How the 2012 Bargain Shares portfolio fared

However, the time has come to decide whether the upside potential on each of the portfolio's 10 constituents is substantial enough to justify still holding them or whether the capital could be better redeployed into my 2013 Bargain Shares portfolio. So, having run the rule over all of my 2012 Bargain Share holdings, I advised selling shares in four of them last week: Telford Homes (TEF), MJ Gleeson (GLE), Mallett (MAE) and Rugby Estates (RES) ('Taking profits after a winning streak', 28 January 2013). Updates on those four companies are detailed below as is my latest advice on the other six companies in the 2012 Bargain share portfolio: investment company Trading Emissions (TRE); Indigovision (IND), a pioneer in security surveillance systems; specialist engineer Molins (MLIN); book publisher Bloomsbury Publishing (BMY); stamp and collectables retailer Stanley Gibbons (SGI); and investment company Eurovestech (EVT).

Telford Homes (TEF)

Aim: Housebuilder

Share price: 201p

Bid-offer spread: 198p-201p

Market capitalisation: £99m

Website: telfordhomes-ir.co.uk

The bumper gains in the past year have been driven by two of my picks in the property sector: East London housebuilder Telford Homes (TEF: 203p) and housebuilder and strategic land specialist MJ Gleeson (GLE: 180p). I am still positive on the sector, which is why I advised buying the eight FTSE 350 homebuilders at the start of the year, a trade that is working out well. However, having more than doubled in the past year, shares in Telford are now priced on a 33 per cent premium to Shore Capital's March 2014 NAV estimate of 152p and are rated on 11 times earnings estimates for that financial year. Those forward ratings represent a significant premium to the sector average and it’s time to bank those huge gains on Telford. Take profits.

MJ Gleeson (GLE)

Main market: Urban regeneration & strategic land specialist

Share price: 180p

Bid-offer spread: 178p-180p

Market capitalisation: £94m

Website: mjgleeson.com

When I advised buying shares in urban regeneration and strategic land specialist MJ Gleeson (GLE) the price was 111p, a significant discount to book value of 184p, even though a chunk of those assets were in cash, housing inventories and plots of land. However, after a stellar run the shares hit a high of 191p on Thursday 24 January to bring the valuation bang in line with the company's NAV. True, the majority of the UK-listed housebuilders are rated on premiums to book value and Gleeson is undoubtedly well-placed as these players compete to buy land off the company to support their own development pipelines.

However, the valuation anomaly I identified a year ago has now been corrected and it's time to book profits here, too. Take profits.

After a stellar run shares in MJ Gleeson are now in line with its NAV.

Mallett (MAE)

Aim: Art dealer

Share price: 65p

Bid-offer spread: 62p-65p

Market capitalisation: £8.5m

Website: mallett.co.uk

It's time to call time on Mallett (MAE), one of the UK's oldest dealers in high-quality antique furniture and works of art. A year ago the company looked well on the way back to trading profitably following the move from its London showroom in New Bond Street to an 18th century grade I listed townhouse in Mayfair's Dover Street. The building not only provides more accommodation for the company's works of art, primarily 18th century and Regency period furniture, clocks and pictures, but slashed the annual rent bill from £1.2m to £550,000.

True, the shares are priced well below book value of 111p, a valuation that certainly looks attractive to activist investor Peter Gyllenhammar, who controls 25.9 per cent of the share capital. However, Mr Gyllenhammar has yet to make a move and Mallett has reported that after an encouraging first half trading conditions have become far more challenging, particularly in New York where Superstorm Sandy affected the company's New York showroom. As a result, analysts at N+1 Singer expect Mallett to post a loss of £0.4m for 2012 and, bid possibilities aside, there no longer appears a catalyst for a re-rating. Sell.

Rugby Estates (RES)

Aim: Real estate

Share price: 345p

Bid-offer spread: 325p-345p

Market capitalisation: £4m

Website: rugbyestates.plc.uk

The investment in Rugby Estates (RES), a small-cap property company in the process of winding itself down, has not gone as planned. That's because a tough secondary market in commercial property is making it difficult to realise the value of the company's assets close to book value, a fact I underestimated when I advised buying in February. Latest guidance is that investors will receive a further return of capital of between 370p and 470p a share, with a return nearer the bottom of that range likely. In the circumstances, I advised selling up last week at 330p a share to crystallise a loss of 9.6 per cent after factoring in the 250p a share of cash returned in June (through an issue of 'B' and 'C' shares) and a three-for-seven share consolidation. The funds will be better redeployed in my 2013 Bargain Shares portfolio where the potential for gains is far greater. Sell.

Trading Emissions (TRE)

Aim: Closed-end investment company

Share price: 23.5p

Bid-offer spread: 23p-23.5p

Market capitalisation: £57.5m

Website: tradingemissionsplc.com

When I advised buying shares in investment company Trading Emissions (TRE) a year ago, they were trading on a huge discount to book value. That was mainly because investors could not quantify with any degree of certainty the carbon emission reduction (CER) liabilities of the company. However, that has all changed and management has since gone into great detail about how these liabilities are being contained. In turn, this enables investors to get a grip on what the underlying value in the business really is and, importantly, how much of the company's net assets will be returned to shareholders as Trading Emissions winds itself up.

