And one special situation that is paying off handsomely is Russian-focused investment company Aurora Russia (AURR: 39.75p).
From Russia with profit
If you followed my advice to buy shares in Aurora Russia at 30.5p, a price that was freely available ('Time to play Russian roulette', 4 Feb 2013), you will be showing a 30 per cent paper profit on your holding in less than three months. Moreover, there is a real prospect of further gains to come in the next month.
That's because the company is now sitting on a healthy cash pile, following the sale of Aurora's 92 per cent-owned subsidiary OSG Records Management to private equity firm Elbrus Capital, in a deal worth up to £30.3m. The sale price is the equivalent of 27p per Aurora Russia share, which is 5p a share more than I had factored into my break-up value of the company when I first advised buying the shares at 30.5p.
In my original calculations I had calculated a break-up value of 45p a share for Aurora after factoring in: a 40 per cent haircut to the carrying value of Aurora's stake in Unistream Bank and DIY retailer Superstoy in a fire-sale scenario to value these stakes at £16.6m, or 14.8p a share; an exit from Flexinvest Bank would bring in £9m (or 8p a share) after deducting the £3m value of the bank licence (these figures have been estimated by broker Jefferies); cash on the balance sheet, property assets and trade receivables would cover all liabilities including management fees, realisation fees and operating expenses.
But with the investment in OSG bringing in 27p a share (albeit 3p a share of that is dependent on the March 2014 earn-out terms being met and a further 2.4p a share will be held in escrow subject to any warranty claim), then a 45p a share net cash return to shareholders is looking conservative. That's because it assumes a 60 per cent haircut on the 25p a share carrying value of the stakes in Unistream Bank and Superstoy, which is now looking overly cautious.
A win-win situation
In a trading update this week, Aurora's board announced that the unaudited net asset value of the company was 52.7p a share at the end of March 2013. This valued the stakes in Unistream Bank, Superstoy and Flexinvest at £32m, or around 28.5p a share. All of these investments are being marketed for sales, so it is reasonable to assume this valuation is a fair indication of the market price achievable.
The board also announced a tender offer for 38m shares, or around 34 per cent of the company's issued share capital, at 52.3p a share. However, Aurora's shareholders can tender all their shareholdings if they so wish above this basic entitlement. Excess tenders will only be satisfied on a pro-rata basis, to the extent that other shareholders tender less than their basic entitlement. Results of the tender offer will be announced on 30 May and cheques for the tendered shares will be sent out on 6 June.
So, if you followed my advice to buy Aurora's shares at 30.5p in early February, I would advise you to tender all of your shares at 52.3p. You have absolutely nothing to lose by doing this. At worst, you end up with 34 per cent of your holding repurchased by the company at 52.3p a share. This reduces your carrying value on the remaining 66 per cent of your Aurora shareholding to only 19.5p. That's half the current share price. And if some shareholders don't tender all of their basic entitlement, then you hit the jackpot. It's a win-win situation. The record date to be eligible for the tender offer is close of trading on Monday 6 May, which given the bank holiday means that the shares have now gone ex-entitlement to participate in the tender offer.
A seismic contract
When a director splashes out over £500,000 of cash buying shares in his own company, it is always worth investigating. In the case of Aim-traded Thalassa Holdings (THAL: 141p), a company that was founded in September 2007 by executive chairman and former banker Duncan Soukup to acquire marine seismic equipment, the share-buying is quite significant.
That's because Thalassa has just signed a contract with Statoil ASA (NO: STL), the Norwegian energy company listed on the Oslo and New York Stock Exchanges, 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. Thalassa's portable modular source system equipment will be installed on vessels to provide a seismic source and enable Statoil to perform life of field seismic studies and permanent reservoir monitoring.
The seismic acquisition contract is for an initial fixed term until the end of 2017 and Statoil has the option to extend the contract by two further terms of two years each. The total contract value, excluding any extensions, is $32m (£21m), and this could double to $65m if Statoil exercises options to extend the contract by a further four years. In addition, Thalassa will also supply Statoil with a bespoke dual portable modular source system. The value of that contract is $19.8m. The first survey is scheduled to start on 1 October over the Snorre field.
So to raise working capital to service this huge contract, Thalassa has issued 4.5m new shares at 120p, or approximately 28 per cent of the enlarged issued share capital. Mr Soukup purchased 10 per cent of the new shares at a cost of £537,000 and now owns 28.2 per cent of the 16.3m shares issued. That's quite some investment and one that is worth following, especially as the company's finances were sound prior to the fundraising. In fact, the company had net cash of $2.5m at its December year-end.
To put the size of the contract into some perspective, Thalassa reported pre-tax profits of $1.25m on revenues of $14m last year, to produce EPS of 10¢ (6.7p). In other words, the annual revenues on the fixed-term element of the Statoil contract equates to over half of last year's revenues.
New contract wins
Thalassa has been winning other new contracts, too, reflecting the growing demand for its technology from oil and gas exploration and production companies looking to perform life of field seismic studies or permanent reservoir monitoring. Earlier this year, the company announced one with SMG Ecuador, the Ecuador business of State Sevmorgeo Company, the Russian geological sea survey company. This contract runs between February and June this year and is worth $6.7m, or almost half of Thalassa's revenues in 2012. This not only underpins current year revenues, but highlights the growing demand for the company's services.
Even without any further contract wins, analyst John Cummins at broker WH Ireland expects the company's turnover to more than double to $28m in 2013, to produce pre-tax profits of $2.4m and EPS almost 40 per cent higher at 13.7¢ (8.8p). This is purely based on contracted revenue to date. In 2014, the broker expects a further 25 per cent hike in pre-tax profits to around $3m. But as Thalassa wins further new contracts and upgrades come through, there should be significant potential upside to these earnings estimates.
Priced slightly above the level of my original buy recommendation ('Potential for seismic gains', 19 Mar 2013), the market has yet to wake up to the fact that Thalassa is in the early stages of an earnings upgrade cycle. On a bid-offer spread of 135p to 141p, the shares are seriously undervalued from my lens and a target price of 200p a share is not unrealistic for a company that is on course to increase profits by at least 150 per cent, and potentially significantly more, over the next couple of years. It's worth taking Mr Soukup's lead. Buy.
MORE FROM SIMON THOMPSON ONLINE...
My next article will appear online by 12pm on Thursday 2 May. I have also written two other online articles so far this week, both of which are on our home page:
'Seasonal stock picking strategies', 30 Apr 2013
■ My new book Stock Picking for Profit will be published at the end of May and is being sold only through YPDBooks at £14.99 plus £2.75 postage and packaging. Pre-orders can be placed online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213.
