To recap, the company paid a special dividend of 1.32p a share last autumn following a part sale of one of its investments, details of which I will go into later on, and then subsequently moved its trading facility to the London Matched Markets Exchange (LMMX) share matching facility, formerly JP Jenkins (www.lmmx.co.uk). The rationale for the move to LMMX was that the low trading volumes in the company's shares didn't warrant maintaining a listing on Aim. In the first half of last year, there were only 335 bargains in Eurovestech shares and the average daily trading volume was a miniscule 0.04 per cent of the issued share capital.
In the circumstances, and given the company has no need for further funding, the board wanted to save the £125,000 annual costs of staying on Aim - equivalent to 12.5 per cent of Eurovestech's annual running costs - and delisted the shares on 24 September. However, as a result of the move, the shares have fallen way below the radar of most investors and are treading water at the same price as they were at the time of the delisting.
Moreover, having advised buying the shares at 9.3p in February 2012, then net of the special dividend of 1.32p we are still 1p a share under water on the investment. This is incredibly frustrating because, if anything, the investment case is even more compelling now than when I first advised buying the shares 18 months ago.
Deep discount to sum-of-the-parts valuation
In fact, the shares are trading on a huge 55 per cent discount to net asset value of 15.6p a share, even though the company was sitting on cash and cash equivalents of £5.33m, worth 1.6p a share. In addition, Eurovestech owns a 60 per cent stake in KSS Fuels worth £10.8m, or 3.32p a share, having sold a 40 per cent stake to Invesco Asset Management for £7.2m in cash last autumn. KSS Fuels is a fast-growing profitable company and a global leader of fuels pricing and retail network planning solutions, servicing over 400 customers in 80 countries, including North America, Europe, Japan, South Africa and Australasia.
Importantly, Eurovestech's stake in KSS will have increased in value since the last valuation in December 2012. That's because KSS reported record results a few weeks ago, growing revenues by over 15 per cent to more than $24m (£15.5m) in its latest fiscal year, driven by increases in both of the company's core business segments: retail fuel pricing and retail network planning solutions. In Europe, major new retail fuel pricing deals were signed and in Japan and South Africa significant growth in retail network planning solutions contributed to the large increase in revenue. Furthermore, buoyed by record revenues for fiscal 2013, the board of KSS expects that profits will hit a record, too. Management is forecasting further top line growth in the year ahead.
We will have to wait to see the figures, but in the 2012 fiscal year, KSS Fuels achieved revenues of $21m (£13.6m) and generated underlying cash profits of $1.2m. At the current valuation, the business is being valued on less than 1.2 times current year sales and less than 20 times pro forma cash profits. Neither metric looks extended for a business growing this quickly, so expect a valuation uplift in the investment when Eurovestech reports its own full-year results in September.
But even without a revaluation, there is solid asset backing here: Eurovestech's cash on the balance sheet and the stake in KSS are worth 5p a share alone, or 70 per cent of its current share price. And, clearly, if the company's board could find a buyer for 40 per cent of the share capital of KSS last autumn, the current valuation looks well underpinned given the operational progress KSS has made since then. What this also means is that Eurovestech's other investments, worth 10.6p a share, are in effect being valued at a bargain basement 2p a share.
This is plainly absurd since these investments include a valuable shareholding in Maxifier, a company which helps publications maximise results of their advertising campaigns. To give you some background, Maxifier opened its first office in Japan in January last year and signed its first local contract with Recruit, a major Japanese publisher. Maxifier's global presence has attracted recognition and support in the industry, which in turn led to one of the leading innovators in global advertising, Dentsu Digital Holdings, making a strategic investment in the business a year ago. This followed additional funding rounds with other third party investors. As a result, Eurovestech's 44.6 per cent shareholding in Maxifier's is worth £7.4m, or 2.2p a share.
An absurd valuation
In other words, the stakes in Maxifier, KSS Fuels and cash on the balance sheet cover Eurovestech's share price completely. This leaves investments worth 8.6p a share in the price for free! And it's not as if they are poorly performing investments, either.
For instance, Eurovestech owns a 16.5 per cent stake in ToLuna, a leading online panel and survey technology company, providing digital data collection and consumer insight to research agencies, businesses and individuals.
Operating from 17 offices in Europe, North America and Asia Pacific, ToLuna has built one of the largest and most diverse qualified online panel communities in the world, with more than 4.8 million respondents from 39 countries. The business is also benefiting from the movement of market research services online. US spending on online surveys in 2012 was in excess of $2.4bn (£1.56bn), and European spending in excess of $0.9bn.
ToLuna has also started to benefit from the shift to mobile devices, which enables surveys to be completed while people are waiting for a plane, commuting to work or even standing in a queue. This provides immediate feedback from consumers at the "moments of truth" when they decide to make a purchase or react to an advertisement. In North America, around 10 per cent of surveys which were previously taken on desktops are taken on mobile devices; for 18 to 24 year olds the figure is 18 per cent.
It's certainly a fast growing segment of the market to be operating in. ToLuna was recognised in Investec's "Top 100 fastest growing private companies" in the UK last year, in which ToLuna was ranked fourth. The rankings were based on compound annual growth rates of sales over a four-year period, based on accounts filed up to February 2012.
At the time of ToLuna's delisting from Aim, the company was valued at £161m, although it also had £13m of cash on the balance sheet. Currently, Eurovestech's shareholding in ToLuna, which was taken private in April 2011, is in the books at £23.8m, or 7.2p a share. This valuation implies the equity of ToLuna is worth £145m. True, the debt structure will have changed since the delisting, but this still looks a conservative valuation for a fast growing company. It's also an investment in Eurovestech's share price for free!
Target prices
So, although Eurovestech's shares have failed to make any headway since the delisting 10 months ago, you cannot knock the operational progress the investee companies have been making, nor uplifts in the valuation. True, a liquidity discount needs to be applied to Eurovestech shares on the basis they are traded off market, but in my opinion, a 55 per cent discount to book value is far too wide. To put this undervaluation into some perspective, Eurovestech is being currently valued at £23.2m, almost £30m below its net asset value of £52.7m.
It's also my view that, if you have the patience, the shares are likely to deliver especially as Eurovestech's board have committed to "drive value from the portfolio and release surplus cash for shareholders". Chairman Richard Grogan noted that this policy was "being pursued with vigour" at the time of Eurovestech's half-year results. For a company so undervalued that is something well worth considering. My target price is 10p a share, which, if achieved, would still mean the portfolio is being conservatively valued on a 40 per cent discount net of cash on Eurovestech's balance sheet. Medium-term buy.
Please note that I will update the investment case on both Inland (INL: 32p) and WH Ireland (WHI: 59p) as soon as I have completed my research and analysts have released their updated estimates.
Finally, I updated the investment case on 11 small-cap shares in three other online articles yesterday: Small-cap wonders; Deep value plays and Small cap trading buys. I have also analysed the investment case on four other small cap companies in three online articles today: Running profits; Capitalising on capital returns; and Indigovision shares slump on warning.
