management Consulting (MMC), Manx Telecom (MANX), and Chariot Oil & Gas (CHAR). I will be publishing updates on these companies in the near future.
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
