The latest share price rise was driven by a raft of analyst earnings upgrades after the company announced the acquisition of Chicago-based GKC Holdings, a fast growing law-focused investment manager and the second largest litigation finance player in the world. GKC has US$1.3bn (£1.04bn) of assets under management (AUM) in private investment vehicles and is expected to report operating profit of US$9.1m on income of US$15.4m in 2016, reflecting management fee income of between 1 to 2 per cent of AUM, and performance fees of around 15 to 20 per cent. The initial consideration of US$160m is being funded from US$93.75m of Burford’s own cash, US$43.75m is being settled through three-year loan notes, and the balance of US$22.5m is being paid to the vendors by issuing 3.7m new Burford shares, all bar 177,605 of which are subject to a three-year lock-in. An earn-out of US$15m is contingent on GKC contributing US$100m of income.
Strategically, the deal makes sense as adding GKC’s experienced team and its readily available capital enhances Burford’s ability to meet growing client demand for its services, accelerate growth and scale up its core litigation finance business. Moreover, the addition of investment management fees to the mix boosts visibility on Burford’s future income and reduces earnings volatility, as does GKC’s focus on other aspects of legal finance including the provision of capital to litigation cases after they have settled and pending approvals and payments. Importantly, given the structure of the deal, it’s immediately earnings accretive to Burford’s shareholders.
For instance, analyst Trevor Griffiths at broking house N+1 Singer has upgraded his 2017 and 2018 EPS estimates by 9.7 per cent and 15.4 per cent, respectively, to 44.1 cents and 57.7 cents, implying the shares are currently priced on 11.8 times upgraded 2018 estimates. Given the magnitude of the upgrades, it’s worth pointing out that Mr Griffiths believes that GKC will provide “high quality and low capital intensive earnings, and give Burford access to the substantial pools of available private institutional capital.” He also notes that Burford will become the clear global leader in litigation and legal finance by a substantial distance, a view shared by analyst Jonathan Goslin at brokerage Numis Securities who notes that “based on management's illustrative earnings example and GKC’s current committed and invested capital of around US$500m, we estimate GKC could contribute between US$50m to US$70m annual income to Burford over the medium-term (including performance fees of between US$45m to US$60m) and be 30 per cent earnings accretive.” Numis has raised its target price to 650p, while N+1 Singer’s new target price of 568p has already been hit.
In the circumstances, I feel that it’s still worth running your huge profits on this holding given the upside from the acquisition is yet to be fully factored into the valuation, assuming of course Burford can lift EPS by two-thirds over the next two financial years as N+1 Singer predicts. Run profits.
Oakley hits the dividend list
Private equity investment company Oakley Capital (OCL:150p) made two important announcements this month, both of which are worthy of comment. I included the shares in my 2016 Bargain share portfolio at 146p, and last reiterated that advice at the same price (‘Exploiting undervalued situations’, 31 Oct 2016) after non-executive director Peter Dubens splashed out £1.6m buying shares in his company.
He had good reason too as Oakley has sold off a controlling stake in a leading German online dating site, Parship Elite, in a transaction that resulted in an uplift of £19m over the carrying value of the holding at the half-year stage to lift the company’s net asset value (NAV) per share by 10p to 225p. Furthermore, Oakley's holding in newly listed media group Time Out (TMO:138p), accounting for a fifth of its NAV, has recovered half its post-IPO losses since the June half-year end, which adds at least 3p a share to NAV. And earlier this month, private equity firm Cinven agreed to sell Host Europe, the largest privately owned hosting provider in Europe, to GoDaddy Inc (NYSE: GDDY) the world's largest cloud platform dedicated to small independent ventures. Oakley Capital retained a minority interest in Host Europe, having sold most of the investment for a huge return almost two years ago, so Cinven’s disposal will boost Oakley’s NAV by 1.8p a share.
However, despite making thumping returns on some of its investments, analysts at Liberum Capital note that Oakley’s share price “discount to NAV is around 35 per cent which compares to a historic average of 20 per cent for the fund since inception and a current discount of 24 per cent for the direct private equity peer group (ex-3i). We also note the recent acquisition of £2.4m of shares by the managing partner of the investment manager”. One reason for the larger share price discount to NAV is the lack of a dividend, something the board of Oakley have just addressed having declared a maiden dividend of 4.5p per share in respect of the 2016 financial year. The dividend will be paid on 30 January 2017 to shareholders and the ex-dividend date is 29 December 2016.
