In fact, I selected no fewer than three investment companies that matched my strict criteria and which I believe offer scope to produce positive returns over the course of the coming year irrespective of the market backdrop. I also ran my rule over a number of other investment companies which may have failed to make it into this year's portfolio, but some offer upside potential nonetheless.
Cashed up and undervalued
One of these is a small-cap investment company LMS Capital (LMS: 68p) whose board has been pursuing the realisation of its investments with a view to returning cash to shareholders. I have been following the shares closely for the past five years now, having initiated coverage when the price was 54.5p ('Capital returns', 11 February 2011), Although the share price has only risen by 26 per cent in that time, this only tells part of the story as LMS has returned chunks of cash back to shareholders, too.
In fact, it has had four tender offers: a buy-back of 17.4 per cent of the share capital at 84p in December 2012; a buy-back of 17.2 per cent of the share capital at 90p in July 2013; a buy-back of 22.5 per cent of the share capital at 95p in May 2014; and a buy-back of 28.7 per cent of the share capital at 96p in December 2015. This means that if you who bought 10,000 shares at 54.5p on my buy advice five years ago you will still retain a holding of 3,778 shares, worth £2,569 and with a net asset value close to £3,626, and have received total cash proceeds of £5,660. That cash return is more than the initial investment so you will now have a free ride on the balance of your holding.
Furthermore, there have been multiple buying opportunities along the way. For instance, the shares were trading at 72p, or 23 per cent below end of June 2015 book value of 94p when I highlighted the potential for an imminent and low-risk cash windfall ('Capitalising on tender offers', 19 November 2015). If you had bought in at 72p a share on that advice three months ago, and subsequently tendered 28.7 per cent of your holding at 96p a share in December, then your remaining holding has a break-even of 62.3p a share post the tender. Or put it another way, net of the cash return, the holding has turned in a near 10 per cent profit in the past three months during which time the FTSE All-Share index has fallen by 10 per cent.
The point being is that it's possible to exploit trading opportunities such as this because not all investors will spot them straight away, or for that matter realise the glaring valuation anomaly on offer. With that in mind, a reader has rightly pointed out that LMS Capital's share price has pulled back 15 per cent on short-term profit taking from a high of 80p in early December to 68p now. The obvious question is whether this represents another buying opportunity given the shares are on a 29 per cent discount to the their last reported net asset value of 96p? In my view it does.
A discount too deep
That's because in the tender offer circular that was sent out to shareholders at the end of November 2015, LMS Capital had shareholders funds of £139m as of 30 September 2015, of which £47.4m was in cash and around £100.4m in listed and unlisted investments. LMS Capital also had liabilities of £9m. So, net of the £40m of cash that was subsequently returned to shareholders at the end of last year, the company's pro-forma net asset value is £99.2m of which £7.4m is in cash. This means that net funds equate to more than 10 per cent of its current market capitalisation of £70.4m.
Moreover, sterling has fallen by 4.25 per cent from £1:$1.513 to £1:$1.449 since the end of September 2015. That's worth noting because I reckon that after adjusting for disposals made in the third quarter of last year around two thirds of the investment portfolio is denominated in dollars. So, even after factoring in for the $2.7m decline in value of LMS Capital's holding of 13.9m shares in New York Stock Exchange-quoted Weatherford International (US:WFT), a global diversified upstream oilfield service group, I reckon the US portfolio has actually risen in value by 1.5 per cent since September 2015. Based on 103.4m shares in issue, this lifts net asset value by around a penny to 97p a share, of which net cash accounts for more than 7p a share. The stake in Weatherford is worth £6m at current exchange rates, or 6p a share.
So after stripping out the highly liquid stake in Weatherford and cash on the balance sheet from LMS Capital's share price, this means that its other shareholdings, mainly unquoted private equity-style investments and fund holdings, are being valued at a 35 per cent discount to their last reported book value per share. That seems very harsh considering that the company has successfully been divesting at above the carrying value of its investments. Indeed, the shareholding in Wesupply, a B2B service provider that enables supply chains to exchange data efficiently and effectively, realised £10.6m after costs (but before carried interest) in the third quarter last year, or 41 per cent above end June 2015 carrying value in LMS Capital's accounts. This is not an isolated example either.
Of course, the board still needs to dispose of the rest of its £100m investment portfolio and the spike in investor risk aversion may make this harder short term. However, with the shares trading so far below book value per share, and with that measure of shareholder value likely to have held up well in recent months, then there is a huge margin of safety here. Indeed, I reckon that the company increased net asset value per share from 93p to 97p last year. Ahead of those full-year results in four weeks' time, I rate LMS Capital's shares a buy.
Leaf Clean Energy files legal action
I read with interest an announcement from Aim-traded clean energy investment company Leaf Clean Energy (LEAF: 37p), regarding its shareholding in Invenergy Wind LLC, North America's largest independently owned wind power generation company. Leaf Clean Energy is in the process of selling off its assets in order to return cash to shareholders and the 2.3 per cent equity stake in Invenergy is by far the largest of its investments.
After adjusting for last autumn's return of $10.1m (£6.44m) of cash through a mandatory redemption of shares at 60.82p, I estimate that the company now has a net asset value of $110m (£71.3m), or 64p a share, based on 118.16m shares in issue. The holding in Invenergy is worth $95m, or 55p a share, and the company also has net funds of around $6m.
