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Bargain shares 2016

Our portfolios are based on the investment ideas of Benjamin Graham (see box ‘Rules of Engagement’) and they have beaten the FTSE All-Share index in 14 out of the 17 years in which we have run them. During that time, they’ve generated an average return of 21.3 per cent in the first 12-month holding period compared with an average increase of 3.3 per cent for the FTSE All-Share.

That’s not to say this investment strategy is a one-way bet. Investing rarely is. Indeed, last year’s motley crew of bargain shares put in a relatively flat performance, albeit that was markedly better than the 7.4 per cent negative return on the FTSE All-Share, the index against which we benchmark our annual performance. As usual, the hidden gems we uncovered in the stock market were largely found among the under-researched small- and micro-cap segment. Targeting small-cap companies has reaped handsome rewards over the years, thereby justifying our bias towards them, but it works both ways as any companies that disappoint can be punished severely given the less liquid nature of these shares. This explains why three of last year’s constituents underperformed badly and wiped out the gains made on the winners. The flip-side is that when we get it right we can expect substantial outperformance as our track record shows.

And, of course, no portfolio can be immune to a market crash: the collapse in share prices in the global financial crisis in 2008 wreaked havoc, but readers who kept faith subsequently recovered all their paper losses, which again highlights the solid asset-backing of the companies. In fact, two of those companies from the 2008 portfolio - Indian Film Company and Raven Mount - both succumbed to takeovers. Mergers and acquisitions (M&A) activity has been a recurring feature of all my portfolios, as predators, attracted by the asset backing on offer, run their slide rule over the numbers. For example, energy company Fortune Oil (FTO), a constituent of the 2014 portfolio, and Inspired Capital (INSC), a constituent of last year's portfolio, were both taken over.

I have a feeling that corporate activity will play a part yet again in this year’s portfolio as I have made the conscious decision to target cash-rich companies and those with a realistic chance of realising substantial returns from assets held for disposal. As all the companies in this year’s portfolio are trading at or below the book value of their assets, I am unlikely to be the only one to have spotted the anomalous pricing. This approach also mitigates risk if the general market environment continues to prove unfavourable.

So, once again, I have run the rule over 1,700 listed companies on Aim and the main market of the London Stock Exchange to come up with a portfolio of companies where the asset backing should be strong enough to overcome any short-term trading difficulties and, in time, reward our loyal following of long-term value investors.

Listen to this week's free IC Companies & Markets podcast in which Simon Thompson discusses his Bargain Shares portfolio with editor John Hughman.

 

Bargain Shares Portfolio 2016

Company name

TIDM

Market

Activity

Offer price (p)

Market value (£m)

Bargain rating

BowlevenBLVNAimOil and gas exploration and production19.2563.12.20
VolvereVLEAimGrowth and turnaround company42017.21.04
French ConnectionFCCNMainClothing retailer4543.30.84
BioquellBQEMainMicro biological control technologies14561.90.81
JuridicaJILAimCapital provider for corporate legal claims4347.40.68
Oakley CapitalOCLMainPrivate equity investments1472810.60
Mind + MachinesMMXAimOwner of top level domains7.7559.20.52
Gresham House StrategicGHSAimInvestment company80029.50.53
Gresham HouseGHEAimAsset management company31531.00.50
Walker CripsWCWMainWealth manager and stockbroker4316.30.49

 

BOWLEVEN (BLWN)

Aim: Share price: 19.25p

Bid-offer spread: 19-19.25p

Market value: £63.1m

Website: bowleven.com

Bowleven (BLVN), the African-focused oil and gas exploration group, delivered handsome returns in my 2010 Bargain Shares Portfolio. In fact, having hit pay dirt in the shallow waters of the Etinde Permit off the coast of Cameroon, I recommended banking an eye-watering 159 per cent gain only nine months after highlighting the investment potential that year. The fact that the company’s market capitalisation has fallen from £750m to £63m since then partly reflects the very depressed state of the oil market, but also a valuation anomaly and one that I expect to be rectified in the coming year.

