Small cap trading plays

Please note that the offer prices used in the table to benchmark the performance were all available in the market when my articles were published online. If I have reiterated a previous recommendation, I have used the share price at the time of the new article as this is the price the shares were tradable at and represent the entry point for new trades. For instance, shares in marketing services provider Communisis (CMS) were trading at 28.5p when I initiated a buy recommendation in February last year ('A small cap trading buy', 12 February 2012), but you will note that the offer prices I have used in the table are all significantly above this price. If you followed my advice on this company you should now be sitting on bumper gains and my advice is to run your profits.

Laggards with medium-term potential

Having run through the list of companies I have written about in the past six months, only four are causing me a headache: API (API), IQE (IQE), Sutton Harbour (SUH) and Trading Emissions (TRE). Of these I can see definite recovery upside in the shares of packaging materials group API - trading on a spread of 62p to 65p - back above the 70p entry point when I first highlighted the investment case. I can also see upside in chip maker IQE after what has been a roller coaster ride and can only reiterate the comments I made last month when the shares were priced at 29p (Qualcomm news hits IQE shares, 22 Feb 2013). The sell-off post this month's full-year results that has taken them down to 26.5p is overly harsh.

Shares in Sutton Harbour have sunk and are my worst investment by far, but I see little point bailing out at such a depressed level and so far below book value of the company's assets. It may take time, but there is medium value in this situation.

Profitable gains to be made on Trading Emissions

Shares in one of the companies I advised buying in my 2012 Bargain share portfolio, Aim-traded investment company Trading Emissions (TRE: 23p), have drifted on profit taking, but I have no hesitation reiterating my buy advice with the shares trading in the market on a bid offer spread of 22.75p to 23p - a massive 56 per cent discount to proforma book value of 52p a share after factoring in the 6p a share capital return through a 'B' share issue earlier this year.

Adjust for that return and Trading Emissions' book value currently consists of a carbon credit portfolio with a negative liability of £14m, or 5.6p a share; a private equity portfolio worth £105m, or 42p a share; and net cash of £39m, or 15.6p a share. And with a further distribution to shareholders "expected to be announced in the second quarter this year", and the company actively looking to dispose of the portfolio of carbon and private equity investments, the shares are well underpinned. In my view, they are easily worth 30p on any basis and remain a very attractive trading buy ahead of news of the size of the next capital return.

Hyper value gains

Of the other active buy recommendations, Aim-traded investment company BP Marsh & Partners (BPM: 122p) is very interesting as I highlighted at the end of January (Hyper value gains, 31 January 2013). That's because BP Marsh announced that it is in discussions with a potential acquirer of all the shares it holds in global insurance broker Hyperion Insurance Group, one of the fastest-growing companies in the UK. BP Marsh's 13.84 per cent stake is in the books at £31.1m, valuing the equity of Hyperion at £225m.

At that level the holding is worth 106p a share of BP Marsh & Partners' net asset value of 178p; and once you factor in net cash of £3.3m on the company's balance sheet, worth a further 11p a share, that means the stake in Hyperion and net funds accounts for 117p of BP Marsh's current share price of 122p. This leaves a portfolio of eight other investee companies valued at £16.9m, or 57p a share, in effect in the price for free.

Moreover, with BP Marsh's shares trading on a 31 per cent discount to book value of 178p a share, the current valuation fails to acknowledge the company's enviable record of increasing net assets at an underlying annual compound growth rate of 12 per cent after running costs, realisations, losses and distributions since it was established in 1990 (excluding £10.1m raised on flotation). It was more of the same when the company reported half-year results last autumn when net asset value per share rose by more than 7 per cent from 166p to 178p year on year.

True, there is no certainty a sale of the stake will happen, but the fact that Hyperion has been lining up an IPO on the main London market later this year and BP Marsh is now talking to other parties interested in buying the whole of its stake ahead of that IPO, clearly favours a deal being done.

In my view, any news of a confirmed sale of the Hyperion stake could easily see BP Marsh’s share price move up to around 150p, of which 117p would be fully backed by cash. It would also mean that the investment in those eight other investee companies, worth 57p a share, would then be attributed a modest value of 33p. On a bid price-to-offer price spread of 117p to 122p, the shares have obvious potential.

