Bargain share portfolio 2009

GNE Group (GNE: 150p, Market capitalisation £20.9m)

Website: www.gnegroup.net

Investment company

Imagine being able to buy £1 of assets for just 57p. Better yet, imagine that £1 was all cash to start with. It may seem incredible but this is exactly what is on offer at GNE, a company that recently sold off its main petrol stations operations in a £51.6m cash transaction. That allowed GNE to pay down all its borrowings. Apart from some remaining commercial property assets and a very small fuel cards business - the combined value of both have a book value of around £3.1m - by my calculations the company is sitting on £36.6m of net cash, worth 263p a share, and has a net asset value of £39.7m, or 282p a share.

Despite this chunky cash pile shares in GNE are trading at 150p, valuing the company at just £20.9m. In other words, at this price we are getting 113p a share of cash for free as well as other assets worth around 19p a share.

It is worth pointing out that the company had intended to return 150p-a-share cash back to shareholders through a special dividend last month. However, these plans changed when a concert party, controlling 28.7 per cent of the share capital, approached the board with a proposal to turn GNE into an investment trust targeted at the technology sector. The party is led by Martyn Ratcliffe, chairman of small-cap software company Microgen.

True, it is possible that if shareholders approve the change in strategic direction, the new management team could destroy shareholder value by making some poor investments. However, it is worth noting that Mr Ratcliffe has bought a chunky 15 per cent stake in GNE and has been appointed to the board so he has a clear vested interest in enhancing shareholder returns. He also has the backing of North Atlantic Smaller Companies Trust which has a 11.6 per cent stake in GNE. And let's not forget that we can take a chance on GNE because we are buying into that 263p a share cash pile at just 150p a share. On a bargain rating of 1.75, GNE gets my vote.

Mallett (MAE: 50p, market capitalisation £6.9m)

Website: www.mallett.co.uk

Antique dealer

Mallett may be one of the oldest dealers in high-quality antique furniture and works of art, but it has not been immune to the impact of the credit crunch and deteriorating economic conditions. Job losses among wealthy clientele in the City, and shrinking fortunes of the super wealthy, have sent a chill through its upmarket showrooms in New Bond Street, London, and Madison Avenue, New York. Ironically, for a company accustomed to spotting a bargain, shares in Mallett have dropped so far that they are now in the bargain basement having fallen 70 per cent in the past 12 months.

To put this into context, Mallet's last reported net asset value of £25m (June 2008) is 3.5 times higher than its current market value of £6.9m. Of these assets Mallett owns freehold property worth £2.1m and short leasehold property valued at £2.5m. But even if we ignore these bricks and mortar properties, there is a further £19.6m of inventories on the balance sheet.

Borrowings are not high either, with net debt of £579,000 at June 2008 equating to only 2 per cent gearing. Moreover, the company confirmed in mid-December that it was able to increase banking facilities by £1m "on competitive terms" to give it additional working capital headroom. That is likely to be needed because, after recording an operating loss of £328,000 in the first half of 2008, Mallett will report a loss for the full year, too. However, the board is addressing its cost base and intends to sell the lease on the premises in New Bond Street - which is now predominantly a fashion street dominated by high end retailers - with a view to taking lower-cost premises elsewhere in Mayfair. It has also replaced its chief executive and appointed new directors to head its sales, marketing and operations.

Admittedly, trading could get far worse before it gets better. But with tighter cost and inventory control, Mallett should comfortably make it through the downturn. And when the economic upturn emerges, and profits return, it is highly unlikely the shares will be trading on a vast 73 per cent discount to net assets. On a bargain rating of 2.93, the tightly-held shares - five shareholders control around 70 per cent of the share capital - rate a long-term buy.

Trafficmaster (TFC: 16p, market capitalisation £21.9m)

Website: www.trafficmaster.co.uk

Satnav & vehicle tracking services

Shares in Trafficmaster - one of the leading suppliers of satellite navigation and commercial vehicle tracking systems - have endured the type of horrendous crash that the company's products help its customers avoid.

The derating has been so severe (shares down 70 per cent in the past 12 months), that the company's market value is now 50 per cent below its last reported net asset value of £42.7m. On an earnings basis, the shares are also lowly rated: based on flat pre-tax profits of around £4.7m for 2008, they trade on five times earnings estimates of 3.16p a share. For 2009, analysts at Cannacord Adams expect profits of £5.6m and EPS of 4.1p.

This bombed-out valuation reflects the fact that the slowdown in consumer spending has hit sales of high-end cars such as BMWs, in which Trafficmaster has installed systems, and sales of satellite navigation systems, to which it provides services. Still, the company's consumer division remains highly profitable, generating £2.9m annual trading profits and boasting over 100,000 subscribers paying an average of £80 a year in fees. Plus there are another 700,000 end users who use Trafficmaster's navigation, speed camera warning, stolen vehicle tracking and traffic services.

Trafficmaster also has a business services operation, offering fleet tracking and management services mainly in the US, which has been prospering as corporate customers look to minimise overheads. Revenues rose 16 per cent in the first half of 2008, and were up by a third in the third-quarter alone. This business not only benefits from a high oil price - which increases fuel costs and the need for companies to target more efficient road usage - but also from the economic slowdown as Trafficmaster's Fleet Director product reduces fleet management costs. That said, it is taking longer to sign up new contracts than previously as potential customers have been asking for longer evaluation periods before signing up.

It's worth noting that the company has been keeping a close eye on cash generation and paid down £1.1m of borrowings in the third quarter of 2008 and a further £2.3m in the fourth quarter to leave it with net debt of £8.2m at the year-end. That equates to balance sheet gearing of around 19 per cent, with borrowings well within total bank facilities of £13.3m. The latter includes a seven-year term loan of £5m repayable at the rate of £208,000 per quarter between March 2007 and March 2013 and a £10m credit facility secured on property assets worth £14.2m. The company has two facilities with Barclays and these are not up for review until March 2011 and December 2012, respectively.