It seems lost on investors that the company reaped $170m (£120m) in cash from a farm-out of two-thirds of its interest at the Etinde project to Lukoil and New Age in March 2015. The company still retains a 20 per cent non-operated interest in the project, is carried up to $40m for two appraisal drilling wells there, is due to receive $15m of deferred consideration on completion of the drilling (by September at the latest), and a further $25m at the time of the final investment decision being made on the development. The total consideration for the transaction is $250m and the cash windfall received from the farm-out explains why the company had net funds of $120m on its balance sheet at the end of October, deferred consideration of $55m in respect of the $40m carry on the appraisal wells, and the $15m cash payment due in the next seven months. However, with Bowleven’s market capitalisation now only £63m, this means that it’s being valued below its net cash of £85m – and that figure ignores deferred consideration of £39m.

It also means that exploration assets worth $304m are in the price for free. Clearly, the 20 per cent interest in Etinde is worth millions as highlighted by the fact that LUKOIL and New Age acquired their 40 per cent interests for $250m. So, with Bowleven’s shares trading so far below cash, and the valuable 20 per cent retained interest in Etinde in the price for free, I rate them a buy on a bargain rating of 2.2 especially as news from the African projects later this year is likely to reinforce the investment case. Buy.

 

VOLVERRE (VLE)

Aim: Share price: 420p

Bid-offer spread: 415-420p

Market value: £17.2m

Website: volvere.co.uk

Investors are missing a trick with Volvere (VLE), an investment company founded by Jonathan and Nick Lander who have the respective roles of chief executive and finance director. It’s proved to be a decent investment, with Volvere’s share price rising more than fourfold since listing on the junior market 13 years ago, driven by the Landers’ and non-executive chairman David Buchler’s ability to spot turnaround situations and then exit them at a chunky profit. The three directors and five other shareholders control almost 3m of the 4.09m shares in issue, so the free float is limited. However, it’s worth pursuing because there is glaring value in the shares.

That’s because the company’s current market value fails to reflect the disposal of one of its investments, transport planning and engineering consultancy JMP, in a £8m deal at the end of December. Volvere owned 76 per cent of the equity in JMP and received £5.5m of cash net of costs, having acquired the business for only £400,000 in May 2013. Since then, JMP has repaid all the working capital loans Volvere made and paid out dividends of £450,000 to Volvere, so this has been a hugely successful investment. It’s one that I reckon will see Volvere book a £4.5m gain on the carrying value in its next set of accounts and means that equity shareholders’ funds of the company will have increased by 25 per cent to £22.1m, or 540p a share, in 2015. I also estimate that Volvere now has net funds (consisting of cash and marketable securities) worth £14.3m, or 350p a share, so 83 per cent of the current share price is fully backed by cash.

Moreover, investments in three companies are being conservatively valued in Volvere’s accounts. For example, the company initially acquired a 54 per cent stake in frozen pie and pasty maker Shire Foods in July 2011. Shire had net assets of £3.3m at the time, but was loss-making, which explains why Volvere was able to acquire more than half the company for what now looks like a bargain basement £500,000. Fast forward three years and Shire turned in underlying pre-tax profit of £800,000 on revenue of £12.1m in 2014. Net assets of that business have grown to £5.3m and Volvere now owns 80 per cent of the equity. In my book, Shire has to be worth £10m in a trade sale scenario given its ongoing growth – the business turned around a seasonal pre-tax loss of £180,000 in first half of 2014 into a profit of £310,000 in the first six months of 2015, so it is making rolling 12-month underlying pre-tax profit of £1.3m.