The board intend to adopt a dividend policy which takes into account the profitability and underlying performance of the company in addition to capital requirements, cash flows and distributable reserves. Subject to any unforeseen circumstances, expect a payout of 4.5p per share for the 2017 financial year which means that the shares now offer a dividend yield of 3 per cent, so will now be on the radar of income funds.
I would flag up too that the company's investment team has been making some potentially lucrative investments. Indeed, only this morning, Oakley announced that it buying a portfolio of European real estate websites including Casa.it in Italy and atHome.lu in Luxembourg. Oakley is backing the existing management team to acquire the business in a carve-out from its parent company, REA Group (ASX:REA).
The transaction builds on Oakley's growing track record in the online consumer sector through its previous successful investments in Facile.it, Parship Elite and Verivox.de. Oakley is attracted to these business models because of the strong underlying structural market growth in these segments, their asset-light nature which leads to strong cash conversion, and the ability to accelerate performance through effective management, especially around marketing.
Moreover, a pre-close trading update at the end of January is likely to highlight a year-end NAV of at least 230p a share, up from 200p at the end of 2015, so bringing into focus the obvious value on offer in the shares without even factoring in the potential for further gains from new and exisiting investments. Needless to say, with the insiders buying – Mr Dubens bought a further 510,000 shares at a cost of £756,000 since my last article, the share price discount to NAV at extreme levels, and the company now paying a dividend, I continue to rate Oakley’s shares a buy at 150p. Buy.
Bowleven share buy-back suspended
In the summer I noted that the board of Bowleven (BLVN:24.5p), the African-focused oil and gas exploration group, has announced a US$10m (£7.7m) share buy-back programme under an authority voted through by shareholders at the 2015 annual meeting ('Bargain shares on a tear', 23 Aug 2016).
All the shares purchased have been on-market and subsequently held in treasury, so this in effect creates a floor for the share price. It makes commercial sense because the company's market value is only slightly higher than Bowleven's cash balance and massively below its last reported net asset value. Indeed, when I last advised buying the shares at 24p (‘Exploiting earnings potential, 14 Nov 2016), I noted that Bowleven had net cash of $99m (£80m) on its balance sheet at the end of October, a sum worth 24.25p a share. This means that Bowleven's Etinde Permit off the coast of Cameroon, in which it has a 20 per cent non-operated interest, having completed a farm-out deal with Lukoil and New Age at the start of 2015, and the 100 per cent equity interest in the smaller Bomono project, offshore Cameroon, are being attributed no value whatsoever in the share price. These two developments have a combined value in excess of $200m in the company's balance sheet.
Bearing this in mind, Ethinde has been valued using a long-term oil price of $65 a barrel for a project that has gross 2C contingent reserves of 290m barrels of oil equivalent; and Bomono's valuation reflects a gas price of $7 per million cubic standard feet of gas. The fact that the oil price has rallied sharply since my last article is a key reason why Bowleven’s share price hit a high of 27.5p earlier this month, well up on the 18.9p entry point in my 2016 Bargain shares portfolio. That’s because with Brent Crude now only $10 a barrel below the level at which Ethinde has been valued at then the chances of the project entering into commercial production has improved markedly. Ethinde accounts for 40p a share of the company’s net asset value of 90p, so is a significant investment.
The other reason the share price was rallying was down to Bowleven’s share buy-back programme. However, at last week’s annual meeting, Crown Ocean Capital, a Monaco-based offshore private investment vehicle with a 13.3 per cent stake in the company, voted against the motion to continue with market purchases of the shares, forcing Bowleven’s board to suspend the buyback programme. Chairman Billy Allan noted that the board "believes the actions of Crown Ocean Capital are part of a broader agenda to frustrate the strategy of the management team and to try cheaply to obtain control of the future direction of the company for its own interests. No satisfactory explanation has been provided as to why Crown Ocean Capital has voted against the resolutions, nor has Crown Ocean Capital made clear its intentions, despite having previously expressed confidence in the chairman and the executive management team”.
