Marwyn subsequently recycled part of the proceeds into Aim-traded Zegona Communications (ZEG: 160p) by backing that company's acquisition of Telecable de Asturias, the leading quad play telecommunications operator in Asturias, north-west Spain. Zegona funded the €640m (£444m) consideration through a £251m placing at 150p a share, current cash resources and a new loan facility of €270m to settle Telecable's outstanding borrowings. I noted the significance of the deal at the time ('Game changers', 28 Jul 2015). Since then Zegona has announced its intention to move from Aim to the main board on Friday this week. That's worth noting because with a market capitalisation well north of £300m, Zegona is a shoe in for inclusion in the FTSE SmallCap index, so expect the company to appear on the radar of small-cap funds.
The potential capital upside from Zegona's acquisition of Telecable aside, the board of Zegona is targeting a payout equivalent to a 3 per cent dividend yield at the placing price, so this will provide Marwyn with a decent income stream. The holding accounts for over a third of Marwyn's net asset value per share of 274p, so it is significant.
I would expect further deals to follow suit because the disposal of the balance of the stake in Entertainment One has brought in additional cash proceeds of £103m, or 166p per Marwyn share. Of this sum, the company plans to return 24.6p a share to shareholders through a partial cash redemption of its ordinary shares during November. This is equivalent to almost 9 per cent of its net asset value. In other words, with Marwyn's shares priced on a bid-offer spread of 215p to 220p, shareholders tendering 9 per cent of their holdings at net asset value of 274p will receive a 25 per cent premium to the existing share price on the tendered shares.
Marwyn's bumper cash pile also means that it has funds available for a follow on investment in Gloo Networks (GLOO: 127p), a newly listed Aim-traded technology company that has been established to acquire media companies where there is scope to use data and technology to change their business models to unlock value and increase profitability. Gloo is led by digital strategy experts Rebecca Miskin (chief executive) and Juan Lopez-Valcarcel (operations director) who held high-profile positions at Hearst Magazines, the publisher of titles such as Cosmopolitan, and Pearson International, respectively.
Gloo's intention is to acquire and operate businesses with an enterprise value up to £1bn, so expect a further fundraise when its first acquisition is announced before the year-end. Marwyn's cornerstone investment in Gloo accounts for 5.2 per cent of the company's book value. It is speculative at this stage, but Marwyn is proving a shrewd judge of companies before they make substantial acquisitions. The shareholding in BCA Marketplace (BCA: 170p), Europe's largest car auction operator, is a case in point as the holding now accounts for 34p a share of Marwyn's net asset value.
So with Marwyn cashed up to take advantage of future deals, and shareholders in line for a substantial cash return, I have no hesitation reiterating my buy advice with the shares priced 20 per cent below book value. Please note that I first recommended buying shares in Marwyn earlier this year at 220p ('Exploiting a value play', 5 May 2015).
Global Energy awaits the right deal
Shareholders in Aim-traded South American oil explorer and producer Global Energy Development (GED: 30p) are patiently waiting to see how the company will deploy its bumper cash pile of $35m (£22.5m), or 62.5p a share at current exchange rates. Chairman Mikel Faulkner notes that options being considered include paying a dividend to shareholders or making an acquisition in the energy sector.
In the meantime, the company has just announced that is lending Everest Hill Energy $8m (£5.2m) under a six-month bridge financing agreement alongside Global Energy's major shareholder HKN, which is lending $2m. Everest is an affiliated company of the Quasha family trusts, which have an interest in Lyford Investments, a shareholder in Global Energy. HKN, Lyford and parties acting in concert with them are interested in 22.5m Global Energy shares, representing 62.4 per cent of the issued share capital.
The bridging finance is secured on all of Everest's holdings of Global Energy and HKN securities which have a market value of $15m. Global Energy will receive an origination fee of $160,000 and earn 1 per cent per month in interest, so is in line to make a $640,000 return on the finance agreement over the next six months. This will go some way to covering the company's operating costs. In the first half, Global Energy reported a net loss of $1.46m, albeit this included severance costs as staff numbers were slashed from 21 to 12 employees after the sale of the Llanos portfolio at the end of last year.
