Time to 'arb' away the valuation anomaly
The company I have uncovered, Marwyn Value Investors (MVI: 143p), has been under my watchful eye for some time now as I have been waiting patiently to press the buy button. I think that time has now come because the share price discount to net asset value has widened to such an extent that the downside risk looks virtually non-existent and a 20 per cent-plus re-rating in the share price looks firmly on the cards. Let me explain.
The company was created in April 2008 through the amalgamation of two Marwyn funds and was admitted to trading as a closed-end investment company on the Specialist Fund Market of the London Stock Exchange in December 2008. The investment objective of the company is simple: to maximise total returns through the capital appreciation of its investment in Marwyn Value Investors LP, an open-ended fund domiciled in the Cayman Islands, which was launched in March 2006 with backing from more than 60 leading institutions and alternative funds.
Marwyn Value Investors LP specialises in the acquisition of growth businesses by taking significant stakes in quoted portfolio companies and has so far invested in 13 portfolio companies which have together completed 68 transactions, with an aggregate transaction value in excess of £1bn. It has been successful, having generated net asset growth of 140 per cent in that period.
Hidden value in the portfolio
Currently, the ordinary shareholders of MVI have interests in five companies: film producer Entertainment One (ETO); healthcare software company Advanced Computer Software (ASW); Breedon Aggregates (BREE), the largest independent aggregates company in the UK; specialist asbestos services company Silverdell (SID) and transport and consumer goods investment company Marwyn Management Partners (MMP). Of these companies, all bar Marwyn Management Partners, which only accounts for around 2 per cent of net assets of MVI, are Investors Chronicle buy recommendations.
Moreover, shares in these companies have been soaring since MVI last updated the market. For instance, shares in Entertainment One, which has just completed the acquisition of Alliance Films to become the largest independent film distributor in Canada and the UK, have risen 10 per cent since 18 January as investors warm to the earnings-enhancing deal. Even now, shares in Entertainment One are still only rated on 11 times EPS for the 12 months to March 2013, dropping to 10 times the year after. Given that the investment in the company accounts for more than 75 per cent of MVI's net asset value then prospects for the two companies are closely interlinked. But even though shares in Entertainment One have rallied 46 per cent off their lows last May, shares in MVI have only risen by 16 per cent in this time, which means the share price discount to net asset value has widened further. That's important because, by my reckoning, the investment in Entertainment One, a company with a £500m-plus market value, is now worth more than MVI's own market value.
Of interest, too, is the investment in Advanced Computer Software (ASW). Half-year figures from the healthcare and business software specialist revealed robust sales growth and impressive cash-flow generation. Underlying cash profit jumped 10 per cent to £13.2m, while cash generated from operations rose 9 per cent to £12.3m. The cost-saving IT solutions offered by the company are clearly proving popular in the current climate, which is hardly surprising. The shares are proving popular, too, having soared by 40 per cent from 60p at the end of September to 83p now. In fact, the value of MVI's investment has increased in value by almost 20 per cent in the past three weeks alone. By my reckoning, MVI's holding is now worth around £25m.
And it is not the only share price gathering momentum as MVI's investment in Silverdell has soared 45 per cent since late September and is up 12 per cent in the past three weeks. The company offers specialist asbestos services in the UK by providing environmental, remediation and consultancy services across diverse end-user markets including government, retail, utilities, nuclear, marine and petrochemical. To highlight the growth potential in this business, it's worth considering that the price has more than doubled since we first tipped the shares at 7.25p two years ago, and yet the shares still trade on just nine times forecast earnings.
True, the share price of Breedon Aggregates is unchanged since the last investment update from MVI but, taking all the gains into account, by my reckoning MVI currently has a net asset value well over 10 per cent higher than the 186p a share reported on both 18 January 2013 and 28 September 2012. But MVI's share price, at 135p, is barely changed, having been 127p at the end of September and 130p a month ago. On this basis, I calculate that shares in Marwyn Value Investors (MVI), are priced at a third below net asset value which is anomalous to say the least considering the buoyant performance of its shareholdings and the operational performances from the companies to back up those.
Share price breakout looms
Interestingly, ordinary shares in MVI are now priced just below their September to December highs around 144p and look poised for an imminent breakout. That would certainly be justified based on the performance of the portfolio and the operational performance of the constituent companies. Priced on a bid-offer spread of 140p to 143p, I rate Marwyn Value Investors' (MVI) ordinary shares a very strong trading buy and have a conservative three-month target price of 165p, which, if achieved, would narrow the share price discount to current book value to around 20 per cent. Please note that Marwyn also has a 'B' class of shares, which I am not recommending buying.
■ Please note that I have released another two online articles today - Seeking alpha among the housebuilders and A share set to hit the jackpot - both of which are also available on my homepage. I will also be releasing another online exclusive on Tuesday morning. 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. Please note that my next online exclusive column will appear on my homepage tomorrow morning.
MORE FROM SIMON THOMPSON ONLINE...
Since the start of this year I have written no fewer than 24 online articles, all of which are available on my homepage. These include articles on the following companies or investment strategies:
Oakley Capital, Randall & Quilter, Inland, Terrace Hill, Heritage Oil, Cairn Energy, Polo Resources, Trifast, Noble Investments, Fairpoint (Bargain Shares for 2013, 8 February 2013)
Telford Homes, MJ Gleeson, Stanley Gibbons, Molins, Indigovision, Trading Emissions, Mallett, Bloomsbury Publishing, Rugby Estates, Eurovestech (How the 2012 Bargain Shares fared, 8 February 2013)
Future (Decision time after a bright start, 5 February 2013)
Sanderson (An 'app' online investment, 5 February 2013)
Aurora Russia ('Time to play Russian Roulette', 4 Feb 2013)
BP Marsh & Partners ('Hyper value gains', 31 Jan 2013)
Bellway ('Profit from the London property boom', 30 Jan 2013)
Telford Homes, MJ Gleeson, Mallett, Rugby Estates ('Taking profits after a winning streak', 28 Jan 2013)
Market timing ('Lessons to learn', 24 Jan 2013)
Communisis, Netcall ('Bumper trading gains', 23 Jan 2013)
Crystal Amber, API, Sutton Harbour ('More upside to come', 22 Jan 2013)
PV Crystalox Solar ('Seeing the light', 21 Jan 2013)
Bloomsbury Publishing ('A publisher for the digital age', 18 Jan 2013)
Housebuilders first-quarter effect and performance table on all my recommendations from the final quarter of 2012 ('Stockpicking Marvels, 16 Jan 2013)
Eros ('A share firmly in the picture', 15 Jan 2013)
Netcall ('Jumping the gun: take two', 15 Jan 2013)
Moss Bros, Communisis ('Jumping the gun', 14 Jan 2013)
Stanley Gibbons, MJ Gleeson, Spark Ventures ('Small cap wonders', 11 Jan 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 Jan 2013)
Air Partner ('A share ready to take off', 7 Jan 2012)
FTSE 100 traded options strategy ('Highly profitable options', 3 Jan 2012)
Telford Homes, MJ Gleeson, Molins, Noble Investments ('Rampant bargain shares', 31 Dec 2012)