Last month the company made a 6p a share cash distribution to investors, but with the shares still trading 60 per cent below pro-forma book value of 58p a share, and further returns likely as the portfolio of carbon and private equity investments is disposed of, then there should be more upside to come. Adjusted for that dividend, Trading Emissions' book value consists of a carbon credit portfolio with a negative liability of £17m, or 6.8p a share; a private equity portfolio worth £114m, or 45.7p a share; and net cash of £46m, or 18.4p a share.

But the company's investment adviser, EEA Fund Management, calculates that the net liability payable by Trading Emissions to acquire contracted CERs is £33.6m, assuming the worst-case scenario where spot prices fall to zero, and after taking into account portfolio hedges already in place. In other words, having renegotiated a number of these CER contracts after the carbon price collapsed, the maximum possible liability to Trading Emissions equates to 14p a share, which would reduce its NAV by a further 7p to 51p a share. Importantly, the cash pile of 18.4p a share covers all of this 14p a share liability, so there is no further recourse to shareholders. In fact, as these contracts are wound down, Trading Emissions will be able to return more cash to investors which is why the shares remain a buy.

Indigovision (IND)

Aim: Security

Share price: 320p

Bid-offer spread: 316p-320p

Market capitalisation: £24m

Website: indigovision.com

Shareholders in Edinburgh-based Indigovision (IND), a pioneer in internet protocol network-based security surveillance systems have endured a rollercoaster share price ride in recent months. At one point the shares hit a high of 565p on 16 October, a hefty 73 per cent above my advised buy-in price of 325p. Since then the company has paid out dividends of 75p a share and the shares have pulled back to languish around my buy-in price.

True, management didn't upgrade guidance for the current financial year to July 2013 at the annual meeting in November, as clearly some investors had hoped given the number of earnings upgrades over the past year. However, it seems lost on them that the company is still on course to deliver 30 per cent earnings growth in the current 12-month trading period. Indeed, first-quarter revenues to the end of October 2012 grew by 6 per cent and order intake increased by over 10 per cent, continuing the improvement seen in the second half of the prior financial year. Moreover, analysts remain comfortable with their forecasts. Jon Lienard at broking house N+1 Singer Capital Markets still expects revenues to rise from £30.3m to £32.4m in the year to the end of July 2013, which would drive pre-tax profits up from £3m to £3.7m to produce EPS of 32.7p, up from 25p in the prior year. In other words, at the current price, the company is being valued on 10 times earnings estimates. Also, the prospective dividend is 12p a share, so the forward yield is a healthy 3.8 per cent.

It's also worth noting that even after paying out 80p a share in dividends last year, Mr Lienard expects the company to have net cash of £2.8m, or 37p a share, by the July year-end. Strip out that cash pile and the shares are being priced on 8.8 times full-year EPS estimates. It also seems lost on some investors that the company has not actually warned on profits, but has simply said that profits will be more heavily weighted to the second half of the current financial year. Buy.

Molins (MLIN)

Main market: General industrials

Share price: 163p

Bid-offer spread: 159p-163p

Market capitalisation: £32m

Website: molins.com

Specialist engineer Molins (TRE) has provided us with total gains of over 50 per cent to date, but the real excitement has yet to come.

That's because around 60 per cent of sales come from the tobacco industry, where Molins specialises in improving the effectiveness of existing customer plant, monitoring and testing product quality and conducting the analysis of cigarette smoke. This is the high-end part of the business, accounting for a quarter of revenues, and a likely source of some exciting news if, as expected, Molins' tobacco testing business, Arista Laboratories, receives a boost in demand for its services resulting from tighter US regulations being implemented by the Food & Drug Administration (FDA).

The US regulator has now heard representations from cigarette manufacturers in advance of issuing guidance on testing requirements with a view to tightening up the testing regime for harmful compounds found in tobacco smoke. The new regulations will be published in April. Admittedly, the timescale and nature of the FDA testing regime is uncertain, but what is not in doubt is that Molins is well-placed to capitalise on the opportunities, especially as Arista has a significant logistical advantage and a marketing one, too, to attract new business for its onshore US testing services.

In fact, analysts believe that several of the major tobacco manufacturers, which currently do the testing of these compounds in-house, will have to outsource much of it in future if the FDA dramatically expands the number of harmful compounds on its consultation list. In turn, this could offer a real opportunity for Molins to grow its testing business. So, in advance of the FDA making its announcement, I remain a buyer of Molins' shares on nine times earnings, especially as a positive outcome would underpin the 10 per cent profit uplift being forecast for the company in 2013. Buy.

Bloomsbury Publishing (BMY)

Main market: Publishing

Share price: 114.5p

Bid-offer spread: 114p-114.5p

Market capitalisation: £87m

Website: bloomsbury-ir.co.uk

Growing demand for ebooks is doing wonders for Bloomsbury Publishing (BMY), the company best known for weaving its magic with JK Rowling’s Harry Potter books and making magical profits from the titles, too.