True, the lack of newsflow on mergers and acquisition activity has dampened sentiment, which is why Global Energy's shares are priced well below net asset value of 96p even though net funds equate to 62.5p a share. The shares are also well down since I updated the investment case at 44p even though nothing has fundamentally changed ('A six shooter of small-cap buys', 10 Mar 2015). However, to value the equity at less than half the cash pile is a harsh valuation considering that the company has been preserving its Bolivar and Bocachico contract acreage in Colombia by maintaining its ongoing environmental, safety and reporting requirements while delaying capital expenditure in light of the depressed oil price environment. Furthermore, with an increasing number of asset-rich energy companies cash strapped, the delay in recycling the Llanos proceeds has actually worked in Global Energy's favour. Speculative buy.
Orders build for Software Radio Technology
Shares in Software Radio Technology (SRT: 27p), the Aim-traded provider of maritime domain awareness (MDA) technologies and products, are unchanged since my last update ('Value judgements', 3 Aug 2015), even though the company has subsequently announced a valuable contract with a national AIS Maritime Domain Management system. The award is worth $5m (£3.2m) and relates to the initial phase of a long-term programme, with additional phases anticipated in due course. The bulk of this contract is expected to be delivered during the course of the current year.
The system includes the supply of a full GeoVS data management viewing system to enhance maritime security, safety and management of marine environment through the identification of potential threats, prevention of illegal fishing, and improve search and rescue capabilities. This is the second award in recent months as the company won an order for AIS Class A transceivers worth $700,000 (£450,000) for deployment on Philippine fishing vessels.
In addition, the Ministry of Transport in Qatar has just announced that all local vessels are now mandated to be fitted with an AIS transceiver. In connection with the mandate, Software Radio has received an order for AIS transceivers from its regional partner for deployment in Qatar. The total requirement under the new mandate will be for up to 5,000 transceivers.
So, although Software Radio's shares are below my original recommended buy-in price of 31.25p ('On the radar', 3 Mar 2015), with contract momentum building, I still feel this could be a pivotal year for the small-cap company as it makes a decisive move into profitability. Speculative buy.
New investors onboard at Character
I am not the only one who thinks there is more upside to shares in the fourth-largest distributor of toys in the UK, Character (CCT: 518p). I recommended running profits at 505p ('Small caps with further to go', 10 Sep 2015) after the price hit my target of 525p, having originally advised buying at 415p ('Playtime', 1 Jun 2015).
Since I published that article 12 days ago, and following an institutional roadshow, managing director Jon Diver and finance director Kiran Shah have between them offloaded an aggregate of 2.43m shares at 510p. A new investor, hedge fund GLG Partners, has appeared on the share register with an interest in 1.2m shares, or 5.55 per cent of the share capital. Mr Shah and Mr Diver retain holdings in a total of 3.64m shares, or almost 17 per cent of the company's shares in issue, so they still have a substantial financial interest and you really can't fault them for cashing in some of their investments.
Moreover, with a bumper set of fiscal 2015 results due to be released in the first week of December, and the relaunch of Teletubbies in January highly supportive of Character's profits in the current financial year to the end of August 2016, then I feel a rating of 12 times' earnings for the fiscal year just ended is hardly exacting. A move through my 525p target price to the joint house broker's target price of 575p is a real possibility so, on a bid-offer spread of 510p to 518p, I would continue to run profits.
Trakm8 hits target price
Selling by the insiders is always worth noting, but as the case of Aim-traded telematics and data provider Trakm8 (TRAK: 195p) proves, if a company's operational performance is robust, and institutional demand is strong, then it need not prove a hindrance to share price progress.
In fact, shares in Trakm8 have now hit my 200p target price even though five directors offloaded an aggregate of 1.22m shares at 157p each to a new institutional investor in the summer, a point I commented on when I reiterated my buy advice at 178p ('Hitting the right numbers', 20 Jul 2015).The shares disposed of equated to 4.2 per cent of the issued share capital, but it's worth pointing out that the insiders still own almost 40 per cent of the company.