In addition, Volvere acquired Impetus Automotive, a provider of consulting services to the automotive sector, including vehicle manufacturers, dealerships and national sales companies, in a £1.3m deal last March; and a security business, Sira Defence, for £80,000 in 2006. Sira develops products to help the police use CCTV effectively. It’s a profitable business, too, having turned in pre-tax profit of £51,000 on revenue of £139,000 in the first half of 2015. Impetus made a small loss, but it’s very early days in the turnaround.

The bottom line is that all three of these businesses could easily be worth £12m, or 294p a share, if sold now, and significantly more if the automotive consulting business successfully returns to profitability. So, with Volvere’s shares trading 22 per cent below my estimate of end-2015 book value, and the company heavily cashed up for more investments, they are worth buying on a bargain ratio of one.

 

FRENCH CONNECTION (FCCN)

Main: Clothing retailer

Share price: 45p

Bid-offer spread: 44.25-45p

Market value: £43.3m

Website: frenchconnection.com

French Connection (FCCN) hasn’t turned a profit since its 2012 financial year and don’t expect a move into the black for the year just ended (January 2016 year-end). Disappointing spring sales in the UK sent the company heavily into the red and resulted in a doubling of pre-tax losses to £7.9m in the six months to the end of July 2015.

However, there are reasons for optimism. A trading update at the end of November indicated a promising start to the winter selling season, with like-for-like sales flat in the problem UK/Europe retail division in the first 16 weeks of the second half, reversing a 10 per cent-plus fall in the first half and a 6.1 per cent decline in the same period of 2014. Moreover, gross margins firmed up by 150 basis points, reflecting a higher proportion of full price sales, and better buying.

Importantly, an axe has been taken to underperforming stores. Six stores were closed in the first half, another seven in the second half, and the company will be giving up its lease on its loss-making Regent Street flagship store in London’s West End next month in return for a compensation payment of £2.4m. The net effect will be to slim down the operated estate to 133 stores, excluding a further 254 franchise and licenced shops mainly located overseas. It makes commercial sense to do so because French Connection has been accelerating its profitable licensing operations from which it derives annual income north of £6.5m and also has a highly profitable wholesale business which turned in operating profit of £14.6m in the 2015 financial year. The key is to reduce losses on the retail side through a rationalisation of the estate, and targeted investment in e-commerce (accounting for almost a fifth of retail sales), to return the company to profitability overall.

I feel there is a chance of doing so, especially if the spring collection is well received. And because of the poor performance in the first half of 2015, French Connection has relatively easy comparatives to beat, which increases further the possibility of positive newsflow this year. Importantly, this is not reflected in the price, with the shares trading 13 per cent below book value. Or, to put it another way, strip out fixed-asset investments worth £11.3m, and current assets less all liabilities represent almost 90 per cent of French Connection’s market capitalisation. There is substantial cash backing as the company ended the first half with net funds of £15m and stocks worth £37m so, as those inventories are wound down during the important December and January trading period, I would expect net funds to be nearer to £20m now, or half the current market value.

In effect a company making north of £170m in annual sales, and which could have made a second half profit, is currently being valued by investors at around £23m. If improvement in trading seen in the second half continues, then that’s a very low valuation. Buy.

 

BIOQUELL (BQE)

Main: Share price: 145p

Bid-offer spread: 143-145p

Market value: £61.9m

Website: bioquellplc.com

Last year no fewer than 11 companies I followed were either taken over or exited the stock market following a sale of all their operating assets. The average gain on those holdings was 50 per cent. I have a feeling that Bioquell (BQE), a provider of specialist microbiological control technologies to the international healthcare, life science and defence markets, will be joining that list – and with good reason.

Andover-based Bioquell generates a large chunk of its revenue by selling biocontamination control technology products, based around hydrogen peroxide vapour (HPV). These are highly efficacious at eradicating micro-organisms such as bacteria and viruses at room temperature and are principally used by biopharmaceutical, biotechnology and research institutions to provide sterile equipment and/or sterile facilities. It’s an international business with operations in the US, France, Ireland, Singapore and China.