The share price of Bowleven pulled back from 27.5p to 24.5p post news of the suspension of the buy-back programme, albeit that’s almost 30 per cent higher than the level at which I advised buying in February. Clearly, this is frustrating, but ultimately the value in Bowleven will be fully realised when oil and gas prices recover to a level at which investors have more confidence that its projects will be commercially viable. I remain convinced that the macro risk to the oil price points to the upside, and with major producers recently agreeing to take supply off the market, then the ongoing oil price rally has potential to exceed the $65 a barrel level required to justify the valuation of Bowleven’s Ethinde investment in its accounts.
Furthermore, with the shares only trading inline with cash on the balance sheet, then these substantial investments are being underpriced in the share price. We will have to wait for Crown Ocean Capital’s next move, but at this level I remain a buyer of the shares even without a share buyback programme in place. Buy.
Amber alert for share price gains
I noted with interest yesterday’s drilling news from Aim-traded Hurricane Energy (HUR:48.5p), the UK-based oil and gas group focused on hydrocarbon resources in naturally fractured basement reservoirs and specifically on the UK continental shelf. So too did other investors whose buying sent the share price up 16 per cent to within 10 per cent of the June 2014 all-time high of 54p.
The price surge looks justified as Dr Robert Trice, chief executive of Hurricane, points out that “the Lincoln Well has discovered a significant oil column outside structural closure on our Greater Lancaster Area acreage, west of Shetland. Our initial assessment of the drilling results will be subject to refinement by analysis of wireline and sidewall core data, however, current analysis indicates that our pre-drill resource assessments - which were constrained by the oil down to in the Arco Well - of approximately 250m barrels of recoverable oil for the Lincoln prospect may be conservative”.
Analyst Dougie Youngson at brokerage finnCap has a target price of 72p on the shares, implying a valuation of £865m for the equity, noting that “Hurricane is building a huge resource base in a strategically important part of the North Sea”. He has a point as the company now has 444-470m barrels of oil equivalent of 2C Contingent Resources and 432-442m barrels of oil equivalent of P50 Prospective Resources on acreage it wholly owns. If anything, Mr Youngson's target price could prove conservative as analysts Sanjeev Bahl and Elaine Reynolds at Edison Investment Research upgraded their total risked net asset value by more than a third to 101p a share this morning, of which the the Lincoln component now accounts for 33p a share, up from 8p a share prior to yesterday's announcement. This is assuming a 60 per cent chance of success, rather than 15 per cent embedded in their previous risked net asset value estimate.
With newsflow from its wells positive, and the oil price recovering strongly, then this is rather good news for Hurricane’s shareholders, and also for Aim-traded activist investment company Crystal Amber (CRS:189p).
That’s because Crystal Amber owns a 14.5 per cent stake in Hurricane which accounted for 69.8p of its net asset value of 196.6p a share at the end of November. However, that valuation was based on Hurricane’s previous share price of 39.5p, so with Hurricane’s share price surging to 48.5p then this has added a thumping 16p a share to Crystal Amber’s own net asset value. Furthermore, by my reckoning Crystal Amber’s other top ten holdings have added 9p a share to its net asset value since the last monthly update, so spot net asset value is around 221p a share, or almost 13 per cent higher than at the last monthly update. This also means that the shares are trading on an unwarranted 14.5 per cent share price discount, and that’s before factoring in the potential for Hurricane’s share price to extend its gains.
So, having last advised running profits on Crystal Amber at 181p (‘Small cap watch’, 6 Dec 2016), having included the shares as one of the constituents of my 2015 Bargain Shares portfolio when the price was 149.25p, I now rate them an outright buy at 189p and have raised my target price to 205p. Buy.
Bilby restates results and parts company with finance director
At the start of November, Aim-traded Bilby (BILB:49p), a provider of gas heating appliance installation and maintenance services to residential and commercial properties, warned that that a large public sector customer has taken some of its previously outsourced work back in-house, and delayed other work under contract to Bilby. I rated the shares a hold for recovery at 70p on the basis that the contract loss was a one-off as the board had indicated, and because the company had also announced a number of newly awarded contracts ('On the earnings beat', 7 Nov 2016).
However, a fortnight ago, the share price fell by a third after Bilby’s audit committee concluded that the 2016 accounts (March year-end) would have to be restated in order to take into account the additional costs incurred and referred to in November’s trading update. This restatement was released in Bilby’s half year results last Friday and which revealed a reduction in revenue of £99,000 relating to disputed revenue, and an increase in cost of sales totalling £556,000 relating to delayed sub-contractor costs and changes in the terms of trade with sub-contractors.
