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Investment company watch

Investment company watch
January 5, 2017
Investment company watch

I highlighted the possibility of mergers & acquisition activity in my column a week ago when I rated the shares a buy at 200p ('A quartet of small-cap value buys', 28 Dec 2016), having previously advised buying at 198p in the autumn ('Riding small-cap bumper gains', 24 Oct 2016) after initiating coverage at 88p ('Hyper value small-cap buy', 22 Jan 2012).

It's proved a great investment for shareholders, too. Following a strategic review carried out by investment bank Canaccord Genuity, American global financial services company BGC Partners is acquiring Besso for an enterprise value of £70.5m, placing a value on BP Marsh's equity holding of £20.6m. To put this sum into some perspective, it's £500,000 ahead of the last valuation in BP Marsh's accounts, 48 per cent higher than the carrying value when Besso commenced a strategic review, and a thumping sevenfold increase on its original £2.8m investment. BP Marsh also has a £1.36m loan outstanding to Besso which will be repaid on completion of the deal. As a result, BP Marsh will have about £18.4m of cash available for new investments after transaction costs and tax, representing 25 per cent of its last reported net asset value (NAV) of £73.8m, or 253p a share.

I would also flag up that BP Marsh's loan portfolio of £15.2m, worth 52p a share, includes a £6m loan to privately owned global insurance broker Hyperion Insurance on which it earns annual interest of £450,000 and is due for repayment in October. This means that cash, loans, receivables and the cash proceeds from the Besso disposal are worth 150p a share, or almost 70 per cent of the current share price. That's rock-solid asset backing.

It's hardly surprising that investors have reacted positively and shares in BP Marsh are making solid progress towards my 230p target price. With valuation uplifts likely on the balance of BP Marsh's £53m equity portfolio when the company reports its full-year results to the end of January 2017, I feel my target price of 230p is now looking increasingly conservative. Guidance is for a 10 per cent hike in the dividend per share to 3.76p, too, a payout clearly well supported by the ongoing strong investment performance and one that has seen the company grow NAV per share at a compound annual growth rate of 11.3 per cent since 1990. Buy.

 

Burford's legal eagles hit the jackpot

BP Marsh is not the only company on my watchlist that has made a significant disposal. The same is true of Aim-traded Burford Capital (BUR:618p), a provider of investment capital and professional services for litigation cases. The company announced earlier this week that it has sold several million dollars of participation interest in its investment relating to the 2012 expropriation by Argentina of a majority interest in YPF, the New York Stock Exchange-listed energy company formerly owned by Repsol, the Spanish energy major.

At the time of the expropriation, Repsol owned more than 50 per cent of YPF and the Petersen Group, another Spanish firm, owned 25 per cent of YPF. After suing, Repsol ultimately settled its claims and received a payment of approximately $5bn (£4bn) from Argentina and YPF. Burford has been appointed to provide financing to the liquidators of the Petersen Group, which went bankrupt after the expropriation, who are proceeding with claims worth $3bn against both YPF and Argentina. Burford is entitled to 70 per cent (less expenses to take its recovery to below 60 per cent) in the YPF-related claim. To date, Burford has invested $17.5m (£14.3) of capital, but the pricing of the sales of participation interest in the Petersen claim implies a value for Burford's investment of more than 10 times its investment to date, which if realised, would make it the most successful investment the company has ever made.

I highlighted the possibility of a bumper windfall from the Petersen claim in quite some detail a couple of months ago when I strongly advised running profits on Burford's shares at 505p ('Targeting record highs', 21 Nov 2016), having initiated coverage when they were priced at 146p in the summer of 2015 ('Legal eagles', 8 Jun 2015). In that November article, I flagged up that analyst Trevor Griffiths at broking house N+1 Singer had spotted that Judge Preska of the US Federal District Court (New York Southern) had just issued her 47-page opinion and order concerning the defendants' (Argentina and YPF) motion to dismiss the plaintiffs' action. The judge found for the plaintiffs effectively on all points, which means not only is there a case to answer, but the probability of ultimate success for Burford and its client has increased, albeit there is substantive litigation risk, and the claim still has a long path to follow before a final outcome is known. However, in the event of a successful outcome, it's worth noting Mr Griffiths points out that the state has settled similar such cases at 50¢ in the dollar, so there is potential for a significant windfall payout for Burford's shareholders.

