This means that if you followed my advice to buy Bioquell's shares at 149p in this year's Bargain Shares portfolio, you will have an average buy in price of 98p a share after taking into account the cash distribution. Clearly, some investors have decided to sell their remaining holdings as soon as the tender closed on Monday this week, hence the subsequent share price fall. That could prove to be a costly mistake on their part in my view.
That's because the company is in bid talks with several parties for the sale 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. I believe the last option is by far the most likely.
Bearing this in mind, the company now has 22.9m shares in issue which at a price of 140p gives the company a market value of £33.2m, a modest premium to its net asset value (NAV) of £24.1m. Moreover, Bioquell is completely debt-free, has almost £7m cash in the bank, and owns £5.3m of plant and equipment. The working capital position is strong, too, with current assets of £9m almost double current liabilities. From my lens at least, a price-to-book value ratio of 1.4 times is a modest valuation for a company that increased cash profits by £1.2m to £3.4m on revenues of £26.9m last year and reported underlying operating profit of £771,000 after accounting for a £1.6m non-cash depreciation charge on plant and equipment and almost £1m of amortisation charges.
Or put it another way, strip out net cash from the current market capitalisation, and Bioquell's retained operations are being valued at £26m, or just 7.6 times last year's cash profits. That valuation fails to recognise the strong prospects for its biocontamination control technology products, based around hydrogen peroxide vapour (HPV), and which chairman Nigel Keen clearly spelt out at the time of the full-year results seven weeks ago. At the time he noted that "underlying demand for the eradication of bioburden and the provision of an aseptic environment remains strong in the Life Sciences sector. Antibiotic resistance and hospital acquired infection remain real and increasing issues for healthcare providers around the world. There remains ongoing geopolitical stress in a number of parts of the world, which is helping drive demand for our defence business".
True, the sale process has been dragging on, and the board has said that it's unlikely that a sale of the company would achieve a price higher than the 200p tender offer price. But with the shares trading on a bid-offer spread of 140p to 145p, there is a huge safety margin here, especially as analysts believe that a purchaser could easily take out substantial costs from the business, not least £1.5m of annual central costs. That's worth noting because at the current price the business is in effect being valued at only 5.5 times cash profits before annual running costs. There is clear value here and I would be very surprised if a sale is not concluded at a 20 per cent plus premium to the current share price.
So having included the shares at 149p (equivalent to 98p post tender offer) in this year's Bargain Shares portfolio, and maintained my buy advice at 165p (equivalent to 130p post tender offer) when details of the buyback was announced ('Bargain shares updates', 4 May 2016), I would recommend that you use all the cash received from the tender offer to buy back the shares in the market at what I believe is still a bargain basement price. Buy.
Minds + Machines record auction
Minds + Machines (MMX:10p), a company that provides services in all areas of the domain name industry, ranging from registry ownership to consumer sales, and primarily focused on the new top-level domain (gTLD) space, has reported another surge in sales of its .vip gTLD.
When I highlighted the record breaking sales figures a month ago ('Bargain shares updates, 25 May 2016), the company had taken more than 200,000 registrations within the first five days of launch and generated aggregate billings of $3.2m (£2.2m). I can now reveal that registrations exceeded 400,000 in the first 20 days since launch and the company has taken total billings and orders worth more than $5.5m (£3.7m). Minds + Machines paid $3.1m for the gTLD in an auction in September 2014, highlighting the revenue potential from its portfolio.
Demand from China accounts for the vast majority of sales and at premium prices too. In fact, the 20 premium .vip names auctioned off in China generated gross proceeds of $632,000. Chief executive Toby Hall plans to release further .vip premium inventory on a regular basis throughout the next 12 months through the auction channel and expects to materially build the company's revenue streams.
The success of the .vip sales means that total domains under management have rocketed by 127 per cent to almost 700,000 in the first five months of this year. It also explains why Minds + Machines share price has risen by 25 per cent since I included the shares in my 2016 Bargain Shares portfolio. I feel that the re-rating has some way to run given the hidden value in the balance sheet and the earnings potential from a portfolio of 28 gTLDs which had a book value of $41.3m (£28.3m) in Minds + Machines last accounts, a sum worth 3.75p a share. The company is also sitting on net cash of 3p a share. Clearly, if the business can move into profitability, and it's going the right way, then the shares should be priced on a decent premium to book value of 7.1p a share.
