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Bargain Shares on a tear

Some buyers did manage to buy in at around the 8.29p offer price when the market opened on Friday, 3 February 2016, but most had to pay around the 9p mark that day and over the following week the 600-plus bargains that traded were mainly in the range of 9p-10p. Nonetheless, with Chariot's share price soaring to 20p last week, hundreds of you will have doubled your money.

The excitement surrounds a farm-out deal for Chariot's Rabat Deep Offshore permits in Morocco. A subsidiary of oil giant Eni has taken a 40 per cent operated interest in the licence and both Woodside and the Moroccan government retain 25 per cent equity interests. This reduced Chariot's equity interest to 10 per cent, but the company has now been fully reimbursed for its back costs and Eni will also provide a capped carry for Chariot's share of an exploration well. The JP-1 Jurassic carbonate prospect has gross mean prospective resources of 768m barrels located across a large 200 sq km area and drilling scheduled for early next year will cost more than $50m. If it hits pay dirt, JP-1 could be worth 17p a share on a risked basis to Chariot's shareholders and 87p a share on an unrisked basis, according to analysts.

Investors are also getting excited about the company's adjacent Mohammedia JP-2 prospect, and the Kenitra Offshore Exploration Permit, formerly part of Rabat Deep, in which Chariot holds 75 per cent interests. Material prospectivity has been identified in the JP-2 prospect and other areas in the shallower lower cretaceous play, which have a combined gross mean prospective resource in the region of 1bn barrels. Chariot is acquiring 3D seismic data to investigate the extension of the lower cretaceous play with the aim of defining further material prospectivity to the south of the prospects. The ongoing activity here is well worth noting as analysts point out that there is increasing interest from the oil and gas majors in farming into licences driven by low service costs as well as exploration success.

Clearly, the upside from the Moroccan prospects, and potential for a partnering programme on Chariot's licences in offshore Namibia, could be transformational for the small-cap company. It would benefit the share price too, which could easily rise several-fold in the event of drilling success and further lucrative farm-outs. But nothing is guaranteed in the exploration industry and, with Chariot's share price up 111 per cent in only eight weeks, I feel the sensible thing to do is to top-slice your holdings by selling two-thirds at the current bid price of 17.5p and running the balance for free to keep some skin in the game.

 

2017 Bargain Shares portfolio performance

CompanyTIDM

Opening offer price 03.02.17 (p)

Bid price on 03.04.17 (p)

Return (%)

Chariot Oil & GasCHAR8.2917.5111.1
CrossriderCROS47.96433.6
Management Consulting GroupMMC6.187.7625.5
BowlevenBLVN28.935.522.8
Manchester & London Investment TrustMNL291.6535521.7
AvingtransAVG20023015.0
Tiso BlackstarTBGR556212.7
Cenkos SecuritiesCNKS88.4912.9
H&THAT289.75287-0.9
BATM Advanced CommunicationsBATM19.2517.75-7.8
Average23.7

Deutsche Bank FTSE All-share tracker (XASX)

4094172.0

 

Bowleven's end game

Chariot's soaring share price is one reason why my portfolio is up almost 24 per cent on an offer-to-bid basis, handsomely outperforming the 2 per cent gain on a FTSE All-Share tracker fund. However, it's not the only one as there have been a raft of other winners, including Africa-focused oil and gas exploration group Bowleven (BLVN:35.75p).

I covered the ongoing ructions in the boardroom in two subsequent articles ('Shareholder activism', 22 February 2017) and ('Four small-cap buys', 21 March 2017), since when there has been a further twist as activist shareholder Crown Ocean Capital, a Monaco-based private investment vehicle with a 22 per cent stake in the company, has succeeded in removing all of Bowleven's directors apart from chief operating officer David Clarkson, who was spared the axe.

The contracts of former executive directors Kevin Hart and Kerry Crawford have been terminated, and new directors nominated by Crown Ocean are now progressing with implementing Crown Ocean's plans. These include returning some of the company's $90m cash pile, worth 23p a share, to shareholders, and realising value from Bowleven's interest in the Etinde permit off the coast of Cameroon, which brought in partners Lukoil and New Age in 2015 and left Bowleven with a valuable 20 per cent non-operated interest. The company is carried for $40m of net drilling on two appraisal wells, and is due to receive a further $25m once the final investment decision is made. Etinde accounts for half of Bowleven's book value of 89p a share.

