What really caught my eye was an announcement a few weeks ago that the company, Aurora Russia (AURR: 30.5p), has appointed N+1 Singer to act as broker and Nomad for its 92.8 per cent owned subsidiary, OSG, which plans to list on Aim after Aurora has published its full-year results for the financial year to 31 March 2013. It's a float that will appeal to UK investors since OSG is a fast-growing and profitable records management provider with operations in Russia, Poland, Ukraine and Kazakhstan. OSG's core market is Russia, accounting for 70 per cent of income, where it is a market leader servicing the needs of international and regional blue-chip clients in the banking, telecoms, retail, insurance and service sectors. The bulk of the remaining revenues comes from Poland. Primarily, the business involves the processing, scanning and safe storage of documents and data through online technology and a network of specialised service facilities.
It is a very profitable operation, too, having reported cash profits of £1.7m on revenues of £11m in the six months to end September. OSG is also fast-growing as turnover rose by 19 per cent in that half year, which translated to a £500,000 rise in cash profits given the operational gearing of the business. Importantly, these growth rates show no sign of slowing. In fact, having taken 19 months to increase the number of items in storage from 2m to 3m, it has only taken the business a further 12 months to pass the 4m mark. So, with annualised cash profits currently around £3.4m and growing fast, a carrying value of £29.9m on the 92.8 per cent stake held by Aurora looks sensible. The Aim listing of OSG should also provide the company with some significant gains as I calculate that since making its initial investment of £5.3m for a 37.1 per cent stake in 2006, Aurora has made further investments of £9.2m to take complete control of OSG as well as providing loan facilities of £3.4m.
Hidden value
The investment case becomes even more interesting when you consider that Aurora's £29.9m stake in OSG, worth 25p a share, accounted for 43 per cent of the company's net asset value of £70m, or 62.3p a share, at the end of September. To put that into perspective, with Aurora's shares trading on a tight bid-offer spread of 30p to 30.5p, the company is only being valued at £34.3m. Factor in cash of £2.1m on the balance sheet and £700,000 of property assets up for sale, and the current share price is virtually covered entirely by property, cash and that stake in OSG. That leaves holdings in three remaining investments in the price for free, including a 26 per cent stake in Unistream Bank and a 24.3 per cent stake in Superstoy, a leading DIY retailer in Russia. These are in Aurora's books at £13.6m and £14.3m, respectively, or £28m in total. That's a significant amount of money given that Aurora's board is "in discussions to dispose of these assets and expects to have concrete news to report before the company's year-end results are announced", according to chairman Geoff Miller. Those two stakes alone are worth 24.8p a share.
There could even be a cash distribution from Aurora's wholly owned subsidiary Flexinvest Bank, a Moscow-based retail bank which is now primarily focused on offering credit cards funded by both retail depositors and corporate customers. This stake is in the books for £13.2m and, when the non-core mortgage book is sold by the bank, some of the proceeds will be transferred back to Aurora.
True, Aurora has proved a dire investment since listing on Aim in April 2006 when the company raised £75m at 100p a share. Even investors who subscribed to a placing at 40p a share three years ago are still under water. However, with OSG set to list on Aim and the stakes in both Unistream Bank and Superstoy up for sale, there are obvious catalysts for the 50 per cent share price discount to net asset value to narrow markedly in the coming months. Moreover, the board made a commitment in August 2011 to realise "tangible value" for shareholders within two years, so there is a stated deadline to realise value from the four investments held.
Needless to say, I rate Aurora shares a trading buy and have an end-June 2013 target price of 45p a share. I have calculated this figure by applying a 40 per cent haircut to the carrying value of Unistream Bank and Superstoy in a fire sale scenario to value these stakes at 14.8p a share and assumed an exit from Flexinvest Bank brings in £9m (or 8p a share) after deducting the £3m value of the bank licence (these figures have been estimated by broker Jefferies); and have conservatively valued OSG at £25m, or 22p a share, to reflect likely selling in the after-market when it demerges. I have also assumed Aurora's cash on the balance sheet, property assets and trade receivables will cover all liabilities including management fees, realisation fees and operating expenses. It's time to play Russian roulette.
■ My next online column will be published on our website on Tuesday 5 February and my 2013 Bargain share portfolio will be published online on my home page at 7am on Friday 8 February. Finally, I will be taking a four-week break during April to complete a book on 'Profitable stockpicking', my follow up to Trading Secrets: 20 Hard and Fast Rules to Help You Beat the Stock Market. The book will be published in early summer.
MORE FROM SIMON THOMPSON ONLINE...
Since the start of this year I have written no fewer than 18 online articles, all of which are available on my homepage. These include articles on the following companies or investment strategies:
BP Marsh & Partners (Hyper value gains, 31 January 2013)
Bellway (Profit from the London property boom, 30 January 2013)
Telford Homes, MJ Gleeson, Mallett, Rugby Estates (Taking profits after a winning streak, 28 January 2013)
Market timing (Lessons to learn, 24 January 2013)
Communisis, Netcall (Bumper trading gains, 23 January 2013)
Crystal Amber, API, Sutton Harbour (More upside to come, 22 January 2013)
PV Crystalox Solar (Seeing the light, 21 January 2013)
Bloomsbury Publishing (A publisher for the digital age, 18 January 2013)
Housebuilders first-quarter effect and performance table on all my recommendations from the final quarter of 2012 (Stockpicking Marvels, 16 January 2013)
Eros (A share firmly in the picture, 15 January 2013)
Netcall (Jumping the gun: take two, 15 January 2013)
Moss Bros, Communisis (Jumping the gun, 14 January 2013)
Stanley Gibbons, MJ Gleeson, Spark Ventures (Small cap wonders, 11 January 2013)
IQE, Trading Emissions ('A tech share worth buying now', 10 Jan 2013)
S&P 500 portfolio of dog shares (Dog shares barking back, 8 January 2013)
Air Partner (A share ready to take off, 7 January 2012)
FTSE 100 traded options strategy (Highly profitable options, 3 January 2012)
Telford Homes, MJ Gleeson, Molins, Noble Investments (Rampant bargain shares, 31 December 2012)