So with Trafficmaster well within its banking covenants, cash generation improving (so lowering borrowings and interest costs) and its technology offering cash-conscious businesses a way of reducing fleet costs, the derating is overdone. On a bargain rating of 0.63, the shares have scope to step up a gear or two.

BATM Communication (BVC: 24p, market capitalisation £95.5m)

Website: www.batm.com

Broadband & telecom systems

Profits have been booming at BATM, a company affectionately known in the City as 'Batman'. The business designs and makes broadband and telecom systems that manage the bottleneck of high quantities of data flowing across both wireless and fixed-line networks.

Demand for BATM's services has been robust in recent years and in a trading statement, ahead of preliminary results in March, the company confirmed that revenues last year exceeded $132m (£96m), a rise of 35 per cent on 2007. This is a highly profitable operation, too, boasting gross margins of around 47 per cent in 2008, and given the strong sales growth, broker Shore Capital expects pre-tax profits to rise from $22.1m to around $31.9m (£23.5m) in 2008, giving EPS of 7.7¢ (5.4p). To put that into perspective, BATM has a market value of £95.5m, meaning the shares trade on a miserly 4.5 times post-tax earnings.

BATM is also attractively priced relative to its book value of 20p a share with all current and non-current liabilities covered by a cash pile of $60.1m (£42m), the equivalent of 10.6p a share. With cash generation strong, net cash is forecast to rise to $75m by the end of 2009. It's also reassuring that chief executive Dr. Zvi Marom owns a 22.7 per cent stake in the business, so he has a vested interest in making sure that the interests of the board and outside shareholders are aligned.

However, despite robust trading the shares have been weak, reflecting poor sentiment following profit warnings from major telecoms networks groups such as Nokia and the recent bankruptcy of Nortel. As a result, analysts have been taking a conservative view and have reined back earnings estimates for this year even though BATM has not reported any significant change in customer behaviour in terms of cancellations and deferrals of contracts.

But even if analysts at Singer Capital Market are correct in predicting a 30 per cent fall in pre-tax profits and EPS to $22.2m and 5.2¢, respectively, in 2009, the shares still only trade on 6.5 times earnings. That rating looks unwarranted for a company defensively positioned in its industry since telecoms networks will still need to expand capacity to support new data intensive applications and products. On a bargain rating of 0.5, and trading close to net asset value, BATM rates a long-term buy.

French Connection (FCCN: 48p, market capitalisation £46m)

Website: www.fcuk.com/investorrelations

General retail

The dire macro economic backdrop, and the sharp slowdown in consumer spending, helps explain why shares in French Connection have lost 60 per cent of their value in the past 12 months. However, the company will be one of the survivors in the retail sector as it has a robust balance sheet to weather the slowdown. Remember it has been through recessions before, having been founded by chief executive and chairman Stephen Marks in 1969.

At the end of July, French Connection had net assets of £111m. Even if we attribute no value at all to the company's non-current assets of £33.2m - including property worth £14.8m - it still had adjusted net assets of £78.4m after deducting £54.6m of total liabilities from current assets of £133m.

This compares favourably with French Connection's market value of £46m, which is firmly underpinned by £35m of net cash at the end of July. True, that cash pile had fallen to £20m by the end of October, but this was ahead of the winter selling season when the business runs high levels of inventories. So expect cash levels to have increased significantly when French Connection reports results in March for the 12 month trading period to 31 January 2009. Between October 2007 and end-January 2008, net cash rose by £23m as inventories were turned into cash, so it is not inconceivable that French Connection could be currently sitting on a cash pile close to its market value.

Admittedly, this depressed valuation reflects the tough trading conditions the business is facing. In the 16 weeks to the end of November, underlying sales had risen by only 1 per cent in the UK and European retail business (accounting for 49 per cent of total turnover) and were down in the wholesale business (21 per cent of revenue). The company also has exposure to the US retail market - 22 per cent of annual revenue - although the surging value of the dollar will help offset the impact on lower profits here when these are translated back to sterling.

So don't expect much in the way of profits or dividends this year, although the dividend (1.7p a share interim and 3.3p final) may not be under as much threat as some analysts believe since Mr Marks still controls 41 per cent of the shares capital, so has a vested interested in the payout being held.

Without doubt French Connection is a share for the long-term, but on a bargain rating of 1.7, it is worth backing.

Trikona Trinity Capital (TRC: 34p, market capitalisation £79m)

Website: www.trinitycapitalplc.com

Investment company

Trikona made it into my Bargain portfolio two years ago and duly delivered a 12 per cent return over the next 12 months. However, since then the shares have plunged and, at 34p, trade on a 75 per cent discount to net asset value of 138p a share, little changed from 12 months ago.

True, investors reducing their emerging market exposure will have played a part in this since the investment company has a focus on Indian infrastructure projects. But the shares have fallen so far that the market is now attributing virtually no value at all to the company's £301m investment portfolio. Strip these investments out and Trikona's current assets of £96m cover all its £35m liabilities. The difference of £61m is only slightly below the company's £78m market value.

The board is now conducting a review of the company's investment policy and strategy regarding distributions of capital after activist shareholder, Carrousel, which has built up a 14.3 per cent stake in Trikona, called for a break-up of the fund. Carrousel now has two non-executive directors on Trikona's board.

One way or another something has to give as Trikona's current market value of £78m seriously undervalues its £301m investment portfolio. On a bargain rating of 0.77, there is real value here.

BARGAIN SHARE PORTFOLIO FOR 2009