It's a company I included in my 2016 Bargain Shares portfolio when the price was 41.2p, since when the board has paid out a dividend of 8p a share on Friday, 24 June 2016. And given recent events, shareholders are now in line for an even bigger bumper payout, details of which should be forthcoming at the half-year results in September, and one that has been enhanced significantly by sterling's dramatic fall against the US dollar in the past week. Let me explain.
Based on 110.75m shares in issue, the company's net asset value (NAV) of $126m (£94.7m) at the end of 2015 equates to 113.75 cents, or 85.5p a share at current exchange rates, up from 77p at the time of the full-year results in March 2016. So after accounting for this month's 8p a share payout, pro forma NAV is 77.5p a share of which cash and receivables account for 14p a share and Juridica's 15 outstanding cases have a carrying value of 63.5p a share.
However, the company has reached settlement in two of those cases and will receive a total of $65.8m (£49.5m) before the end of September when it's due to report its half-year results. That's a chunky sum and represents a $10.8m premium to the $55m carrying value of the two cases in Juridica's 2015 annual accounts, although I have been conservative in my spot NAV assumption above given the need to account for tax and other reserves. Nevertheless, the cash from these cases still equates to 44.5p a share.
In other words, the company's cash balance will shortly rise to 58.5p a share, which means that we are in effect getting a free ride on the other 13 legal cases which have a book value in the accounts of $35.4m, or 24p a share using an exchange rate of £1:US$1.33. And given that the board intends to distribute funds back to shareholders, it now looks a racing certainty that shareholders can expect news of another hefty dividend in the forthcoming half-year results.
Clearly, there is no guarantee that the remaining cases to be settled will have a positive outcome. However, the company has a great track record, having generated cash proceeds of $222m (£156m) from two-thirds of the 30 investments made since its formation, of which half have been concluded, representing a return of 30 per cent-plus on its invested capital. So to attribute nil possibility of a successful outcome on any of the remaining cases, as implied by the current valuation, is clearly anomalous. Moreover, given all the cases are being settled in the US courts, if sterling weakens further against the US dollar - as some currency strategists believe it will - then this will boost Juridica's NAV even more.
So, although Juridica's shares have produced a total return of 50 per cent since I included them in this year's portfolio, given the substantial cash backing, the board's commitment to return cash back to shareholders as the company is being wound down, and the fact that the price still trades 27 per cent below my estimate of spot NAV per share, this looks a pretty safe holding in these uncertain times. On a bid-offer spread of 54.4p to 56.5p, I rate Juridica's shares a buy.
I would also point out that Mind + Machines (MMX:9.75p), a company that provides services in all areas of the domain name industry and is primarily focused on the new top-level domain (gTLD) space, is a major beneficiary of the slump in sterling. The company reports in US dollars, its functional currency, and a glance at the breakdown of its assets and cash deposits in the latest annual report reveals that almost 90 per cent is US dollar-denominated. By my calculations, at the current exchange rate of £1:US$1.33, NAV per share of 7.9p includes cash deposits of 3.35p a share and a portfolio of domain names worth 4.1p a share. Given the company is making strong progress in commercialising these domains, and directors have been heavily buying, the shares should be trading on a decent premium to book value. Buy.
French Connection stakebuilding
WA Capital, the investment vehicle of 44-year-old Will Adderley, former chief executive and current deputy chairman of homewares retailer Dunelm (DNLM:770p), picked up almost 1m shares in fashion retailer French Connection (FCCN:36.5p) on Monday this week to take his stake in the company above 8 per cent. WA Capital only started buying at the start of this year.
The company is the laggard in this year's portfolio and weakness in shares across the general retail sector since the Brexit vote has not helped. Also, the top five shareholders control almost 72.7 per cent of the equity, which makes the shares more volatile and prone to large moves on low trading volumes. But ignore the general market noise, and the stakebuilding of WA Capital is intriguing to say the least. The fact that Marion Sears, a 54-year old non-executive director of Dunelm and a former JP Morgan investment banker with M&A experience, joined WA Capital's board a few months back may be pointing towards Mr Adderley's true intentions. WA Capital has no other listed interests apart from a 25 per cent stake in Dunelm, worth £390m, and the 8.16 per cent stake in French Connection.
