The most significant of which is this week’s announcement of the proposed acquisition of Sancus Limited, a finance company in which GLI currently holds a 7.4 per cent stake, for a total consideration of £37.75m. This will be funded by the issue of £17.75m of new GLI shares at a price of 56.5p each and £20m of zero dividend preference shares. Sancus is an offshore alternative secured lending business, which makes loans to Channel Islands-based entrepreneurs, small, medium-sized enterprises (SMEs), high net worth individuals and professionals.
Since its incorporation in July 2013, Sancus has grown rapidly and written £47.6m of loans across 20 transactions. The current loan book is worth £43.1m, of which £17.3m has been lent by Sancus directly, and the balance co-lent by third parties that have been introduced to lend alongside Sancus. These co-lenders tend to be Channel Islands-based family office investors and high net worth individuals.
The average length of the loans averages 11 months and the average annual interest rate is 10.4 per cent. This means given the proposed funding structure, Sancus should be able to satisfy GLI Finance’s requisite 10 to 15 per cent return on equity. This is mainly because the zero dividend preference shares are being issued at 100p each and are redeemable at 130.69p on 5 December 2019, so offer a 5.5 per cent annual return.
Importantly, the acquisition provides GLI with an existing loan book and income stream from Sancus’ loan book as well as a pipeline of future loan origination opportunities and access to an established network of contacts on Jersey and Guernsey. I would point out that this is a related party transaction as GLI’s chief executive Geoffrey Miller is a non-executive of the vendor, Sancus Holdings, and along with his fellow directors of Sancus Holdings control more than 30 per cent of that company’s share capital.
Sancus Holdings will end up owning 18 per cent of GLI’s enlarged share capital, but under a lock-in deed will be unable to sell its GLI shares until after the first anniversary of completion of the acquisition and then only through orderly marketing by broker Panmure Gordon in the first six months thereafter. This should mitigate the risk of stock overhang in GLI’s shares.
Promising investments
Excluding the Sancus deal, GLI has invested a total of £32.7m of equity and debt in 16 alternative lending platforms, since 2012. This means that this latest acquisition more than doubles the company’s exposure to this niche alternative lending market. One of those investments is an equity stake worth around £2.5m in Finexkap, the first French working capital platform to purchase SMEs’ receivables on the web through refinancing vehicles. In just a few clicks, business-to-business (B2B) companies can sell their receivables and gain access to short-term financing at competitive rates and on more flexible terms than traditional factoring services. Finexkap has just completed a $22.5m (£14m) fundraising, of which a third is new equity, which means GLI currently owns 26.4 per cent of the enlarged share capital.
It’s certainly an investment with great potential as France is one of the largest factoring markets in the world with an annual volume of receivables for B2B companies in excess of $800bn (£500bn). Moreover, last year the top 14 factoring companies operating in the country purchased more than $270bn billion of receivables. During the first half of this year the French factoring market grew by more than 15 per cent and expect this positive trend to continue given that access to finance for working capital continues to be a significant constraint for SMEs.
Target price
I first advised buying GLI shares when the share price was price was 53.5p (‘Funded for growth’, 25 February 2014), mainly due to the attraction of the bumper 5p a share annual dividend and the upside from the company’s investments in peer-to-peer and SME lending platforms. That payout is safe as the board have already committed to paying the 1.25p a share quarterly dividend during the transition period as the company refocuses its operations towards peer-to-peer and small- and medium-sized enterprise (SME) lending in the UK, Europe and the US and away from the US syndicated corporate loan market. So with GLI making serious headway with its new investments I feel that my target price of 80p – equating to 1.6 times current book value – is still a sensible objective.
Please note that I last updated the investment case when the price was 57.25p (‘GLI dividend boost’, 24 September 2014).
Bloomsbury tales
Shares in Bloomsbury Publishing (BMY: 164.75p), the publishing house behind the Harry Potter books, are little changed on my recommended buy-in price in my 2014 Bargain shares portfolio, although the 5.86p a share of dividends banked since then has provided some useful income.
As ever the company’s profits are heavily skewed towards sales of consumer titles in the run up to Christmas and of academic titles in the October peak selling period. Bearing this in mind I will be keeping a close eye on the book sellers charts to see how Bloomsbury's strong second half list fares. New releases include Paul Hollywood's British Baking, Tom Kerridge's Best Ever Dishes and River Cottage Light & Easy by Hugh Fearnley-Whittingstall. In addition, there are three high profile TV series linked to the company’s books - Grantchester; Jonathan Strange & Mr Norrell; and Tom Kerridge's Best Ever Dishes.
In addition, and as is the norm, Bloomsbury’s profits are also dependent on the signing of a number of new contracts on which the company expects to generate rights and services income in the latter part of the financial year to end February 2014. True, the second half weighting creates added risk, but trading on 13 times full-year earnings estimates and offering a near 4 per cent yield, the shares certainly have their attractions. Last month’s announcement from Warner Bros of a trilogy of Harry Potter films – to be released between 2016 and 2020 – alongside the release next autumn of the fully illustrated edition of Harry Potter, and the creation of a Harry Potter stage play, can only underpin sales from Bloomsbury’s magical back catalogue.
Interestingly, from a technical perspective, a move above the 165p price level would signal a minor break-out and open the door for yet another attack on the 180p glass ceiling that has stalled progress since October last year. I remain a buyer and feel my 210p earnings-derived target price is not out of place. Please note I last updated my view when the price was 173p (‘Worth a read’,15 July 2014).
Lights camera and time for price action
This week’s pre-close trading update from cinema group Cineworld (CINE: 344p) has framed a strong operational performance. Despite a tough trading back drop, reflecting the FIFA World Cup – admissions have fallen in four of the past five tournaments – an average film slate and the distraction of the warm summer weather, the group has continued to outperform the wider market. In the UK, box office revenues were virtually flat in the first 46 weeks of the financial year versus a market down 4 per cent. A 3 per cent rise in admission prices clearly helped Cineworld, but put in context against a 7 per cent decrease in admissions in the general market, this was undoubtedly a robust performance. Moreover, the decision to introduce a booking fee in the UK has had no adverse affect on MyCineworld bookings which are holding their share at around 20 to 25 per cent of the total bookings.
The other key take for me in this week’s announcement is that earnings guidance for this year and next is being held firm. Factoring in the addition of 192 new screens next year, a full-year’s contribution from the CCI cinema’s acquired earlier this year, and a bumper slate of releases in 2015, it’s only reasonable to expect a substantial ramp up in earnings. In fact, analyst Sahill Shan at broking house N+1 Singer predicts that Cineworld’s EPS will rise to 26.9p in 2015, up from 21.4p in 2014. On this basis, this year’s forecast dividend per share of 10.6p is covered twice over and next year’s 11.6p anticipated payout is covered almost 2.5 times. So not only does the company offer an earnings growth story, but it’s a very achievable one too because those aforementioned earnings forecasts for 2015 factor in an 8 per cent like-for-like increase in UK admissions to reflect a number of blockbuster releases and a return to more normal trading post this year’s summer distractions.
Trading on 12.8 times next year’s earnings estimates, it’s my strong view that Cineworld’s shares are ready for some price action, a fact the directors have already cottoned onto following some major share purchases in the past few months. I have too, having made a strong case to buy the shares at 336p last month (‘Lights, camera, action’, 28 October 2014). Offering a further 19 per cent upside to my target price of 400p, Cineworld shares rate a strong buy.
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