HPV-based products are also used to eradicate superbugs from hospitals, a part of the business that is seeing increased demand from the healthcare sector given the difficulties treating patients who contract bacterial infections that no longer respond to antibiotics. Bioquell’s biocontamination control division generated revenue of £27m last year, is likely to produce double-digit top-line growth in 2016, and could make annual cash profit in excess of £4m

That’s worth noting because, having sold off its specialist testing services subsidiary, TRaC, the board initiated a strategic review of its retained biocontamination control technology products division. A business combination, joint venture, a distribution deal, or a co-promotion agreement are all being considered, as is an outright sale of the company. Expect the strategic review to reach a conclusion by the

end of March.

Bearing this in mind, Bioquell currently has net funds of £47.5m, or 112p a share, so the biocontamination control technology business is being attributed a value of £14.4m based on Bioquell’s market value of £61.9m. To put the valuation into perspective, I reckon the book value of the unit is £17m and it could easily attract a significant bid premium above book value if sold. At the current price, it looks very undervalued. But even if it is retained by Bioquell, downside risk looks limited given the board has already promised to make a substantial cash return to shareholders. Either way, Bioquell’s shares are worth buying on a bargain rating of 0.8.

 

JURIDICA INVESTMENTS (JIL)

Aim: Capital provider for corporate legal claims

Share price: 43p

Bid-offer spread: 41.5-43p

Market value: £47.4m

Website: juridicainvestments.com

The board of Juridica Investments (JIL), a company specialising in backing corporate legal cases with its own capital in return for taking a share of the financial awards in the event of a favourable outcome, made an important announcement three months ago. It’s one that has yet to be factored into the company’s valuation.

Having consulted with its shareholders, and following a disappointing financial performance in 2015, Juridica’s board has decided not to make any new investments apart from funding its existing portfolio of claims, and will now seek to return capital to shareholders following the completion of its investments. It’s a sensible decision given that the company is simply too small to diversify and scale up its operations in this specialist niche area. Not that the company hasn’t been successful to date. Since inception Juridica has generated net cash proceeds of $222m on 19 cases, a return of 33 per cent on its investment capital; and has paid out total dividends of 59p a share to shareholders, a sum equivalent to 47 per cent of the gross capital it has raised. And there is every reason to believe that the company will be able to declare further capital returns significantly ahead of its current market value.

That’s because Juridica now has 15 cases on its books (consisting of antitrust and competition; patents and intellectual property; and commercial cases), which had a book value of $102.8m (£71.9m) at the end of June 2015. It has committed a maximum of $9.7m to support these cases in the future. In addition, the company has cash and receivables on its balance sheet worth $46.3m, or £32.4m at current exchange rates. This means that with the company’s market capitalisation now only £47.4m, then two-thirds of the share price is backed by cash and receivables (money due for payment on claims awarded in Juridica’s favour). Or, to put it another way, with the company’s shares being priced on less than half last reported net asset value of 94p, of which cash and receivables accounted for 29.5p, then investments in legal cases worth 65p a share are being attributed a value of only 13.5p, or one fifth of their value.

Of course, the company still has to win enough of those outstanding 15 cases to crystallise the value on the balance sheet in order to return the cash proceeds to shareholders. The fact that Juridica was forced to writedown the investment value of some of its cases by $31.8m in the first half of last year, which in turn prompted the 71 per cent share price decline in 2015, highlights the risk. But with the cases in effect only being attributed a value of 20 per cent of their carrying value in Juridica’s current market value, there is a huge ‘margin of safety’ here. In addition, the board is reviewing the company’s fees and cost structure so that it can maximise the amount of capital it returns to shareholders. I would expect another corporate update at the time of next month’s full-year results with regards to the timing of likely capital returns to shareholders.

So, with the shares trading on less than half book value, the risk:reward ratio points to a profitable outcome. Juridica gets my vote on a bargain rating of 0.7.