I expect the farm-out deal, announced last month by the former board, with Aim-traded Victoria Oil & Gas (VOG) on the company's smaller Bomono gas project, off the coast of Cameroon, to proceed as planned. That's because it will realise near-term value through production, while tapping in to its new partner's expertise in commercialising local onshore gas deposits using an established gas infrastructure and customer network. It also reduces cash drain, too.

The bottom line is that Bowleven is in play and I really don't expect the company to be listed on the London market this time next year. So, having included the shares in my 2016 Bargain Shares portfolio at just shy of 19p, and rated them a buy again in this year's Bargain Shares portfolio, I feel a realisation value of 50p a share is not unreasonable in a break-up scenario, representing a 60 per cent discount to Arden Partners' latest risked net asset value (NAV) estimate. Buy.

 

Tiso Blackstar primed for a re-rating

I have been taking a close look at the latest results from Aim-traded South Africa-focused investment company Tiso Blackstar (TBGR:64p), which is selling off non-core assets in order to turn itself into a single-sector investor in the media industry and build on its wholly owned investment in The Times Media Group (TMG), the premier news group in South Africa. TMG's activities also encompass television, films and radio stations.

Bearing this in mind, expect the R1.5bn (£90m) disposal of Tiso Blackstar's 22.9 per cent stake in KTH, another South African investment company, to complete next month. The proceeds from the sale will wipe out borrowings of £58m and leave the £178m market cap company with net funds of £48m to invest in the media sector. Shareholders are seeing some of the profits as the board is paying out an interim dividend of 0.28p a share, which goes ex-dividend on 6 April, and plans to make a special payout of around 0.94p a share when the KTH sale completes. A move to the main board of the Johannesburg Stock Exchange should complete by the end of June, so improving both liquidity and investor interest in the shares, which will also retain their London listing.

Other assets up for sale include a stake in Robor, a specialist steel manufacturer, and Consolidated Steel Industries, which performed particularly well in the six months to the end of December 2016, lifting cash profits by 16 per cent to £2.9m. A combined price tag of £30m for these two businesses equates to five times their annual cash profit; a reasonable valuation. This means that, after factoring in pro-forma net funds, Tiso Blackstar's media interests are effectively being valued on a miserly four times their annualised cash profits, a bargain basement rating that should appeal to media-focused investors. Trading on a 26 per cent discount to last reported book value of 87p a share, I continue to rate the shares a value buy on a bid-offer spread of 62p to 64p. Buy.

 

Management Consulting's improved outlook

The key news for me in the full-year results of Management Consulting Group (MMC:8.1p), a business focused on implementing performance improvements for its corporate clients, was that the level of order input in its remaining operating business, Proudfoot, has been sufficient to produce a positive trend in revenues in the first two months of 2017, versus the last quarter of 2016. Moreover, it has continued to successfully secure follow-on work from existing clients.

True, current revenues are not yet at levels that restore the company to profitability after being radically downsized in the past year, but it's a step in the right direction. And although closing net funds of £38m, worth 7.5p a share, was shy of what I was expecting, this is in part down to a near-£8m reduction in trade payables and tax liabilities. The company also failed to get the benefit of the sharp fall in sterling against the dollar after it announced the $165m sale of its retail and consumer business, Kurt Salmon, last autumn.

However, with the share price fully backed by cash, costs being taken out of the business, and the revenue trend more positive, I feel the shares continue to offer recovery potential. Indeed, even if Proudfoot trades at levels seen in the first half of 2016 when it reported a £1.9m operating loss on revenues of £25.7m, this is not going to dent the bumper cash pile that much. Furthermore, a narrowing of losses could be on the cards if clients in the natural resources sector, a segment accounting for almost half of revenue, ease the purse strings. So, ahead of the next trading update, I would definitely hold on to the shares if you followed my advice to buy a couple of months ago.

