That looks an attractive entry point to me considering the track record of the management team led by chairman Peter Dubens who floated the company on the Alternative Investment Market in August 2007 at 100p a share. To recap, Oakley makes its money by taking stakes in private equity ventures established by its associated limited partnership, Oakley Capital Private Equity, and provides mezzanine debt finance. It has been very successful, too, as in the six years to end December 2013, Oakley's net asset value per share doubled and generated a compound annual growth rate of 12.2 per cent.
To put that stellar performance into perspective the FTSE All-Share index increased by only 11 per cent in the same period, the FTSE SmallCap index rose by 30 per cent and the FTSE 250 index by 50 per cent. Among listed private equity companies, over the past five years Oakley Capital's net asset value total return of 85 per cent is second only to SVG Capital (102 per cent, albeit from a low base), and has beaten HG Capital (41.8 per cent), Dunedin Enterprise (36.5 per cent) and 3i Group (30.7 per cent) handsomely.
Given this impressive track record it pays to understand how these returns are being generated.
Assessing the portfolio
While the company does not generally invest directly in portfolio companies, other than through the provision of debt finance, it is possible to "look through" each limited partnership to see how each portfolio company is contributing to the overall investment returns.
In addition, Oakley provides debt finance directly to a number of the portfolio companies. These typically take the form of mezzanine loans with fixed interest rates of between 10 to 15 per cent. The company also provides secured senior debt to certain portfolio companies at interest rates typically of 8.5 to 10 per cent. Investments in loan instruments increased by £4.5m to £29.1m in the financial year to end December 2013, principally due to new loans provided to German web hosting provider Intergenia.
Oakley also provides revolving credit facilities to the limited partnerships at an annual interest rate of 6.5 per cent. The balance owed to the company was £24.7m at the end of December. In aggregate, loans made by Oakley account for £53.8m (43p a share) of net asset value of £246m, private equity investments in the two limited partnership funds a further £130m (106p a share) and cash on its balance sheet was £63m (51p a share). This means net funds equate to a quarter of book value, which mitigates risk significantly. It also means that the private equity portfolio and loans made to portfolio companies and the limited partnership are being valued on a 23 per cent discount to carrying value after adjusting for that cash pile.
In my opinion, a discount of that magnitude would be in order if Oakley had some bad investments on its books. But this is clearly not the case as the company has been successfully exiting investments at very healthy profits. For instance, Oakley exited four holdings during 2013 for aggregate proceeds of £33m and achieved an eye-catching internal rate of return of 43 per cent.
Profitable investments
It's reasonable to expect more profitable disposals in the future. That's because analyst Rob Jones at broking house Liberum Capital notes that "Oakley's current unweighted average holding period for its investments stands at 2.8 years with the most mature investments being Aim-traded telecom's provider Daisy Group (DAY: 176p) at 4.8 years old and German price comparison website Verivox at 4.4 years old. Comparing the maturity of current investments to recent exits, we note that the average holding period for exited investments in 2013 was 3.8 years."
In other words, the odds favour some major disposals in the coming year, the most likely is Verivox, a holding accounting for £23.7m of Oakley’s book value of £246m. Mr Jones points out that "Verivox is not only the most mature non-listed investment, but the platform has now been substantially built out and new registrations continue to rise." In my view, Verivox looks ripe for Oakley to take profits on its investment given the 4.4-year holding period and the fact that the business should be ready for sale. And given the track record of selling investments for premiums to book value, there could be a decent uplift, too. Oakley's shareholding in Daisy is of interest, too, as this is worth £33m and should be easily realisable as this is a large profitable and dividend paying telecoms company with a market capitalisation of £470m.
Asset sales aside, potentially there could be further valuation gains on Oakley's other existing investments. Mr Jones understands that "recent performance at Intergenia has been strong. Although a relatively young investment (December 2011 purchase), by October 2012 it had already paid back all its debt and was profitable and cash generative."
Last July's investment in Reddam House Schools, an operator of private schools in South Africa, looks interesting as a medium-term holding. Currently Reddam House has five schools – two in Cape Town, one in Johannesburg and two in Sydney. As part of the deal, Reddam House's founder has retained a major stake in Reddam and is working to identify new opportunities for schools, both in South Africa and in other geographies. Oakley Capital contributed £10.1m of the £13.6m, which the Oakley limited partnership paid for a 51 per cent stake in Redham.
More recently, the acquisition of a majority stake in North Technology, the holding company of North Sails, a maker of high performance sails and a world leader in sailmaking, looks a promising deal too. Oakley Capital contributed a third of the total equity investment of $62m (£37m), valuing the business at $131m or 0.8 times annual sales. Founded in 1957 by Lowell North, North Technology comprises three market leading marine brands, all focused on providing innovative and high performance products to the sailors & yachtsmen. It has operations in 29 countries.
A discount too deep
In my view not only are Oakley shares attractively priced relative to their historic book value of 200p, but the investment case is even more compelling once you factor in that Liberum are forecasting a year-end net asset value of 220p a share. This means the shares are being priced on a 25 per cent discount to prospective book value. Moreover, based on a year-end cash pile of around 31p a share, Oakley's portfolio of investments is in effect being valued on a 29 per cent discount to Liberum's year-end valuations. For a company that has doubled net asset value per share over the past six years, such a share price discount is not just anomalous but in my book is a clear buying opportunity.
It is also one supported by the technical set-up as Oakley's shares are massively oversold with the 14-day relative strength indicator showing a reading of 20. Trading on a bid-offer spread of 161p to 165p, I rate the shares a medium-term buy and feel that Liberum's target price of 200p is achievable by the year-end.
Please note that I have published six articles so far this week all of which can be viewed on my home page. I am also working my way through a list of companies on my watchlist including: Inland (INL), API (API), Taylor Wimpey (TW.), Barratt Developments (BDEV) and Bovis (BVS).
■ Finally as a special offer to IC readers purchasing my book Stock Picking for Profit before Friday 16 May, and subject to limited availability, online orders placed with YPD Books and quoting offer code 'ICOFFER' will receive complimentary postage and packaging. The book can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Telephone orders will continue to incur the £2.75 charge. I have published an article outlining the content: 'Secrets to successful stock picking'
