I first advised buying shares in as part of my 2012 Bargain Shares Portfolio when they were trading on the Alternative Investment Market (Aim). To recap, following a part sale of one of its investments, KSS Fuels, the company paid a special dividend of 1.32p a share to shareholders and 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 and a move to LMMX would save the £125,000 annual costs of staying on Aim - equivalent to 12.5 per cent of Eurovestech's annual running costs.
The downside of this move is that the shares have fallen well below the radar of most investors and, having advised buying them at 9.3p in February 2012, then net of the aforementioned special dividend the holding is treading water with the shares being offered at around 7.75p on LMMX at present. However, investors seem to have overlooked a major announcement concerning the company's investment in Kalibrate Technologies (formerly KSS Fuels), and one that is set to highlight the deep value on offer in Eurovestech's shares to a much wider audience once again.
Value in Kalibrate
Eurovestech has yet to release its full-year results for the 12 months to the end of June 2013, but on the basis of the half-year figures the shares are trading on a 50 per cent discount to net asset value of £52.7m, or 15.6p a share, even though the company was sitting on cash and cash equivalents of £5.33m, worth 1.6p a share.
Included in the above net assets figure is a 60 per cent stake in Kalibrate, a fast-growing profitable company and a global leader of fuel pricing and retail network planning solutions, servicing over 200 customers in 68 countries, including North America (almost half of sales) and Europe (28 per cent). The rest of the world segment accounts for a quarter of Kalibrate's total revenues and includes operations in Japan, South Africa and Australasia. The top 20 clients account for 60 per cent of revenues and retention rates are incredibly strong, too. In fact, client retention has been above 97 per cent for the past decade.
Kalibrate was a wholly-owned subsidiary until a year ago when Eurovestech sold a 40 per cent stake to Invesco Asset Management for £7.2m in cash, of which £4.5m was used to pay the special dividend. The holding is in Eurovestech's books for £10.8m, or 3.32p a share, but is worth far more than that now. We also have a catalyst to bring into focus the valuation in the holding since Kalibrate will shortly be floating on the Alternative Investment Market (Aim). Broking house N+1 Singer is the Nomad to the company and, as part of the float, the company will be raising funds through a placing. The proceeds will be used to accelerate growth through the expansion of sales in both core and new geographies; invest in product development; fund the roll-out of a SaaS (software-as-a-service) model; develop a managed services infrastructure; and repay an existing shareholder loan.
There is no doubt in my mind that Eurovestech's stake in Kalibrate will have increased in value since the last valuation in December 2012. That's because Kalibrate reported record results in its last financial year, growing revenues by over 15 per cent to £15.5m, reporting cash profits of almost £2m, up from £1.2m a year earlier, and delivering pre-tax profits of around £0.9m. This was driven by growth in both its 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.
At the current valuation, the business is being valued on less than 1.2 times historic sales and only nine times cash profits. Neither metric is extended for a business growing so quickly. In fact, Kalibrate still only has a 5 per cent share of a global addressable market worth around £300m.
It's not unrealistic to expect a significant valuation uplift in Eurovestech's holding in Kalibrate when the company reports its full-year results shortly. That's because the aforementioned placing is expected to raise £6.5m of new funds, the vendors are taking out £6.6m of cash and on listing Kalibrate will be valued at £26.3m. On that basis, Eurovestech's stake could be worth around £12.2m including cash taken out on the float. That's 13 per cent more than the holding is in its books for and would add around 0.5p a share to Eurovestech's own net asset value to take it to around 16.5p a share.
So, by my reckoning, Eurovestech's stake in Kalibrate and its own cash on the balance sheet probably equate to around 5.5p a share, which means all Eurovestech's other investments, worth 10.7p a share, are being valued at only 20 per cent of their book value.
Deep discount to sum-of-the-parts valuations
This is plainly absurd since these investments include a valuable shareholding in Maxifier, a company that helps publications maximise results of their advertising campaigns. To give you some background, Maxifier opened its first office in Japan in January 2012 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, making a strategic investment in the business a year ago. This followed additional funding rounds with other third-party investors. Eurovestech's 44.6 per cent shareholding in Maxifier's was lately valued at £7.4m, or 2.2p a share.
Eurovestech also 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 4.8m 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.
As one would expect, ToLuna is benefiting 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 ranked fourth in Investec's "Top 100 fastest-growing private companies" in the UK last year based on compound annual growth rates of sales over a four-year period.
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 means that the current valuation being ascribed to Eurovestech's equity implies the investment in Toluna is in the price for free.
Target price
So, although Eurovestech's shares have failed to make headway since the delisting 14 months ago, it's impossible to knock the operational progress of the investee companies, nor uplifts in the valuation. True, a liquidity discount needs to be applied to Eurovestech's shares on the basis they are traded off market on a matched bargain basis, but in my opinion a 53 per cent discount to my realistic estimate of book value of 16.5p a share is far too wide.
Furthermore, with the Aim float of Kalibrate due shortly, my target price of 10p a share is starting to look too conservative since it would still mean Eurovestech's portfolio is being valued on a 40 per cent discount to pro-forma book value. No matter which way I look at this, Eurovestech's shares rate a value buy at 7.75p for the medium term.
Finally, I have written two columns today, both of which appear on my home page. In response to recent newsflow, I am currently working my way through a large number of updates on the following recommendations: Bezant Resources (BZT), PV Crystalox Solar (PVCS), Crystal Amber (CRS), API (API), Mountview Estates (MTVW), Daejan (DJAN), Bovis Homes (BVS), WH Ireland (WHI), Netcall (NET) and Pilat Media Global (PGB).
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