So, having previously reported underlying pre-tax profit of £2.85m on revenue of £31.5m, excluding £1.48m of exceptional costs mainly relating to professional fees on acquisitions, amortisation of goodwill, and costs incurred in the tender process for two major framework agreements in the financial year to end March 2016, Bilby’s underlying pre-tax profit has now been restated to £2.2m to produce adjusted EPS of 5.8p.
In addition, the board also noted that delays to other contracts will impact its full year results for the 12 months to end March 2017. The company changed its house broker from Panmure to Cenkos a couple of months ago, and analysts at Cenkos have yet to produce any research, but what is clear is that after reporting first half underlying profits of £1.05m, and that’s excluding a raft of exceptional that led to a hefty reported pre-tax loss, Bilby is going to miss by a country mile the full-year adjusted pre-tax profit estimate of £5.7m which Panmure previously published in mid-July.
Finance director Katie O’Reilly has left my mutual consent which is hardly a surprise given the issues I have outlined above. Managing and business development director David Ellingham, who joined the board in 2014 and is a qualified chartered accountant, has been appointed interim finance director while a replacement is sought. The board have also slashed the interim payout by two-thirds to 0.25p a share. That’s the bad news.
But there are positives...
However, there are reasons to suggest the shares are still worth holding onto for their recovery potential.
Firstly, the company has stated that the two acquisitions it made in April, DCB and Spokesmead, are trading ahead of expectations. DCB is a provider of building, refurbishment and maintenance services to housing associations and local authorities throughout Kent, Sussex, Essex and London; and Spokemead is a specialist in electrical installation, repairs and maintenance services to local authority owned housing stock. Bilby paid £12.7m in total including earn-outs which seems a fair price based on and their combined annual profits is £2.3m in their prior financial years.
Secondly, Waltham Abbey-based property services business Purdy, which was acquired for £8.07m in the summer of 2015, is also trading ahead of management’s expectations. Purdy made proforma operating profit of £1m in the 12 months to end March 2016. The purchase expanded Bilby's services and geographical scope from its core gas maintenance installation and building maintenance services speciality into new areas of heating, building and complementary electrical services in neighbouring boroughs in north east London.
Thirdly, Bilby has collected £5m from outstanding trade debtors since the start of October which is just as well given a first half build up in its trade receivables which shot up from £11.5m to £15m. Net debt stood at £6.9m at the end of September, representing 54 per cent of shareholders funds, and funding lines look decent enough as debt facilities consist of medium-term loan of £5.46m maturing in July 2020, a commercial mortgage of £500,000 maturing in July 2025, and a 12-month rolling working capital facility of £2.25m due for review in May 2017.
In terms of future earn-outs on previous acquisitions, only 25 per cent of the maximum deferred consideration of £1.5m due in the next 12 months is payable in cash, and the plan is to cover this sum from available working capital facilities. A further £897,000 of deferred consideration is due after 12 months of which £787,000 is due in cash.
Fourthly, the company has won a number of new gas service contracts which are due to start in April including one with Shepway and East Kent Housing, the largest ever to be awarded in the county, in addition to work with the MoD, and a raft of London councils including Lambeth, Haringey, and Tower Hamlets. The ability to win new contracts suggests that the aforementioned contract loss was a one-off.
Fifthly, senior management have substantial skin in the game: founder and deputy executive chairman Phil Coppolo owns 36.4 per cent of the 39.7m shares in issue, so has every incentive to make sure the company is on a firm footing for recovery; forty-year old Leigh Copolo, newly appointed main board chief operating officer, is interested in 1.32m shares, representing 3.3 per cent of the issued share capital; and Mr Ellingham owns 2.25m shares, or 5.7 per cent of the share capital.
So, although Bilby’s shares have fallen below the 75p level at which I commenced coverage 19 months ago ('Buy-to-build' growth play, 18 May 2015), and are well down on the 175p record high hit in January this year, the company’s equity is only being valued in line with the aggregate consideration paid for the three acquisitions since Bilby listed its shares on the Alternative Investment Market in March last year. This means that the P&R business which was valued at £17m on flotation based on a listing share price of 58p is currently being ascribed a fraction of that valuation.
If the company’s senior management team can get its act in order, there should be recovery potential in the shares which are priced on just 9 times historic net earnings post the profit restatement. Hold for recovery.