Sky high share price gains

It's not often you get the opportunity to buy shares in a company offering a solid 6 per cent dividend yield and trading on a modest 6.5 times earnings estimates net of cash. However, that's what Air Partner (AIP: 370p), a provider of aviation services to industry, commerce, governments and private individuals worldwide, offered investors a couple of months ago when I flagged up the investment case (‘A share ready to take off’, 7 January 2013).

Other investors clearly had the same idea as shares in the company have accelerated off the runway and cruised up 20 per cent to my 370p target price (on a bid basis) on Tuesday 26 March, a few weeks after the company reported its interim results. The statement and outlook was reassuring enough for analysts at brokerage Oriel Securities to predict that Air Partner is on track to grow pre-tax profits from the £3.2m reported in the 12 months to July 2012 to £3.8m. On this basis, EPS on continuing operations rise by around 12 per cent from 21.3p to 23.8p, which means last year’s 18.3p dividend is covered 1.3 times. That cover may look a tad tight, but the board was confident enough to raise the payout 10 per cent last year and, with the company sitting on a £17.3m cash pile at the end of January, worth 168p a share, the interim payout was raised by 10 per cent to 6.05p a share. On a rolling basis, the current yield is 5.1 per cent and brokers expect the full-year payout to be around 20p a share, so the prospective yield is 5.4 per cent.

Moreover, strip out that cash pile from the current share price of 370p and, net of cash, the shares are trading on a modest earnings multiple of 8.5. Or put it another way, if you strip out that £17.3m cash pile from Air Partner's £38m market value, then a business forecast to make £3.8m of operating profit is being attributed a value of only £20.7m. So, if you followed my earlier advice to buy at 310p, I would run your profits as I can see further upside as the shares rerate.

Prepare for seismic gains

Full-year results from Aim-traded Thalassa Holdings (THAL: 146p), a company formed six years ago to acquire marine seismic equipment and, in particular, a technology called Portable Modular Source System (PMSS™), clearly show the business is moving in the right direction.

Revenues last year shot up from $2.4m to $14m which in turn drove operating profit up from $344,000 to $1.48m to produce a 140 per cent rise in EPS to 12c. This reflects the growing demand for the technology which is installed on vessels to provide a seismic source to enable oil and gas exploration and production companies to perform life of field seismic studies or permanent reservoir monitoring.

Thalassa has been winning contracts, too, and earlier this year announced one with SMG Ecuador, the Ecuador business of State Sevmorgeo Company, the Russian geological sea survey company, to provide and operate Thalassa's Portable Modular Source System as part of seismic data acquisition surveys being conducted in Ecuador by SMG Ecuador. This contract runs between February and June this year and an initial value of $4.2m has since been increased to $6.7m, or almost half of Thalassa's revenues last year. This not only underpins current year revenues estimates, but highlights the growing demand for the company’s services.

But the major catalysts for a share price rerating depends on a deal with Statoil ASA (NO: STL), the Norwegian energy company listed on the Oslo and New York Stock Exchanges, being closed. Thalassa has received and executed a letter of intent from Statoil, to provide long-term seismic acquisition services for permanent reservoir monitoring of the Snorre and Grane oil fields in the Norwegian sector of the North Sea. The seismic acquisition contract is for an initial fixed term until 2017 and Statoil has the option to extend the contract by two further terms of two years each. Subject to contracts being signed, the first survey is scheduled to commence on 1 October this year over the Snorre field. The total contract value is $32m (£21m) and this could double to $65m if Statoil exercises options to extend the contract by a further four years.

The letter of intent also covers Statoil's purchase of a bespoke dual portable modular source system (D-PMSS™), which Thalassa's WGP subsidiary will maintain and operate throughout the duration of the contract. The proposed value of this contract is $19.8m (£13.2m) and delivery of the system is expected by 1 October 2013. The procurement process for the D-PMSS™ has already started and Statoil has agreed to meet all costs incurred by Thalassa in the event that final contracts are not executed.

It goes without saying that this is a major deal which, in my view, could see Thalassa’s earnings estimates soar if a contract with Statoil is signed. This would undoubtedly put a rocket under the company’s share price and it is easy to see why. That's because after factoring in a 60 per cent earnings upgrade to 2014 estimates of around 9.3p a share I can see Thalassa producing EPS of 22.5¢, or 15p at current exchange rates. That assumes turnover rises to almost $25m to generate pre-tax profits of $3.2m in 2014, more than double profits last year. On that basis the shares, at 150p, would be trading on less than 10 times earnings – a bargain basement valuation for a company on a sharp earnings upgrade cycle.