 

OAKLEY CAPITAL (OCL)

Main: Private equity investment company

Share price: 147p

Bid-offer spread: 145-147p

Market value: £281m

Website: oakleycapital.com

Shares in Aim-traded private equity investment company Oakley Capital Investments (OCL) have been unduly de-rated since it raised £130m at 165p a share last April to exploit co-investment opportunities alongside the Oakley private equity funds it has substantial interests in. City heavyweights Ruffer, Invesco Asset Management, Woodford Investments and Sarasin & Partners subscribed for almost 80 per cent of the new shares issued.

Since listing at the end of 2007, Oakley’s net asset value per share has more than doubled to around 200p a share, compared with a flat performance from the FTSE All-Share, a performance which attracted the fresh capital from some shrewd City names. To achieve these returns Oakley takes stakes in private equity ventures established by its associated limited partnership, and provides mezzanine debt finance and secured senior debt funding directly to a number of the portfolio companies. It also offers revolving credit facilities to the limited partnerships.

True, existing shareholders saw some dilution as the placing was pitched at a discount to net asset value at the time, but this has to be weighed up against the potential to generate even greater returns on co-investments alongside the returns on the Oakley funds. Admittedly, sentiment has not been helped by sterling’s sharp appreciation against the euro in the first half of last year as the majority of the company’s investments are denominated in euros. However, sterling has fallen back by around 6.5 per cent against the single currency since Oakley’s half-year end, so reversing all of the currency led declines which dampened its book value last year.

In fact, in a pre-close trading update at the end of last week, the company revealed that net asset value per share had risen by 9 per cent in the second half of 2015. But this wasn’t simply down to currency gains alone because on a like-for-like basis the fair value of the companies invested in Oakley’s funds shot up by 31 per cent to drive Oakley’s net asset value up from £358m at the half year stage to between £378m and £382m at the end of last year. Oakley held £158m in cash at the end of June, some of which will have been used on new investments since then, so it’s clearly anomalous for the shares to be priced 27 per cent below book value when the portfolio is doing so well and net funds equates to over half the share price.

Moreover, there is potential for portfolio gains this year too. For instance, the largest holding, accounting for more than 10 per cent of Oakley’s net asset value, is in digital media group Time Out. It’s doing rather well, having been marked up by 13 per cent in the first half of last year with prospects for more uplifts according to analysts at brokerage Liberum Capital. The platform has almost 40m monthly users and has achieved double digit annual digital audience growth since 2011. Other major holdings include a £20.6m stake in Italy’s largest car insurance broker and price comparison website, Facile.it; and North Sails, a world leader in sailmaking with operations in 29 countries.

Although Oakley’s shares are unloved, there is undoubtedly value here. The board have acknowledged as much by using £8m of a £158m cash pile to buy back 6m shares at 139.3p, representing a 30 per cent discount to end December 2015 net asset value of 198p to 200p a share. It makes sense to do so because if you strip out pro-forma cash and receivables from Oakley’s market capitalisation of £281m, this means its loans and equity stakes are in effect being valued at 40 per cent below their latest value according to my calculations.

The market is also ignoring a potential earn-out from last June’s disposal of Verivox, a leading consumer energy and telecommunications price comparison website. Oakley sold its 19 per cent interest in the company and this could deliver almost 4p a share of net asset value uplift to Oakley if Verivox’s 2015 financial performance meets the terms of an earn-out.

The bottom line is that Oakley’s current valuation is not just anomalous, but well worth exploiting. Buy.

 

MINDS + MACHINES (MMX)

Aim: Share price: 7.75p

Bid-offer spread: 7.5-7.75p

Market value: £59.2m

Website:mindsandmachines.com

Minds + Machines (MMX) provides services in all areas of the domain name industry, ranging from registry ownership to consumer sales, and is primarily focused on the new top-level domain space which is organised and regulated by the Internet Corporation for Assigned Names and Numbers (ICANN). ICANN has been expanding the number of generic top-level domains (gTLD) beyond the standard dot.com web addresses which makes Minds + Machines of interest to me because it’s a player in this niche industry, having built a portfolio of over two dozen of these new domains including .miami, .work, .law and .london.

