I first made the case for investing last summer when the company's shares were trading at 9.5p and reiterated the advice in the autumn when the price had risen to 11.25p. Since then the company has returned 2.5p a share in cash, or £10.2m, to shareholders through an issue of 'B' and 'C' shares, so our entry points can be adjusted to 7p and 8.75p, respectively. The good news is that with the shares currently trading on a bid-offer spread of 9.75p-10.25p, many of you will be sitting on some decent profits if you followed the advice.
But having seen the price drift back from a high of 11.88p last month, the market is offering us yet another decent entry point if you are willing to take a 12-month time-frame. That's because Spark Ventures is in the process of selling off its investment portfolio and has a deadline of March 2014 to do so. Importantly, the board has not been slow to return cash to shareholders either, having announced £26.4m, or 6.6p a share, of distributions in the past four years. It's also worth noting that, once adjusting for those cash returns, the company's net asset value (NAV) has risen by 56 per cent since October 2009, so the portfolio has performed pretty well, too.
Count that cash
Moreover, there is obvious value still within the company as, adjusting for those capital returns, Spark Ventures' NAV is now 13.66p, or £56.1m, whereas at the current share price its market value is only £42m. And, even though the board returned £10.27m to shareholders earlier this year, I reckon that once you factor in the £2.5m cash received in January from the first proceeds from the sale of chip designer Aspex, the £250,000 proceeds from the sale of a 30 per cent stake in SPARK Venture Management, and restricted cash of £1.8m, then pro-forma net cash is currently around £4.55m, or 1.1p a share. That cash pile can only grow further because, following the sale of Aspex to Ericsson, Spark is due a final cash payment of £3.25m, or 0.8p a share, in late 2013/early 2014.
There is also clear value to be realised in the other 15 remaining investments Spark currently holds (worth £48.9m).
Valuable investments
For example, the value of Spark's holding in the world's leading music publisher, Kobalt, has risen by 11 per cent in the financial year to the end of September. Spark realised £3.5m selling down its stake last summer, but still retains a holding worth £8.83m in a company that controls a 14 per cent share in both the US billboard market and the UK singles publishing market. If that was not impressive enough, Spark's stake in London-based internet marketplace notonthehighstreet.com has surged from £4.5m to £10.2m since September 2011, and that's after Spark sold off £800,000 of its holding when Fidelity Investments bought in at as part of a funding round last May. The company looks ideally placed to capitalise on further upside from a business that offers merchandise from around 2,000 specialised UK-based retailers.
The investment case is even more compelling when you consider that Spark Ventures is a founder investor in Mind Candy, the company behind Moshi Monsters, a developer of skill-enhancing games designed to enable children to connect safely with each other in a social network. Moshi Monsters now has an overseas client base in over 180 countries, boasts over 50m registered players globally and has the best-selling children's magazine in the UK. Spark sold half its holding in Mind Candy for £3.1m in 2011 and retains a £3.15m investment (based on a £129m value placed on that business) and owns a further stake worth around £250,000 through its holding in Firebox, an online seller of gadgets, toys and games.
Low risk investments
So, by my reckoning, Spark's holdings in notonthehighstreet.com, Kobalt, Firebox and Mind Candy have a combined value of £22.4m, or 5.5p a share, which could be easily realised. Add to that the current cash pile of £4.5m, or 1.1p a share, and the £3.25m cash outstanding from Ericsson on the Aspex sale (or 0.8p a share) and 7.4p of the current share price of 10.25p is backed by cash or these realisable investments. And that's assuming there will be no more upside in these investments between now and when they are sold. But, even if there isn't, this means that Spark's other 11 investments (excluding the cash outstanding on Aspex) are in effect being attributed a value of just 2.85p, or £11.7m, even though they have a book value of 6.26p, or £25.6m. That looks incredibly harsh since one of those investments is a £15.5m holding in IMImobile, a highly profitable provider of the technology infrastructure for mobile data, voice and video services to mobile telecom operators and media companies.
Management incentivised
It's worth noting, too, that the management team making the disposals are incentivised to obtain the best possible prices because they will receive 15 per cent of future distributions made to Spark shareholders once 11p a share has been paid out, falling to 5 per cent once 14p a share has been returned. It's therefore reassuring that non-executive director Michael Whitaker, previously founding chief executive of Spark, is one of the largest shareholders, with a 5.6 per cent stake, so has an interest in the disposals being made for the highest possible price.
So not only are management's and shareholders' interests aligned but, with the portfolio performing well and disposals surpassing expectations, a further distribution to shareholders of 12p a share, or £49.2m, looks a realistic - if not a conservative - possibility over the next 12 months. That's after factoring in a fairly generous £6.8m of wind-up costs, management incentives and property liabilities. Needless to say, I rate Spark Ventures' shares, at 10.25p, a medium-term value buy and have a fair value price target of 12p over the next 12 months.
■ Finally, I will be taking a four-week break during April to complete a book on 'Stock-picking for profit', 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 42 online articles, all of which are available on my homepage. These include articles on the following companies this week:
Netplay TV (Another roll of the dice, 12 March 2013)
Global Energy Development (Patiently waiting, 12 March 2013)
US equity market trade (Profit from St Patrick's Day, 11 March 2013)
