One that clearly sticks out is from investment company LMS Capital (LMS: 79.25p) which has just sold off its stake in Updata, one of the UK's leading suppliers of IT network services which is being acquired by Capita (CPI) for a cash consideration of £80m on a cash free, debt free basis. The net proceeds of £27.2m received by LMS for its stake, over 26 per cent more than the carrying value in its accounts, represents a 5.3 times return on cash invested and an eye-catching internal rate of return of 52 per cent since acquisition in 2009. More importantly, this disposal boosts the company's net asset value per share by 4p to 92p. It also means that LMS’s book value of £172m now consists of net cash of £45m, or 24p a share.
The company’s stake in New York Stock Exchange quoted Weatherford International (WFT: NYQ), one of the world's largest diversified upstream oilfield service companies with a market value of $13bn (£7.8bn), has been gaining value too. That’s because since LMS’s financial year-end the share price of Weatherford (www.weatherford.com) has risen 11 per cent to $17.23, valuing the shareholding at £21.3m and adding over a penny to LMS’s book value per share. If you mark that stake to market value, as well as other quoted investments worth around £5m, and it now means that cash and liquid assets account for £71m of LMS’s book value of £174m. In other words 38p of the company’s current share price of 78p is either in cash or easily realisable quoted investments.
That’s well worth noting because in the March full-year results the board of LMS confirmed their intention to make a further distribution to shareholders later in the year. And as we know from past capital returns made by LMS, this has been done by buying back shares through a tender offer process with the tender price pitched at net asset value. Namely, by my reckoning the current spot book value per share of 93p is 17 per cent higher than the current share price. In other words, at some point this year the board will be buying back shares at this elevated price to the benefit of all shareholders.
Potential for valuation uplifts
There is also a realistic chance of valuation uplifts on future disposals too. And because LMS has a direct investment equity portfolio worth £43m, it is ideally placed to realise value at top dollar as it did with Updata. For instance, LMS's investment in US-based Nationwide Energy Partners looks promising. The company specialises in the design, installation, operation and maintenance of private electric distribution systems for new housing communities. The business also offers full-service account management of electric and water utilities, including sub-metering systems, meter reading, billings and collections. It is a high-growth business generating double digit revenue growth. LMS's shareholding in Nationwide Energy Partners was last valued at $16.3m (£9.8m), or 6.25 per cent of the £157m portfolio.
LMS also has a stake, valued at £5.5m, in UK-based Entuity, a leading provider of network management software, enabling systems integrators and enterprise customers to deploy and manage complex networks, reduce network downtime and ensure network configuration compliance. Entuity supports hundreds of customers in over 50 countries worldwide. Products are mainly marketed through resellers, systems integrators and distributors. Three of the 'big five' in infrastructure management - BMC, IBM Global Services, and Oracle - either re-license, re-sell, or recommend Entuity's solution for their frameworks. LMS booked a £2.6m valuation uplift on this investment holding at the year-end revaluation.
The company also has around £69.1m invested in funds, most of which are minority stakes, consisting of US and UK buy-out and venture capital funds and UK property.
Balancing risk and rewards
As I see it the main risk here is not a fall in the value of investments, as there should be ample scope for further valuation uplifts, but foreign exchange risk. That’s because a significant proportion of the investment portfolio is denominated in a currency other than pounds sterling, principally US dollars. As a result changes in the value of the US dollar impact the sterling-denominated valuation of the company's US investments. For example, around 59 per cent of the portfolio at the end of last year was denominated in US dollars, so with the US dollar weakening against sterling, this resulted in an unrealised foreign currency loss of £2.2m. As is common practice in private equity investment, it is the board's policy not to hedge the underlying non-sterling investments, but this does create risk.
That said, with the company making decent headway towards selling off its investment portfolio in order to wind up the company, and with the shares trading well below my conservative spot net asset value estimate of 93p a share, I can see further upside potential. The most likely catalysts for which will either further asset sales at above book value or a further capital returns which we know will be announced later this year. In fact, I feel that the shares could easily offer 10 per cent upside over the next six months to my new target price of 88p.
So having first advised buying LMS shares at 54.5p in February 2011 ('Capital returns', 11 Feb 2011), and subsequently advised selling back a total of over a third of your holdings through a tender offer at 84p at the end of 2012, and at 90p last summer through a tender process at 90p a share, I still feel there is further upside to come. On a bid-offer spread of 78.5p to 79.25p, LMS shares rate a low-risk buy.
Please note that I am working my way through a long list of companies on my watchlist that have reported results or made announcements recently including: IQE (IQE), Pure Wafer (PUR), (LMS), Communisis (CMS), Eros (EROS), Inland (INL), Netplay TV (NPT), API (API) H&T (HAT) and Record (REC).