So, having more than doubled since I first recommended buying at 92p ('Zoning in on a profitable price move', 16 Feb 2015), it's time to decide whether there's still fuel left in Trakm8's tank. I feel there is. The trading statement at the annual meeting earlier this month highlighted a 22 per cent rise in the installed base of telematic units since the March fiscal year-end, a 19 per cent increase in new orders, and a strong and growing base of recurring revenue. It's no coincidence, either, that the latest rise in the share price to an all-time high of 211p last week coincides with a Capital Markets day for analysts and investors. It clearly went well and justifiably so.
That's because I feel that the earnings risk remains firmly to the upside given the bumper sales pipeline and robust order book. Analyst Lorne Daniel at broker finnCap previously upgraded his adjusted fully diluted EPS estimate from 10.3p to 11p, based on the company delivering pre-tax profit of £3.4m in the 12 months to the end of March 2016 on revenue up from £17.9m to £25m. This implies EPS growth of 86 per cent and means the shares are currently rated on 18 times earnings forecasts. That may seem fair value, but finnCap also anticipates another step change in profit in the 2017 fiscal year, pencilling in revenue of £29.9m, pre-tax profit of £4.8m and EPS of 15.4p. On that basis, the forward PE ratio is 12.5.
Of course, there is execution risk in delivering next year's numbers, but with Trakm8's cutting-edge technology securing major contracts with insurers Marmalade and Direct Line, and in the fleet market too (Bibby and Saint Gobain), there is no reason at all to expect the growth story to grind to a halt. I would advise running profits at 195p in anticipation of a move towards finnCap's target price of 220p. Run profits.
Globo investors await bond issue
Shares in Aim-traded Greek mobile software provider Globo (GBO: 33p) have endured a rollercoaster ride since I recommended buying them at 47p earlier this year ('Going global', 2 Feb 2015). Having peaked out at 61p in early June, the shares have been steadily falling away since then even though the company has been delivering operationally. I addressed investors' concerns in a column seven weeks ago, having interviewed the company's chief executive Costis Papadimitrakopoulos at quite some length ('Short sellers in for shock treatment', 4 Aug 2015). The share price at the time was 42.75p.
The main drag on sentiment has been the delay in getting a high-yield bond issue off the ground as uncertainty surrounding the Greek economy, and the global equity market rout in the summer, have impacted the high-yield bond market. The company expects the fundraising process to conclude shortly, but in the meantime it is committed to completing the first of the acquisitions in the pipeline using its cash resources held with investment grade banks. Globo has net funds of €47.4m on its balance sheet, up from €40.4m at the end of December 2014, a sum equivalent to almost 9p a share. The company has been given a credit rating of BB- from rating agency Standard & Poor's and B2 from Moody's and is attempting to raise in excess of $150m (£97m) through a five-year high-yield bond to fund a number of acquisitions.
These will be used to fulfil the company's ambition of becoming a leading pure-play operator in the enterprise mobility management (EMM) and Mobile Application Development Platform (MADP) business segments offering businesses solutions to expand their engagement with employees and customers through the mobile channel via a secure and extensible environment that runs on all smart devices. Strategically it makes sense to do so. Globo will be paying no more than 10 times cash profits for its planned acquisitions and has sensible expectations of synergy benefits too.
Moreover, existing businesses are performing well and the company is on track to lift EPS from 6.7p to 8.7p in 2015, so there is decent earnings growth coming through. We should see evidence of this when Globo releases its half-year results on Tuesday, 29 September. In the circumstances, I feel that the shares are being harshly valued on a PE ratio of four, a rating that fails to recognise the company's increasing international bias. The technical indicators also point to a turning point: the shares are deep in oversold territory and a long tail on the weekly candlestick chart last week highlights the weak share price momentum could be at an end. Ahead of the half-year results, I remain a buyer of Globo's shares and maintain fair value at 69p. Buy.
Pittards share price leathered
Shares in Aim-traded leather goods manufacturer Pittards (PTD: 106p), a constituent of my 2015 Bargain share portfolio, have been marked down 17 per cent this morning after the company issued a profit warning alongside its half year results.
