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Exploiting a value play

Exploiting a value play
May 5, 2015
Exploiting a value play

This looks another opportune time to buy back into this value play. That's because Marwyn's share price is 25 per cent below my end-April NAV estimate of 295p despite the fact that NAV per share has risen by 12 per cent in the past three months, and there have been some potentially profitable new portfolio investments.

It's a company that has been worth following since it was created through the amalgamation of two Marwyn funds and was admitted to trading as a closed-end investment company on the Specialist Fund Market of the London Stock Exchange in December 2008. Since inception Marwyn has boosted its NAV per share by 280 per cent in the past nine years. To put that into perspective, the FTSE 350 investment companies index has risen by 27 per cent in the same period. The investment objective is simple: to maximise total returns through the capital appreciation of its investment in Marwyn Value Investors LP, an open-ended Master Fund domiciled in the Cayman Islands.

The investment strategy is to focus on companies and sectors that allow mid-term profitability to be forecast with a reasonable degree of confidence, given the resilience of the underlying revenue stream. Marywn's investment team also considers situations where structural or regulatory changes within an industry create opportunities for established market-leading companies to develop and capture value in new ways. Although these specific investment criteria help to identify opportunities with potential, ultimately it is the management teams of the investee companies that deliver the value. Marwyn's advisers also have the conviction to back a proven management team that has demonstrated a thorough understanding of how to create value within their sector.

 

A rewarding investment

This strategy has certainly reaped rewards. For example, when Marwyn cashed in its stake in the UK's largest building aggregates group, Breedon Aggregates (BREE: 45.5p), in November, the investment had returned £43.5m of cash proceeds, equating to a 3.7 times cash return on the investment and an annual internal rate of return of 30 per cent. The shareholding in FTSE 250 film producer Entertainment One (ETO: 320p), the largest independent film distributor in Canada and the UK, has also proved incredibly profitable, having trebled in value since the company listed on the London stock market in 2007.

The stake in Entertainment One accounts for three-quarters of Marwyn Value Investors' portfolio value, so prospects here are clearly important. Bearing this in mind, analysts predict Entertainment One will lift EPS by 12 per cent to 23.4p in the financial year just ended, and at a similar rate to 26.4p for the fiscal year to the end of March 2016. On that basis, Entertainment One's shares are rated on 12 times earnings estimates, and on a PEG ratio of one. That's attractive for a company that has already doubled EPS since 2010.

 

Investments with potential

Marwyn's investment advisers have clearly been putting the cash from the Breedon share sale to good use. The company invested £9m at 120p a share in Haversham, a company that listed on the market with the aim of acquiring businesses in the European automotive, support services, leasing, and manufacturing sectors. Haversham subsequently raised £1bn at 150p a share last month in the reverse takeover of BCA Marketplace (BCA: 152p), the operator of Europe's largest used vehicle marketplace. Marwyn invested a further £10m at 150p a share in that placing and the investment, worth £21m, accounts for 9 per cent of its portfolio.

In addition, Marywn's Master Fund has invested £12m at 120p a share in the £30m placing of Aim-traded Zegona Communications (ZEG: 138p), a newly listed company established to acquire and operate businesses in the European telecoms, media and technology sector. Zegona was founded by ex-Virgin Media executives Eamonn O'Hare and Robert Samuelson to focus on network-based communications and entertainment investments that require active change to realise their full value, and to create long-term returns through fundamental business improvements.

Zegona's objective is to create a portfolio of assets with enterprise values in the range of £1bn to £3bn. It's a case of following the man as both Mr O'Hare and Mr Samuelson held prominent roles in Virgin Media prior to the media group's takeover by US giant Liberty Global in a $24bn (£16bn) deal. The cornerstone investment in Zegona is similar to the one in Haversham when Marwyn backed Avril Palmer-Baunack, the former chief executive of Autologic, a company subsequently acquired by transport group Stobart (STOB: 108p), and the current non-executive chairman of Redde (REDD: 124p), the car accident services support group I am also keen on.

Marwyn's Master Fund also recently invested £10m in Marwyn Management Partners (MMP: 3.5p), an Aim-traded company that is the ultimate majority shareholder in Le Chameau. Established in 1927, Le Chameau is a French heritage footwear brand specialising in the production of bespoke, handmade rubber boots. Building on its reputation for quality, the management team has been beefed up with the aim of growing its international presence in the luxury market and in particular more buoyant overseas markets such as the UK and the US. The new management team has also repositioned its retail network in France, and rationalised underperforming and non-core product lines.

The bottom line is that Marwyn's share price discount to NAV is out of kilter with the progress it has been making this year. Moreover, with Entertainment One likely to release upbeat results in a few weeks' time, buying shares in Marwyn offers a low-risk entry point on a bid-offer spread of 215p to 220p, and my initial target price is 260p. Buy.

Please note I published an article with all the share recommendations I have made this year at the end of last month. My next column will appear on my home page of our website at 12pm on Monday, 11 May 2015.

■ 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'