It's easy to see why WA Capital continues to stake build at these levels. Strip out a cash pile worth £14m and one that equates to almost 40 per cent of French Connection's market value of £35m, and the company's retail operations are being rated on just 0.13 times last year's annual sales of £164m, a valuation that will prove anomalous if the board can execute a return to profitability. It's worth noting, too, that the business is up against soft comparatives from last year for the first half to end-July 2016, so I fully expect French Connection to report positive like-for-like sales in the current trading period.
So, ahead of the half-year results scheduled for September, I remain a buyer of the shares at 36.5p.
Volverre buying opportunity
Frankly, it's ridiculous to value shares in Aim-traded investment company Volvere (VLE:465p) on a 100p-plus discount to the company's end-2015 NAV of 569p. The company is led by Jonathan and Nick Lander, who have the respective roles of chief executive and finance director, having founded the company 13 years ago to invest in distressed and undervalued businesses with a view to turning them around and exiting at a hefty profit. They have been successful too. NAV per share rose by a third to 569p in 2015, and over the past 13 years it has increased at a compound annual growth rate of 14.3 per cent, a performance that any fund manager would be proud of. There is solid asset backing to suggest the upwards momentum can be maintained.
After adjusting for borrowings, net funds of £13.4m account for 70 per cent of the company's market value of £18.9m, so in effect its three investee companies are being attributed a value of only £5.5m. The largest investment is an 80 per cent shareholding in food producer Shire Foods, a company that increased revenue by 28 per cent to £15.5m last year and doubled underlying pre-tax profit to £1.6m. The holding is very conservatively valued in Volverre's accounts at £5.8m, or 5.5 times Shire Foods post-tax profits.
The 100 per cent stake in Impetus Automotive, a provider of consulting services to the automotive sector, including vehicle manufacturers, dealerships and national sales companies, has a carrying value of £2.5m. In the nine months since Volvere took control of the business, Impetus generated underlying operating profit of £583,000 on revenue of £12.1m, so is being valued on only four times annualised net profits. A small security business, Sira Defence, which develops products to help the police use CCTV effectively, posted pre-tax profits of £118,000 and has nil value in the accounts.
In other words, you can buy into these businesses seriously on the cheap at the current price. That's something I would recommend doing. Buy.
Walker Crips raises dividend on profit surge
I still feel there is clear value on offer in the shares of Walker Crips (WCW:47p), the financial services company whose activities encompass stockbroking, investment and wealth management.
The company more than doubled reported pre-tax profit to just shy of £1m in the 12 months to end March 2016 and even if you strip out exceptional gains that flattered the performance, underlying operating profit rose by a fifth to £0.65m. Higher-margin discretionary and advisory funds now account for £2.3bn, up from £2bn in March 2015, of total assets under management (AUM) of £4.1bn, a record high. The boost in AUM helped drive investment management fees up by 30 per cent to £13.6m and despite declines in equity markets the target of achieving £5bn of AUM by 2018 looks firmly in reach.
Part of the growth in AUM 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. The contribution from this business was above expectations, a performance that gives weight to the board’s stated strategy of materially increasing the proportion of revenues earned as fees, rather than transaction-driven commissions. In fact, non-broking income now accounts for almost 62 per cent of group revenues of £26.1m, over five percentage points higher than a year earlier.
True, trading activity in the first few weeks of the new financial year has been quiet, hardly an unexpected outcome considering the caution investors have shown in the run up to the EU Referendum. However, there are reasons for “cautious optimism”. For instance, the group’s competitive range of structured products is gaining traction amongst financial advisers and their clients. With the addition of new product lines we can “expect another strong contribution from this key offering.” In addition, the increase in the ISA annual subscription to £20,000 next April, coupled with the introduction of a new Lifetime ISA in the last Budget, have boosted the ISA regime. The group now has £600m worth of ISA AUM. Moreover, net funds of £7.2m are worth 19p a share, or 40 per cent of the market value, and provide the board with the firepower to make further measured value-added acquisitions.
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 £17.7m is still well below net asset value of £20.6m. There is a decent dividend too. Having raised the full-year payout by almost 9 per cent to 1.85p a share, the dividend yield is almost 4 per cent.
So having advised buying the shares at 43p in this year’s Bargain Shares portfolio, I continue to rate them a buy on a bid-offer spread of 45p to 47p. Buy.
