Unfortunately, I ignored this sensible approach earlier this year when shares in Aim-traded investment company Aurora Russia (AURR: 32p) had ramped ahead to a multi-year high after I advised buying them at 30.5p ('Time to play Russia roulette', 4 Feb 2013). True, we banked some profits after tendering 36.9 per cent of those holdings back to the company at 52.3p a share in May. Factoring in the 70 per cent-plus profit on the tendered shares, this meant the carrying value was only 17.7p on the balance of the holding, which compared favourably with Aurora's share price of 40p at the end of April. That should have been the cue to take profits on the balance too!
However, given the big gap between the net asset value of the company - around 55p a share in June - and a share price of 32p when I updated the advice, I felt that it was still worth buying them, a stance that is looking ill judged given the relentless slide in the price since then. As a result, my original buy recommendation is only modestly in profit (around 7 per cent), having seen the 46 per cent paper gain in the summer disappear.
Moreover, following what can only be described as a disappointing set of half-year results, and one that included a raft of asset write-downs on Aurora’s remaining three investments, it’s also fair to say that investors who banked profits in the interim have proved shrewder than myself. That said, the knee jerk reaction to last week’s results is way overdone and, trading on a bid-offer spread of 21.5p to 23p, the upside potential far outweighs the downside risk in my opinion. This is because Aurora’s share price has been driven down to a level that fails to put a realistic valuation on the remaining three investment holdings. Let me explain.
Deep discount to sum of the parts valuations
Firstly, it’s well worth noting that even after a hefty £9.1m fall in the company’s investments between the end of March and September, which has seen Aurora’s net asset value per share decline from 55.4p to 40.7p and book value fall to £30.2m, the company is not a forced seller of its assets. It has cash in the bank and time on its side to realise full value from its investments.
At the end of September, net cash was £4.2m and receivables of £2.9m were received after the half-year end following a cash settlement on the final proceeds from the £30.6m sale of Aurora’s stake in OSG, a fast-growing and profitable records management provider with operations in Russia, Poland, Ukraine and Kazakhstan. This means that net cash is £7.1m, or 9.5p a share based on the 74.2m shares in issue. It also means that Aurora’s three remaining investments are being ascribed a value of less than £10m in its current market value of £17m, massively below their end of September book combined value of £23.2m. And that’s after factoring in the aforementioned write-downs.
True, some share price discount is in order given Aurora’s board remain cautious - hence the investment write-downs - and with good reason too. Clearly, it has been a tough task to sell assets into a weakening economy, hence the absence of any asset disposals in the past six months. They are not alone in this view as economists at the World Bank predict that Russia's gross domestic product (GDP) is only likely to have grown by 1.8 per cent this year, down from 3.4 per cent in 2012 and 4.3 per cent in 2011, albeit they are forecasting a recovery in GDP to 3.1 per cent in 2014. Furthermore, although the World Bank projects oil prices are predicted to remain stable at around US$105 (£64.19) a barrel, it’s also clear that Russia's immediate prospects are heavily dependent on recovery in the eurozone. The Organisation for Economic Co-operation and Development (OECD) has a similar view that the economy of Russia will return to growth as the region overcomes the impact of the slump in Europe.
In turn, this less benign back drop has hampered the investment performance across Aurora’s portfolio and hindered the ability of the board to achieve sale prices at anything like the previous carrying value of the investments in the accounts. The 11 per cent fall in the rouble in the past six months hasn’t helped either when the value of these assets is translated back into sterling, the reporting currency in Aurora’s accounts.
That said, the company’s board is more optimistic of recovery in the market for asset sales in 2014 and this should make for a better tail wind to finally make disposals. They have also entered talks with other prospective investments managers for Aurora Russia's remaining assets, which it expects to conclude in the first quarter of 2014. The current management arrangement terminates by mutual consent at the end of April, so there could be fresh impetus from a new asset manager to realise value, and at good prices, for shareholders from Aurora’s investments.