In fact, it now has around 279000 domains under management, or 2.5 per cent of the total. The target is to achieve average annual revenue of around $15 to $22 per standard name, and between $200 and $225 per premium name in order to give the company a recurring revenue stream from its valuable portfolio of domain names, worth over $40m (£28m), and deliver a move into sustained profitability. But to achieve this, the company has had to ramp up its sales and marketing effort and in a more focused way, too. To fund this drive, the board has restructured its cost base, reaping annualised cost savings of $1.3m in the first half of 2015, $924,000 in the third quarter, and a further $700,000 is expected this year. This means that $2.94m has been sliced off costs and should mean the company will hit sustainable operating profitability in 2016.

The acceleration into a sales and marketing-led business seems to be paying off as the company announced in October that registrations for its .miami domains passed 11,500 within a month of launch, making it the top selling city gTLD that month. Over three-quarters of registrations were within the state of Florida, which augurs well for renewals. Dot London domains, which the company runs in partnership, had its first annual renewals last autumn and, encouragingly, around 75 per cent of the domains were renewed. And in a pre-close trading update this week the company announced a near trebling of total billings in the fourth quarter.

The board’s confidence of achieving its goals, not to mention the significant value it sees in the company’s assets, is highlighted by its decision to use £15m of a $48m cash pile to buy back the shares. So far, £6.2m has been spent on the programme. It makes sense because analysts at N+1 Singer estimate that the average value paid for a TLD in private and ICANN auctions is around $6.5m, or four times higher than the value attributed to each TLD in Minds + Machines portfolio. Why bother paying four times the amount to buy a new TLD when a share buy-back programme is immediately value accretive for shareholders?

However, the operational progress made is not being factored into the company’s share price. Indeed, adjusting for the 71.6m shares bought back since the end of September 2015, I estimate the company has pro-forma net assets of $85.5m, of which net funds are just shy of $36m or half the current market capitalisation. So, in effect, the operating business with over $40m of domains is being valued at only its conservative valuation on the balance sheet even though a move into profitability is on the cards. Last week’s announcement of a move into China certainly has potential given the surge in registered TLDs there in the past year.

A recent board room reshuffle also augurs well, with major shareholder Henderson now having representation on the board, and both the marketing and operating officer positions strengthened. On a bargain ratio of 0.56, Minds + Machines’ shares are well worth browsing over.

 

GRESHAM HOUSE STRATEGIC (GHS)

Aim: Share price: 800p

Bid-offer spread: 795-800p

Market value: £29.5m

Website: ghsplc.com

When market volatility spikes, it pays to have ample cash available to exploit attractive investment opportunities. That’s because more often than not shares in decent companies are dragged down indiscriminately in the sell-offs. It also pays to have a watchlist of companies where you have already carried out due diligence so you can take advantage of investment opportunities as and when they occur.

One such company that fits the bill is Gresham House Strategic (GHS), an Aim-traded investment company that was previously known as New Media Spark. A placing and open offer raised £14.3m last summer and means that, after adjusting for investments made since then, the company has net funds of £15.2m, accounting for 42 per cent of its net asset value of £36m. That cash pile also represents more than half of the company’s market capitalisation of £29.5m. At the current price the shares are rated on an 18 per cent discount to book value of 975p.

What this means is that an investment portfolio of six small-cap companies, worth nearly £21m, is in effect only being attributed a value of £14.3m in Gresham House’s market value of £29.5m. That’s an extreme valuation considering that the holding in one of its portfolio companies, Aim-traded technology company IMImobile (IMO), is worth £15.5m and has significant upside potential in my opinion. My colleague Alex Newman is of the same view, having recommended buying IMImobile’s shares in last week’s magazine, and so too does ToscaFund Asset Management, which has raised its stake in IMImobile from 21 per cent to 27.8 per cent since June. It’s an intriguing stake given that ToscaFund is the investor behind takeovers last year of technology companies Daisy and Phoenix IT.