I am not the only one thinking this way, as analyst Tintin Stormont at broker N+1 Singer believes that "with Minds + Machines now a pure-play registry business, it's business model should show strong growth which eventually translates into predictable, recurring revenues (renewals), strong operational gearing leading to high operating margins, and excellent cash conversion". N+1 Singer has a 'discounted cash flow model' derived valuation of between 11p and 32p a share based on the assumption of 20-30 per cent annual billings growth over the next three years, and a cost base that grows by 8-12 per cent per year post restructuring. Ms Stormont believes "the scope for value creation is significant". Clearly, the insiders are of the same opinion as, in the past month, Mr Hall doubled his holding to 500,000 shares and non-executive chairman Guy Elliott acquired another 600,000 shares at 10p each to take his holding to 3.07 per cent. On a bid-offer spread of 9.75p to 10p, the shares rate a buy.
Oakley takes time out for IPO
Last week's flotation of media group Time Out Group (TMO:146p), the globally recognised brand of city-based leisure magazines, hit the markets at the worst possible time as investors were firmly in risk off mode in the run-up to the EU Referendum. The company raised gross proceeds of £90m at 150p a share, and net proceeds of £58m after transaction costs and paying down debt, to give a market capitalisation of £195m.
My interest in Time Out stems from the shareholding in the company of Oakley Capital Investments (OCL:140p), an Aim-traded private equity investment company. Time Out accounts for £91.7m, or 24 per cent of Oakley's net asset value (NAV) of £382m, so is a significant shareholding. True, the 1.7p a share uplift to Oakley's NAV post the IPO was less than I had anticipated, but the key here is that Time Out now has a wider group of shareholders and the sizeable capital raise will fund the development of the business.
As I noted when I highlighted the investment potential of Oakley a few months ago ('Take time out to consider Oakley', 25 April 2016), Time Out is now a multi-platform media and e-commerce business with a content-distribution platform comprising free magazines, mobile apps, website, live events and the new Time Out Market subsidiary. It has a presence in 107 cities across 39 countries and a worldwide audience reach of 111m consumers. Half of annual revenues of £28.5m are derived from print, but the digital side is exploding, growing at a compound annual rate of 22 per cent between 2010 and 2015. The admission document revealed that digital revenues increased by 38 per cent in the first four months of this year to account for more than half the total.
Oakley has invested substantial amounts of capital to develop Time Out, which is why the media group posted an operating loss of £18.5m on revenue of £28.5m in 2015. Of the cash proceeds from the IPO around £20m will be used to develop the successful Time Out Markets concept in new cities; £15m is earmarked for sales and marketing to boost consumer awareness in e-commerce and social media; and £10m will fund technology and product development. The key here is monetising both Time Out's global audience and digital advertising propositions via e-commerce and improving the data and content provided to local businesses.
Of course, there is execution risk, but with Oakley's shares rated on a 30 per cent discount to pro forma NAV of 202p, and cash and interest receivables accounting for 58p a share of NAV, then in effect the private equity portfolio and the interest in Time Out Group is being attributed a value of only 57p in the pound. I feel that's a harsh valuation for a company that produced a 33 per cent return on its investment portfolio last year, driven by strong increases in the cash profitability of the investee companies. Buy.
Inland bumper land sale
Shares in Inland (INL:70p), the specialist housebuilder and brownfield land developer, have drifted since I recommended running profits at 80p ('Housebuilders updates', 6 Apr 2016), albeit the price is still up 200 per cent since I initiated coverage in my 2013 Bargain share portfolio ('How the 2013 Bargain shares fared, 7 Feb 2014). I still believe that a target of 95p is achievable and two large land sales last week did nothing to change that view.
The company offloaded a 1.05 acre site in Acton, West London and a 0.6 acre site in Farnborough, Hampshire for £18.1m, or double book value, which means that profit from this activity is set to be well ahead of the £7.5m forecast embedded into house broker Stifel's estimate for the 12 months to end June 2016. It also virtually guarantees that adjusted pre-tax profits for the 12 months to end June 2016 will hit analysts' estimates of £16.8m, up from £15.5m the prior year. I have excluded gains on investments of around £14m for both years which skew the figures. On this basis, Inland's shares are rated on little over 10 times earnings and offer a 1.7 per cent dividend yield.
They are also priced on a thumping 25 per cent discount to Stifel's spot EPRA net asset value of 93p, and a 35 per cent discount to June 2017 estimates. That valuation suggests investors are worried about a sharp slowdown in the south east England housing market, a view that seems overplayed irrespective of the results in the EU Referendum. The fact is that Inland continues to offload oven ready land to housebuilders at above book value, has a growing and highly profitable housebuilding operation, and there is significant hidden value in its land bank. Buy.