In the six months to the end of August, ebook sales rocketed 89 per cent to £4.5m to account for 10 per cent of the publisher's revenues and the company has since revealed that they ramped up a further 58 per cent year on year in the final four months of 2012. Bloomsbury's exposure to this fast-growing segment is clearly positive, but this does have an impact on the timing of the revenues since these sales generally peak in January and February following the sale of e-reader devices at Christmas. Moreover, academic sales, another major revenue stream for the publisher, peak at the beginning of the academic year, in September and October. Since these two revenue streams now account for a higher proportion of total turnover, the proportion of the company's profits accruing in the second half of the financial year increases. This not only skews the results, but also means that the risk to earnings is greater, too, which creates uncertainty.

To some degree this is what we witnessed in a trading statement a few weeks ago when Bloomsbury's chief executive, Nigel Newton, noted that: "We will only begin to have visibility of post-Christmas returns and the important post-Christmas ebook sales over the next six weeks…the results for our 2012-13 financial year will be dependent on these and the completion of several contracts under negotiation." Uncontracted and budgeted rights sales of £2.7m have yet to be signed and there is a risk that these could fall into the following financial year if they are not completed by the 28 February year-end. Clearly, this adds risks to brokers' estimates, which is why investors have not reacted more positively to the trading update.

Even so, the current valuation seems harsh as, based on Peel Hunt’s full-year pre-tax profit estimate of £11.7m, the company is expected to report adjusted EPS of 12p and pay a dividend of 5.5p for the 12 months to the end of February 2013. For the following year, pre-tax profits of £12.2m are forecast to produce EPS of 12.7p and support a raised dividend of 5.7p. On that basis, the shares, at 114.5p, trade on less than 10 times earnings and offer a yield of 4.9 per cent. Net of cash, that multiple drops to nine times prospective earnings. Bloomsbury's shares are also priced a hefty 24 per cent below NAV of 150p a share. Buy.

Stanley Gibbons (SGI)

Aim: Stamps, rare coins & memorabilia

Share price: 288p

Bid-offer spread: 283p-288p

Market capitalisation: £82m

Website: stanleygibbons.com

Stamp collecting may not be to everyone's taste but, in these uncertain times, it is proving a highly profitable business for Stanley Gibbons (SGI), the most famous name in stamps and a company that has been around for over 150 years.

That's not to say that the business is stuck in some bygone age as Stanley Gibbon's management has been embracing the digital age. For example, the company's internet sales from its core website rose by 55 per cent last year, having risen by 67 per cent in 2011. So, to tap into this lucrative area, Stanley Gibbons bought a US-based online collectibles trading platform, bidstart.com, in order to accelerate the company's online presence by using its own expertise, brand, network and financial strength to create a much bigger collectibles trading platform for bidstart. Stanley Gibbons raised £6m through a placing to fund the purchase and investment in bidstart's technology, marketing and staff.

The company has also been tapping into the collectibles market, a move that looks well-timed since chief executive Martin Bralsford expects "the current interest in collectibles as an alternative asset class to increase further in 2013, evidenced by the size of our current order book, as the economic climate results in a desire for investors to allocate more capital into tangible assets."

Investors clearly like the investment case, which explains why the shares are up 62 per cent on a year ago and now trade on 16 times earnings estimates. That is hardly a bargain, but the company has some substantial assets including a £7m cash pile and a stockholding of top-quality rare collectibles, which, according to analyst Charles Hall at broker Peel Hunt, are in the books at £20m and "worth £50m at retail prices". These provide asset backing for 70 per cent of the current share price and I would run your profits.

Shares in Stanley Gibbons are up 50 per cent on a year ago.

Eurovestech (EVT)

Aim: Pan-European development capital fund

Share price: 6.75p

Bid-offer spread: na

Market capitalisation: £22m

Website: eurovestech.co.uk

Long-term shareholders in pan-European development capital fund Eurovestech (EVT) have been well rewarded for their loyalty over the years. However, given the lack of trading in the shares, and following consultation with major shareholders, the board delisted the shares from AIM in late September and they are now traded on a matched bargain facility through London Matched Markets Limited. We bagged a dividend of 1.38p a share at the time, so net of that cash return Eurovestech shares, at 6.75p, are currently priced on a huge 57 per cent discount to NAV of 15.98p.

True, liquidity may not be great on London Matched Markets, but a discount of that magnitude is very harsh considering the company's portfolio of investments has been performing incredibly well. In fact, Eurovestech sold off a 40 per cent stake in one of its investee companies, KSS Fuels, to Invesco Asset Management for £7.2m in cash last autumn. KSS Fuels is a fast-growing and profitable company and a global leader of fuels pricing and retail network planning solutions, servicing over 400 customers in 80 countries. To put this deal into perspective, Eurovestech's remaining 60 per cent holding in KSS Fuels has a book value of £10.8m, or 3.25p a share, and the company also has net cash of £4.6m, or 1.4p a share. Strip these out from the last reported net asset value and this means that all the other investments - worth 11.33p a share - are being valued at a ludicrous 2.1p a share. At this depressed level, Eurovestech's shares are worth holding onto for medium-term gains. Hold.

Bargain Shares Portfolio 2012 update