So, with Leaf Clean Energy's share price trading 42 per cent below book value, then the holding in Invenergy is worth 50 per cent more than its own market capitalisation. Leaf Clean Energy originally invested $40m in Invenergy convertible loan notes in 2008 and 2009, and subsequently converted these into equity last year. That investment has increased significantly in value, and with good reason too, as Invenergy sold 930 mega watts of wind power capacity for $2bn (£1.4bn) to New York Stock Exchange-listed TerraForm Power (US:TERM) at the end of last year.
Bearing this sale in mind, Leaf Clean Energy's board claim that the company's equity investment in Invenergy is governed by the Operating Agreement it entered into when it acquired the convertible loan notes and that Invenergy was required to either obtain its consent to the TerraForm Sale prior to its consummation or, absent such consent, make a payment to Leaf Clean Energy upon the closing of the sale. The amount of such payment is determined by a formula in the Operating Agreement which Leaf Clean Energy’s board has calculated to be $126m, or £87m. That's double Leaf Clean Energy's own market capitalisation.
I would flag up that Leaf Clean Energy has not attributed any value to this disputed payment on its last balance sheet, mainly because Invenergy has informed the company that it does not believe that Leaf Clean Energy is entitled to it. So the fact that Leaf Clean Energy has filed a complaint against its investee, Invenergy, in the Delaware Court of Chancery in Delaware, USA, is of great interest. Of course, there can be no assurance that Leaf Clean Energy will prevail in its legal action, nor how long the proceedings will take, but the fact that it has initiated an action suggests there is a strong case to be made.
Moreover, with its shares trading so far below book value then any upside from this claim is in the price for free. I would also point out that as of eight weeks ago Leaf Energy now has the right to put its 2.3 per cent shareholding to Invenergy with the sale price either agreed between the two parties, or by a third-party independent appraiser. By the same token, Invenergy has a similar option to call the interest and the purchase price will be determined in the same manner. The filing of a complaint could prove to be the catalyst for some action here.
The bottom line is that shares in Leaf Clean Energy are on my active watchlist, and will become an outright buy on a successful exit from the Invenergy investment.
Calling time on Eurovestech
It has been almost a year since I last looked at Eurovestech (EVT:7p), a small-cap pan-European development capital fund ('Taking profits', 25 February 2015).
I first advised buying the shares at 9.3p in my 2012 Bargain Shares Portfolio when they traded on the Alternative Investment Market (Aim). The company then paid a special dividend of 1.32p a share when it moved its trading facility to the London Matched Markets Exchange (LMMX) share matching facility, formerly JP Jenkins (www.lmmx.co.uk) in order to save the £125,000 annual Aim listing costs. Unfortunately, the downside of this move is that the shares have completely fallen off the radar of most small cap investors.
It hasn't helped that the investment performance in the last financial year to end June 2015 was disappointing to say the least. This was largely down to a write-down of £6.8m on the investment in Maxifier, a company that provides publishers with a service that optimises their online marketing campaigns. The company was sold in early July 2015 in a share exchange to Cxense AS (Nor:CXENSE), a company listed on the Oslo Stock Exchange, for just shy of £2m initial consideration with a maximum earn-out of $4.7m should Maxifier achieve certain sales levels.
The good news is that the progress made at two other core investments made up most of the write-off on Maxifier. These holdings are Magenta Technology, a provider of software that manages fleet vehicles more efficiently; and Toluna, a leading online panel and survey technology company, providing digital data collection and consumer insight to research agencies, businesses and individuals. The 49.6 per cent stake in Magenta was revalued upwards from £1.8m to £2.m in the 12-month trading period, and the 14.9 per cent shareholding in Toluna increased in value by £4m to £24.2m. This is by far the largest of Eurovestech's investments and accounts for 54 per cent of its net asset value of £44.1m. Bearing this in mind, Toluna entered 2016 with prospects of generating double digit top-line growth, which is encouraging given the size of the investment.
The value of Eurovestech's 11.5 per cent holding in Aim-traded Kalibrate Technologies (KLBT: 103p), a profitable global leader of fuel pricing and retail network planning solutions, has held up well at £3.8m. The net result was that the company's net asset value per share decreased from 13.4p to 13p in the 12-month period.
That said, it was also disappointing that the board only spent £113,000 repurchasing 1.6m shares at 7p each in the financial year, having acknowledged the deep share price discount to book value. Unfortunately, in the absence of a significant share buy-back programme, it's really difficult to see any other catalyst emerging to get the share price moving. In the circumstances, I am belatedly calling time and if you can get 7p a share, I would take it especially as the sell-off in global stock markets this year is throwing up alternative investment opportunities worth capitalising on. Sell.
MORE FROM SIMON THOMPSON...
I have written articles on the following 69 companies since the start of this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)
■ 32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)
■ BP Marsh & Partners : Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)
■ Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)
■ Bloomsbury Publishing: Buy at 150p, target range 175p to 185p ('Book into a trading play', 11 February 2016)
■ PV Crystalox Solar: Speculative buy at 8.2p ('Lights brighten at PV Crystalox Solar', 11 February 2016)
■ Alpha Real Trust: Buy at 80p, target 105p ('High yield property play', 15 February 2016)
■ LMS Capital: Buy at 68p; Leaf Clean Energy: Await news on Invenergy; Eurovestech: Sell at 7p (‘Investment company watch’, 16 February 2016)
■ 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