But even taking a valuation of $175m for Burford's investment based on the sale of the participation interests last week, Mr Griffiths at broking house N+1 Singer notes that "taxed and converted to sterling at the current spot rate we calculate this uplift to be worth just over 55p a share. This unrealised profit of about $157.5m (£129m), if confirmed, compares with implied second half of 2016 consensus revenue and operating profit expectations of $48m and $35m respectively. We doubt anything from the Petersen case has been included in consensus estimates for 2016, which therefore suggests material increases to 2016 revenue, profit, EPS and book value per share estimates will be seen".

Mr Griffiths also adds that "this item is somewhat one-off in nature, on the grounds of the size of the matter rather than the business process involved. Our price target of 583p is based on a multiple of forward sustainable earnings and as such does not include anything specifically for this and the other known case involving Argentina. The improved tangibility of the Petersen investment as a result of this transaction does appear, in our view, to merit some additional value to be incorporated in our price target".

Trading on 13 times N+1 Singer's recently upgraded 2018 earnings estimates, and after factoring in the potential for a significant realisation from the Petersen case, I continue to believe that it's worth running your massive 323 per cent paper gain on this holding. I last recommended running profits at 573p after Burford's share price rose sharply on the back of a raft of analyst earnings upgrades following its acquisition of Chicago-based GKC, the second-largest litigation finance player in the world ('On a roll', 20 Dec 2016).

So, ahead of the next trading update at the time of the full-year results on Tuesday 14 March 2017, which will undoubtedly make for a good read, I would continue to run your profits.

 

Juridica undervalued

Aim-traded shares in Juridica (JIL:18.5p), a company specialising in backing corporate legal cases in North America with its own capital in return for taking a share of the financial rewards in the event of a positive outcome, have flatlined for the past four months, but there is still potential for a higher valuation.

Juridica is in the process of winding down its portfolio and returning cash to shareholders. It's proved a decent enough investment if you followed my initial advice to buy the shares in February last year when I included them in my 2016 Bargain Shares Portfolio. Since then the company has paid out an 8p a share dividend in June, and a further 32p a share in September at a cost of US$47m 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 in my 2016 Bargain Shares Portfolio you will have almost recovered your initial capital, and still hold shares worth 18.5p each.

I last updated my view after the company released its half-year results and declared that bumper 32p a share cash dividend ('Juridica's bumper cash return, 8 Sep 2016). Admittedly, it hasn't all been plain sailing as Juridica booked an unrealised loss of $23.8m in those half-year results, of which almost 80 per cent related to a change in valuation method applied to its outstanding cases, a significant sum in relation to net asset value of $126m at the start of last year. News of that write-down prompted the share price to fall from 70p to 50p post 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 concluded that it was worth holding onto the shares because they were being priced 31 per cent below the last reported NAV of 26p even though the company retained 8p a share of cash on its balance sheet. This meant that the outstanding cases were being valued at 10p, or 45 per cent less than conservative looking valuations being applied in those half-year results. I say conservative because $18.7m of the downgrade in valuation, accounting for 79 per cent of the $23.8m write-down in the half-year accounts, largely reflects the monetisation of Juridica's remaining investments over a shorter time frame following the board's request to its investment managers to complete the run-off of the portfolio in 2017.

 

Upside from litigation cases

I also believe that the $16.5m valuation of Juridica's five outstanding litigation investments, a sum worth 12.25p a share, including reserves retained by Fields Law Firm PLLC, the counterparty to the company's aforementioned antitrust investment, should have upside. That's because 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 last year, 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 company's forthcoming full-year results in March.

Moreover, following appeal on one litigation case last year, the investment managers state 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. In other words, the $16.5m aggregate valuation of Juridica's five outstanding litigation investments, worth 12.25p a share, could have valuation upside when realised.

Of course, the lack of newsflow since my September article has not helped investor sentiment, but this should not detract from the fact that the shares are rated significantly below book value, and the decline in sterling against the US dollar in the past few months will have widened the share price discount even further. Indeed, using the current exchange rate of £1:$1.2267, down from $1.343 at the time of the half-year results in early September, and after factoring in the 32p a share cash dividend paid out on 30 September, I estimate that Juridica's pro-forma book value is $38.2m, a sum equating to 28.25p a share based on 110.34m shares in issue. That's almost 10 per cent higher than four months ago and means that the share price is now trading 35 per cent below likely year-end 2016 book value.

In my view, a discount of that magnitude is simply too deep considering the company has significant levels of cash on its balance sheet, has potential to generate gains on its remaining investments, and is likely to receive at least some of the aforementioned $23.2m in reserves held by the counterparty to Juridica's antitrust investment later this year. In the circumstances, I rate Juridica's shares a value buy at 18.5p ahead of the forthcoming full-year results in March. Buy.

 

MORE FROM SIMON THOMPSON...

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