Bearing this in mind, Aurora holds stakes in Flexinvest Bank, DIY retailer Superstoy and Unistream Bank. All three investments are geared plays on the Russian economy, and credit growth and consumer spending, in particular.
Disposals to drive Aurora’s share price
I am most hopeful about a sale for Unistream which has generated a pre-tax profit of £1.4m on revenues of £34m in the year to date (to end September). Aurora owns a 26 per cent stake in the bank which is now in the books for £10.7m following a 11 per cent write-down to prudently reflect lower growth rates and a very competitive market.
The 24.3 per cent stake in Superstoy, a leading DIY retailer in Russia, also looks modestly valued at £6.3m. In the year to date, Superstoy has generated underlying cash profits of £5m (before pre-opening expenses for three stores opened this year) on sales of £140m, so a valuation for the company of around £26m hardly looks exacting.
Aurora's final investment is its wholly owned subsidiary Flexinvest Bank, a Moscow-based retail bank which is now primarily focused on offering credit cards funded by both retail depositors and corporate customers. This holding is in the accounts at £6.3m, following a hefty impairment charge due to loan and credit card write-downs and more cautious expectations of realisable value in the current market. Given the lack of progress on the disposal of Flexinvest Bank at a price approaching historic net asset value, alternative options are being reviewed in the event that a sale is not concluded. That is disappointing, but with these three investments being in effect valued at 43p in the pound, then this is already reflected in Aurora’s share price.
In my view, news of a disposal on any one of these three holdings would bring into focus the huge discount to book value Aurora’s shares are now trading on. The shares clearly carry risk, but offered in the market at 23p and with 9.5p a share of cash in the bank, the 44 per cent share price discount to net asset value looks unwarranted to me.
I maintain a buy recommendation on the shares and have a new target price of 30p which reflects the likely sale prices of the stakes in Flexinvest Bank, Superstoy and Unistream Bank net of all liabilities including management fees, realisation fees and operating expenses in the interim period. Buy.
Please note that I have written three columns today, all of which are on my home page. Also, I will update the investment case of WH Ireland (WHI) after the company issues its pre-close trading update on Thursday, 19 December.
Finally, due to unprecedented demand, my new book, Stock Picking for Profit, has sold out and is being reprinted for delivery the week beginning Monday, 6 January 2014. As a special promotion to IC readers, the first 100 pre-orders for the book placed online with YPD Books and quoting offer code ICOFFER will receive complimentary postage and packaging. The book can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213. The book is only being sold through YPDBooks and no other source. It is priced at £14.99, plus £2.75 postage and packaging. Telephone orders will continue to incur the £2.75 charge.
MORE FROM SIMON THOMPSON ONLINE...
Since the start of December I have published the following articles on companies or trading strategies:
■ PV Crystalox Solar ('Cash rich and undervalued', 2 Dec 2013)
■ Pilat Media Global ('Bumper upgrades for software maestro', 2 Dec 2013)
■ Housing market ('Allaying fears of housing myths', 3 Dec 2013)
■ Dragon Ukrainian Properties ('Ukrainian nightmare tames the dragon', 4 Dec 2013)
■ Conygar ('A smart regional property play', 4 Dec 2013)
■ Sutton Harbour ('Small cap value plays', 5 Dec 2013)
■ Crystal Amber ('Small cap value plays', 5 Dec 2013)
■ API ('Small cap value plays', 5 Dec 2013)
■ Greenko ('Fair wind', 6 Dec 2013)
■ Bezant Resources ('High risk, high reward resource play', 9 Dec 2013)
■ Thorntons ('A rating too sweet?', 10 Dec 2013)
■ KBC Advanced Technologies ('Fuelled for more growth', 11 December 2013)
■ Terrace Hill (‘Property play fully valued’, 13 December 2013)
■ Moss Bros (‘Dressed for success, 16 December 2013)
■ Inland, Terrace Hill, Daejan, Raven Russia, Mountview, Town Centre Securities, Bellway, Jarvis Securities, Air Partner, Thalassa, Pilat Media Global, NetPlay TV, 32Red ('Seeking safety and income at a reasonable price', 17 December 2013)