It’s easy to see why ToscaFund is interested. That’s because IMImobile helps companies engage with their customers across all mobile devices by offering some smart software products based on proprietary technology. The importance of mobile interaction can only increase given the rapid take-up of smartphones and tablets, and improvements in network speeds. These strong trends were in evidence in IMImobile’s latest set of results in December, which highlighted double-digit growth in both revenue and profit, and a strong pipeline. However, the cash-rich company is only being rated on six times this year’s likely cash profits to its enterprise value, a rating that fails to reflect the growth potential of the business.

Other holdings in the portfolio include Miton (MGR), a small-cap fund manager I am positive on ('An awesome foursome', 18 January 2015), and Castle Street Investments (CSI), a cash-rich investment company that has just acquired a IT solutions and cloud services company, a deal that has been very well received by the market.

Gresham House Strategic investments are being run by asset manager Gresham House (GHE), a company that also offers a compelling value proposition, so much so that I have also included its shares in this year’s portfolio. The strategy being adopted is to apply private equity techniques to public companies to create a portfolio of between 10 and 15 holdings in the small-cap segment of the market, a concentrated enough number of holdings to allow the investment managers to engage with investee stakeholders.

However, despite the fact that the value of the portfolio has held steady in a down market, Gresham House Strategic’s shares are trading on a deep 18 per cent discount to net asset value, a rating that I feel neither accurately reflects the potential of the existing portfolio nor a highly supportive cash-rich balance sheet that will enable its advisers to take stakes in more undervalued small-cap situations. Buy.

 

GRESHAM HOUSE

Aim: Share price: 315p

Bid-offer spread: 305-315p

Market value: £31m

Website: greshamhouse.com

Investors have yet to cotton onto the progress made, and the low-risk investment proposition offered by Gresham House (GHE), a specialist asset manager and one of the oldest companies quoted on the London Stock Exchange.

Just over a year ago, a new management team led by chief executive Tony Dalwood, the former boss of Schroder Ventures, took the helm with the aim of establishing the company as a specialist asset management group focused on managing funds and co-investments across a range of differentiated and illiquid alternative investment strategies. Since then, the company has made its first acquisition, that of Aitchesse, an asset manager focused on forestry and timber assets. In the past decade, UK forestry has shown an annualised return of 18.8 per cent, almost three times higher than that on UK equities. The pricing and investment backdrop remains favourable for investment in this area and there are substantial tax advantages in the UK, too. Aitchesse reported pre-tax profit of £946,000 on revenue of £2.27m in the 12 months to the end of June 2015, so the £4m initial consideration and £3.7m maximum earn-out looks sensible.

The acquisition came shortly after Gresham House’s newly formed specialist asset management arm won its first mandate with Aim-traded Gresham House Strategic (GHS). This should earn the company annual management fee income of £579,000. Gresham House owns a £5.8m stake in the Aim-traded company, so it has backed its mandate with its own money. Interestingly, since winning the mandate last summer, the net asset value of Gresham House Strategic has been stable in a market down over 10 per cent.

It’s worth noting that Gresham House has ample legacy assets it can dispose of to fund further bolt-on acquisitions in order to scale up its asset management operations. For example, having sold 25.8 acres of land at Newton Le Willows, a town in Merseyside, for £7.25m to Persimmon, the balance of the consideration is payable in three tranches over the next three years. The company still retains a five-acre site with retail planning permission bordering the Newton Le Willows residential site, and which has been valued at £2.25m by Jones Lang LaSalle. The board is considering options for its disposal.