The company did deliver the profit uplift I was looking for in the first half of the year: operating profits rose by half to £752,000, albeit revenues were down 10 per cent to £15.6m. The fall in turnover was as a result of a reduction in demand for military orders, the timing of the cold winter period in the US affecting dress glove leathers, events in Russia and lower demand in the golf category. However, favourable currency movements, price increases and lower hide prices (reflecting the fall in global demand) meant that gross margins jumped by three percentage points and gave a boost to profits which more than compensated for the revenue shortfall.
The problem being that the economic chill from Asia, and the economic slowdown and turmoil in China, in particular, have reduced demand for leathers in July and August, a trend that was confirmed at international trade fairs attended by the company recently. As a result analyst John Cummins at house broker W.H. Ireland has pulled back his full-year revenue estimate from £37.5m to £31.5m and downgraded pre-tax profit estimates by a fifth to £1.6m, implying a flat profit performance on 2014 rather than the recovery I was anticipating. On this basis, expect EPS of 11p.
Mr Cummins has also taken a cautious view to prospects for next year too, reining back revenue estimates by 14 per cent to £34.1m and pre-tax profit forecasts from £2.2m to £2m. The profit downgrade is far less severe than the revenue decline due to the improvement in gross margins (forecast to be 23 per cent for both 2015 and 2016).
Still, this is a marked turnaround from the trading outlook earlier this year when there appeared potential for volume increases to boost Pittards’ earnings. The positive being that the company should be able to deliver on the revised analyst forecasts as I foresee the three factors underpinning the improvement in gross margins continuing for some time yet to support profits and compensate for some of the revenue headwind the leather industry is facing right now. Moreover, the bad news looks priced in for a company forecast to turn in a flat profit performance this year. That’s because with Pittards’ offer price falling this morning to 106p, down from my recommended buy-in price of 129p, the forward PE ratio is very modest at 9.5 and the shares are trading on a chunky 38 per cent discount to net asset value of 171p. Hold.
Please note that a number of companies on my watchlist have issued announcements in the past week and I intend to publish updates as soon as possible. These include announcements from: Town Centre Securities (TCSC); Manx Telecom (MANX); Epwin (EPWN); Safestyle (SFE); Netplay TV (NPT); Vislink (VLK); K3 Business Technology (KBT); KBC Advanced Technologies (KBC); Trifast (TRI); 600 (SIXH), Cenkos Securities (CNKS); Faroe Petroleum (FPM); GLI Finance (GLI); Amino Technologies (AMO); and Cohort (CHRT).
MORE FROM SIMON THOMPSON...
I have published articles on the following companies this month:
■ Equity market strategy ('A sense of perspective', 1 Sep 2015).
■ LMS Capital: Buy at 73p ahead of tender offer; STM: Buy at 53p, target 60p; Entu: Hold at 65p ('Shareholder activism works', 2 Sep 2015).
■ Henry Boot: Buy at 235p, target 260p; Amino Technologies: Run profits at 162p, target 180p; PV Crystalox Solar: Hold at 9.5p ('Planning for success', 3 Sep 2015).
■ Vertu Motors: Buy at 66p, target range 80p to 85p; Cambria Automobiles: Run profits at 68p ('Poised for a strong rally', 7 Sep 2015).
■ Avation: Buy at 127p, target 200p; Fairpoint: Run profits at 177p, target 190p, Redde: Run profits at 158p ('Get ready for take-off', 8 Sep 2015).
■ Stadium: Buy at 132p, target 155p to 160p; Somero Enterprises: Buy at 145p, target 185p; Flowtech Fluidpower: Run profits at 151p ('Switch on for gains', 9 Sep 2015).
■ Tristel: Run profits at 95p, target return to 110p; BP Marsh & Partners: Buy at 145p, target 180p; Character: Run profits at 505p; Greenko: Hold at 80p ('Small caps priced for gains', 10 Sep 2015).
■ Crystal Amber: Buy at 162p ('Crystallising gains', 14 Sep 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'