In fact, I can see Thalassa's share price rising well above 200p on news of any formal contract with Statoil, offering us potentially 33 per cent share price upside. True, a low free float means the small cap shares are volatile and any investment in Thalassa has to come with a wealth warning given that we need confirmation of the Statoil contract to underpin further gains. That said, I believe the risk-reward favours a modest investment and continue to rate Thalassa shares a speculative buy priced on a spread of 140p to 146p.

Global Energy Development under pressure

Shares in Global Energy Development (GED: 93p), the Latin America-focused petroleum exploitation, development and production company with operations in Colombia, came under pressure today after the company reported a fall in full-year profits.

Revenue rose slightly to $44m last year, reflecting a stronger realised oil price of $98 per barrel, up from $95 per barrel in 2011, but as expected gross oil production declined from 519,000 barrels to 492k barrels due to downtime of the Tilodiran well in the Llanos Basin as flagged up six months ago. There was also a delay in completing Rio Verde 2 to a water disposal well (due to delayed receipt of approval) and as a result gross profit fell from $15m to $12.6m.

Reported pre-tax profits of $0.76m, down from $5.9m in 2011, were also hit by unfavourable currency movements of around $0.5m and net profits were hit by a major tax change by Colombia in December which distorted the earnings figures according to house broker Northland Capital. This relates to equity tax and changes that disqualify certain tax losses from previous year and led to a tax charge of $3.7m. However, expect the tax rate to normalize in future.

The good news following what appears to be a kitchen sinking of these accounts is that cash generation remains robust - operation cashflow was almost $10m last year - and net borrowings ended the year at $11.65m, equating to a modest 14 per cent of net assets of $80m. Moreover, the process to bring in a strategic partner with technical expertise and financial resources to accelerate the pace of development of Global Energy’s reserve-rich property in the Middle Magdalena field in Colombia remains on tracks and “is expected to be completed during the second quarter of 2013.” In my view, this and a recovery in profits this year against very weak comparatives will be the major catalyst to drive the company’s share price ahead over the next six months and narrow the huge discount to book value of 149p a share. So, even though Global Energy's shares have been marked down 8 per cent to a spread of 91.5p to 93p this morning, below my initial buy advice of 103p (Insiders major buy signal, 17 December 2012), I am happy holding the shares ahead of a potential farm out agreement on the Magdalena properties which can only highlight the substantial value in the company.

The luck of the Irish

Finally, if you followed my St Patrick's Day trade on the S&P 500 then you should have been able to get your capital back even though the Cyprus bombshell made life uncomfortable for us last week ('Profit from St Patrick's day', 11 March 2013). To recap I advised entering the trade when the index was around 1550 on Wednesday 13 March as the London market closed and I was looking to close it out at end of play on Tuesday, 19 March. In the event, the index closed at 1560 on Friday, 15 March and then traded as low as 1538 before closing on Tuesday, 19 March at 1548.34 (the intra day range was 1538 to 1557). If you had closed the position on Tuesday, 19 March you would have made a small loss on the trade, but with markets rallying since then there have been a number of points to exit at break-even or better in the past week since the S&P 500 has traded as high as 1564. Clearly not the result I was looking for, but not a disaster either.

Simon Thompson's shares and index recommendations since October 2012

MORE FROM SIMON THOMPSON ONLINE...

Since the start of this year I have written 52 online articles, all of which are available on my homepage. These include the following 11 articles in the past fortnight:

Housebuilders first quarter trade, Bellway, Bloomsbury Publishing, PV Crystalox Solar, Jarvis Securities ('Full house', 25 March 2013)

Bezant Resources ('Double your money on a copper bottom investment', 20 March 2013)

Thalassa ('Potential for seismic gains', 19 March 2013)

Greenko ('Buy signal flashing green', 18 March 2013)

Communisis, Polo Resources, Randall & Quilter, Terrace Hill, Fairpoint ('Bumper small-cap gains', 18 March 2013)

Sanderson ('Jumping the gun: take three', 14 March 2013)

Spark Ventures ('Spark a re-rating', 13 March 2013)

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)

Raven Russia ('A major buy signal beckons', 11 March 2013)