Jones Lang LaSalle has also valued the company’s legacy property in Speke, Liverpool, known as Southern Gateway, a multi-let office and industrial complex, at £7.6m. Around 295,000 sq ft of the 375,000 sq ft of the mixed industrial and office space is let out to 14 tenants and generates £783,679 in annual rent. With lease agreements now in place on the remaining space, the company plans to sell the investment.

The bottom line is that Gresham House could potentially reap gross proceeds of £16.15m from the balance of the Persimmon land sale, the five-acre site at Newton Le Willows, and Southern Gateway. That’s a significant sum in relation to its market value of £30m. Post the Aitchesse deal, I reckon the company had cash of £3.9m on its balance sheet, which covers bank debt of £3.28m and the £667,000 short-term loan notes issued to the vendors of Aitchesse last November. So, to free up some of the cash held up in the aforementioned legacy assets, Gresham House’s board has negotiated a new bank facility of £7m, half of which will be available for further investments.

I would also flag up that the company has unlisted investments from which £1.23m will be realised later this year, representing deferred consideration from its interest in a former Royal Mail sorting office in Edinburgh sold to CALA Management. In addition, Gresham House has around £900,000 invested through loan notes and equity in a company that owns a 55-acre cemetery in Chislehurst in the London borough of Bromley.

So, by my reckoning, Gresham House’s pro-forma net asset value is around £29.6m, or 300p a share, and is backed by property assets worth almost £10m; deferred consideration from Persimmon of £6.3m; Gresham House Strategic shares worth £5.8m; unlisted investments of £2.2m; and the £4m paid for Aitchesse. That’s solid asset backing that will provide the cash for Gresham House to develop both its strategic equity and real estate asset management businesses. On a bargain ratio of 0.5, the heavily asset-backed shares are worth buying.

 

WALKER CRIPS (WCW)

Aim: Share price: 43p

Bid-offer spread: 41.5-43p

Market value: £16.3m

Website: wcgplc.co.uk

The major progress being made at Walker Crips (WCW), the financial services company whose activities encompass stockbroking, investment and wealth management, has yet to be reflected in its share price.

An emphasis on a high-quality service offering, and an award-winning product range, have played their part in the company’s investment management business, delivering almost £1m in trading profit in the first half of the current financial year (March 2016 year-end), more than for the whole of the previous 12 months. In a low interest rate environment, structured investment products are proving popular with Walker Crips’ clients seeking a balance between equity exposure and capital preservation. Clearly, if the board can achieve its medium-term target of raising assets under management (AUM) to £5bn, then profit growth has much further to go.

Importantly, fee and non-broking income represent 60 per cent of Walker Crips’ total revenue, reflecting growth in higher-margin discretionary and advisory funds. This segment accounts for £2.1bn, up from £1.6bn in September 2014, of total AUM of £3.9bn. Part of the growth came from London-based Barker Poland Asset Management (BPAM), a private client wealth management business, acquired for £1.8m in cash and £200,000 of new shares in March 2015. But even after stripping out the contribution from BPAM, Walker Crips still managed to increase its discretionary and advisory funds by 5 per cent in its latest six-month trading period, during which time the FTSE All-Share declined by 9 per cent.

But, despite the fact that Walker Crips has reduced its reliance on more volatile transaction fees, and boosted recurring revenue from asset and wealth management, its market value of £16.3m is a fifth lower than its net asset value of £20.9m. In effect, the business is only being valued at £9.3m, or 10 times likely operating profits for the current year, once you adjust for £7m of net cash on the balance sheet. That’s hardly a punchy rating. Furthermore, the board under the leadership of chairman David Gelber continues to evaluate target companies for suitably measured value-added acquisitions. Walker Crips certainly has the firepower to do so.

On a bargain ratio of 0.49, offering a progressive payout and a 3.8 per cent dividend yield, and with cash accounting for 18.5p a share of Walker Crips’ net asset value of 55.5p, the shares are a value buy even in these uncertain times.