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OPINION

Take time out to consider Oakley

Take time out to consider Oakley
April 25, 2016
Take time out to consider Oakley

It has been doing rather well, having has just reported a 10 per cent increase in net asset value (NAV) to 200p a share in the second half of 2015, a performance that completely reversed the dilutive impact of an equity-raising that raised £130m at 165p a share last April.

 

Largest investors in Oakley Capital

InvestorPercentage of equity owned
Woodford Investment Management20.1
Invesco Perpetual19.9
Ruffer18.7
Sarasin & Partners10.2
Fidelity Worldwide Investment5.9
Henderson Volantis Capital5.4
Red Rocks Capital4.6
Rathbones3.4

 

The funds were raised to take advantage of co-investment opportunities alongside Oakley private equity funds that the company has substantial interests in. The company has been doing just that and no matter which way I look at it, the 30 per cent share price discount to book value is an anomalous rating given the track record of the fund's investment advisers: NAV per share has doubled since listing in August 2007, during which time the FTSE All-Share has produced a total return of 7 per cent. In fact, I was so convinced by the investment opportunity that I included Oakley's shares in my 2016 Bargain Shares portfolio.

 

How Simon Thompson's 2016 Bargain share portfolio has fared

Company TIDMOpening offer price on Friday, 5 February 2016 (p)Latest bid price on Thursday, 21 April 2016 (p) Percentage change (%)
JuridicaJIL41.257.539.6%
BowlevenBLVN18.93521.513.5%
Mind + MachinesMMX8912.5%
BioquellBQE14916510.7%
VolvereVLE4194558.6%
Gresham HouseGHE312.53223.0%
Walker CripsWCW44.944-2.0%
Gresham House StrategicGHS796770-3.3%
Oakley Capital OCL146.5136-7.2%
French ConnectionFCCN45.742-8.1%
Average return   6.7%
FTSE All-share  324034807.5%

 

Furthermore, having taken a close look at Oakley's results for the 2015 financial year, it's clear to me that the valuation is completely out of sync with a company that produced a 33 per cent return on its investment portfolio in that 12-month period, driven by strong increases in the cash profitability of the investee companies. In terms of the portfolio mix, investments in the private equity funds account for 41 per cent of Oakley's NAV of £382m; equity co-investments a further 7 per cent; loans to the portfolio companies around 23 per cent; and cash and interest receivables about 29 per cent.

This means that, once you strip out a £110m cash pile (including interest receivables) worth 58p a share, then Oakley's investment portfolio (valued at 142p a share) is in effect being attributed a value of only 82p in the current share price, or 42 per cent less than its book value. That's a bargain-basement valuation in my view considering the scope for further significant gains from mature companies in the portfolio.

 

Time Out primed for valuation gains

For instance, the company's largest equity holding is in media group Time Out, the globally recognised brand of city-based leisure magazines. Oakley made its first investment in late 2010 with a view to transforming a print brand into a leading digital platform with freesheet publications. It has succeeded as Time Out is now a multi-platform media and e-commerce business with a content-distribution platform comprising free magazines, mobile apps, website, live events and the new Time Out Market subsidiary. Time Out has a presence in 107 cities across 39 countries and has a worldwide audience reach of 100m consumers.

Half of the brand's annual revenues of £28.5m are derived from print, but the digital side is exploding, growing at a compound annual rate of 22 per cent between 2010 and 2015. By the end of last year, monthly page views on Time Out's websites had soared to 135m, up from 33.8m in 2010. The content is ideal for tablet and mobile access as it enables consumers to access local information in real-time. It's also easy to monetise through advertising, sponsorship, events and media partnerships with leading global brands (such as Apple and Google); through consumer offers, mainly loyalty cards and tickets; and business listings - a premium subscription product that enables small businesses to list and enhance their profile in return for a monthly listing fee.

The move to a free print model is clearly paying off: total revenues at Time Out London rose by 8 per cent within a year of adopting the free model and it now has a weekly readership in excess of 1m. The expanded circulation through a free print model not only enables advertisers to reach a broader readership, but also target the affluent millennial audience, too.

The key point is that Time Out has an enterprise value of £106m in Oakley's latest accounts, or 3.7 times its annual revenues, well below the valuation multiplies for the likes of TripAdvisor (5.9 times enterprise value to revenue multiple), Priceline (7.5 times), BuzzFeed (12.5 times), or Vox Media (16.7 times). It's not unrealistic to expect the valuation disparity to close in an IPO scenario, or well before then. In fact, analyst Connor Finn at house broker Liberum Capital can see the value of the company's holding rising from 20.7p to 37p per Oakley share simply based on Time Out generating revenue growth of 10 per cent over the next couple of years and the enterprise value to revenue multiple expanding to five times. I think that could be a conservative estimate.