Small-cap M&A potential

Avingtrans (AVG:238p), a maker of critical components and services to energy, medical and industrial sectors, has announced that it’s in bid talks with specialist engineering Hayward Tyler (HAYT:48p). The news sent shares in the target up a third on Friday, but they are still down almost 50 per cent in the past five months, a reflection of a disappointing first half operating loss and guidance of only cash profit break-even for the full year to end March 2017.

I can see why the directors of Avingtrans are interested in deploying the company’s £27.8m on this target, a sum worth slightly more than Hayward Tyler’s own market capitalisation, as they can deleverage its highly geared balance sheet, while at the same time exploiting a record order book and a pipeline of new business opportunities worth over £500m. There is no certainty of a bid being agreed, but if Avingtrans senior management team can work their magic as they have done so well in the past, then there is significant scope to boost Hayward Tyler’s margins and profits.

So, having last rated shares in Avingtrans a buy at 215p ('Engineering reratings', 6 March 2017), I have no hesitation reiterating that advice at 238p as a sensibly priced acquisition has potential to be significantly earnings enhancing over the next few years. Buy.

Broking for a profitable recovery

As anticipated corporate broker Cenkos Securities (CNKS:94p), a leading brokers in London for growth companies, has reported a sharp fall in pre-tax profits in 2016, a reflection of the decline in fundraising activity on the junior market in the first half of 2016. Last year the company raised £1.3bn for clients, down from a record £3.1bn in 2015 which included £1.1bn raised in the IPO of BCA Marketplace (BCA).

However, Cenkos still managed to deliver a healthy pre-tax profit of £4.4m on revenues of £43.7m and retains a rock solid balance sheet with net funds of £23.8m equating to 42p a share, or 45 per cent of its market capitalisation. A final dividend of 5p a share goes ex-dividend on 27 April which takes the total to 6p a share and means the dividend yield is pretty healthy at around 6.4 per cent.

Of course, it was prospects for a rebound in corporate broking activity on the junior market which prompted me to include the shares in this year’s portfolio. Bearing this in mind, chief executive Jim Durkin notes that “there continues to be good institutional demand to fund high quality companies and ideas, since the start of this year we have been engaged in a number of fund raisings for clients, and our current pipeline is encouraging." As financial adviser and nominated broker to 119 companies, Cenkos is well placed to exploit the much improved stock market environment and I continue to rate the high yielding shares a buy.

Manchester shares head north

Shares in small closed-end investment trust Manchester & London (MNL:357p) are on a tear, rising by 21 per cent on an offer to bid basis since I included them in this year’s portfolio. An analysis of the bargains going through the London stock market shows that almost 250 of you were able to buy around the 293p level on the day the portfolio was released, and the price only edged up a few percentage points over the following week when another 400 investors bought in.

It’s easy to see why the company is of interest. That’s because over half the investment portfolio is invested in US-listed shares with a distinct bias to the technology sector. So, with the US tech sector rallying strongly, Manchester & London’s net asset value (NAV) per share has surged almost 7 per cent from 367p to 392p in the past eight weeks. This means that two-thirds of the share price gain reflects a halving of the share price discount to NAV to 10 per cent, but it still looks too deep to me.

Another reason for investors’ interest is because Mark Shepherd, who leads the investment team, has sold down 2.25m shares of his holding to improve liquidity in the shares no end. He still owns 11.2m shares, or 52.2 per cent of the equity, so this is not a concern. The prospect for another healthy dividend is another attraction as only once in the past decade has the dividend been less than 10p a share. Buy.

Finally, I covered the full-year results of the three other constituents of this year's Bargain Shares portfolio in the following articles, all of which are available to view on our website:

BATM Advanced Communications: Buy at 18.25p, target 25p ('Five value opportunities', 15 March 2017)

H&T: Buy at 283p, target 375p ('Five value opportunities', 15 March 2017)

Crossrider: Buy at 68p ('Going for growth', 20 March 2017)

 

MORE FROM SIMON THOMPSON...

A comprehensive list of all the investment columns I have written in 2017 is available here.

The archive of all the share recommendations I made in 2016 is available here

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