I would also flag up that the above Time Out valuation excludes the £7m co-investment Oakley made in Time Out Fly Pay, a mobile ordering and payment app (a pay-at-table concept for restaurants and bars). The investment is being used to scale up this business by expanding both its restaurant partners and customer base. Nor does it include a £5.6m investment in Time Out Markets, in which Oakley has a 75 per cent equity stake. Last year, Time Out was selected to manage a large part of the historic Mercado da Ribeira in Lisbon, the second most visited attraction in the city and an area I visited last September. The 7,000 sq metre space includes 23 mini restaurants, eight bars, six gift shops and hosts numerous cultural events. It's profitable, too, having made cash profits of £1m in 2015. Similar concepts will be opened in London, New York, Berlin and Dubai. Oakley also made a direct £13.3m co-investment last summer in Time Out Group, using the cash from the April fundraising, so in total all these investments account for 17 per cent of Oakley's NAV.

 

A favourable wind in its sail

I also believe there is significant valuation upside in Oakley's shareholding in North Sails, a world leader in sail-making with operations in 29 countries and a 63 per cent share of the racing sails market. The holding accounts for 7 per cent of Oakley's NAV. North Sails offers a resilient revenue stream, given that wear and tear results in a high recurring replacement cycle.

There is a growth angle, too, in the apparel side of North Sails' business as the brand was underexploited prior to Oakley taking its stake in the company a few years ago. Since then it has been relaunched as an aspirational lifestyle brand under a new management team with experience and a successful track record in this industry. New collections have been launched to serve consumers in the medium to premium price points, and the company is expanding overseas, with a focus on the US and Europe, having previously been primarily an Italy-focused operation. There is also a co-investment opportunity for Oakley in the rollout of stores, which will bring the brand to urban consumers.

The important point being that if you assume a modest 5 per cent cash profit growth in the core sail-making business, and mid-teens growth in the apparel segment, albeit off a very small base, then it's not difficult to envisage Oakley's stake in the business rising sharply between now and the end of next year. In fact, Liberum's model suggests the attributable value in North Sails could rise by more than 40 per cent to 20p per Oakley share by December 2017 based on these assumptions and using a cash profit multiple of 11 times, up from 10.4 times in 2015.

 

A profitable education

Oakley's stake in Educas Investments, a leading international schools group, is of keen interest too. The business comprises 18 premium private schools, of which half are based in South Africa with the rest in Australia, the UK, Switzerland, Colombia and Kenya. This holding accounts for 7 per cent of Oakley's book value.

The international private education sector is highly fragmented, with the majority of schools operating as single units. Educas is seeking to take a share of this market via a buy-and-build strategy, with a focus on South Africa, where Educas has partnered with a property developer to develop greenfield schools to take advantage of the growth of private education in the country. The number of independent schools in South Africa increased from under 1,000 to almost 1,600 between 2000 and 2013, mainly due to the emergence of a more affluent middle class where aspirational parents are seeking alternatives to state schools.

Strong cash flow generation, high revenue visibility and generally upward-only school fees make for a strong investment case. Furthermore, Oakley's investment in Educas looks conservatively valued on 10.5 times cash profits to enterprise value, a third less than the rating of New York Stock Exchange-listed Nord Anglia Education. But even if we only tweak that multiple up to 11 times and factor in mid-teens cash profit growth this year and next, the value of the holding rises from 14p to over 22p per Oakley share. Those assumptions don't seem unreasonable.

 

Price comparison sites booming

I can also see significant upside in Oakley's stake in Italy's largest car insurance broker and price comparison website, Facile.it. Italy has one of the largest car insurance markets in Europe, alongside the UK and Germany, with an annual gross written premium of €20bn (£15.7bn), but the share of online transactions is significantly below other countries. In fact, around 80 per cent of all car insurance is taken out online in the UK, but only 10 per cent in Italy.

However, the share of business carried out by price comparison websites is steadily increasing. Facile.it has a 67 per cent share of the online car insurance market, leaving it well placed to take advantage of the growing trend for market switching, not only on car insurance, but on a diversified range of products it offers, including gas and electricity, broadband internet services, bank accounts and mobile phones. Indeed, the company now helps around 2.2m Italians a month to compare prices on key items of household expenditure. And the increasing adoption of price comparison sites by consumers is driving Facile.it's profits up sharply and leading to chunky revaluation gains for Oakley's stake.

In fact, assuming a continuation of recent trends, analysts at Liberum factor in cash profit growth of 25 per cent for Facile.it this year and next. If achieved, this should boost the valuation of Oakley's stake from 18p to 33p a share.

 

Investments with potential

Oakley's stake in Parship, Europe's leading online dating business, looks interesting too. The business, which has more than 10m registered users and has been signing up 1m new registered users a year, has been benefiting from an increase in the number of single people, the popularity and growing acceptance of online dating, and the rise of consumer usage of mobile devices. These trends have enabled online dating companies to reach a wider and younger demographic, and drive up user engagement. They are also driving profits, with Liberum forecasting 20 per cent annual cash profit growth for Parship this year and next, which would in turn boost the valuation of Oakley's investment from 15.9p to 28.7p a share.

The bottom line is that if the investee companies meet the above targets, then Oakley's NAV per share is likely to rise to 224p by the year-end, and I wouldn't bet against Liberum's prediction of 252p by December 2017. On an unwarranted 38 per cent discount to prospective book value, I rate Oakley's shares a strong buy and have an initial price target of 180p. Please note that I have taken into account the fact that Oakley's eight largest investors own 89 per cent of the issued share capital when making this recommendation. Buy.