Over the years a recurring theme of my annual Bargain Shares Portfolios is the potential for corporate activity. It makes sense given that my balance sheet based investment approach highlights companies in deep value territory, so there is always scope for predators and other value investors to run their slide rules over these businesses too.
A case in point is the ousting of the board of small cap Africa-focused oil and gas exploration group Bowleven (BLVN:30.75p) by activist shareholder Crown Ocean Capital, a Monaco-based private investment vehicle. The liklihood of a hefty capital return to shareholders is one of the reasons why the shares are up by more than 60 per cent since I first advised buying at just under 19p in my 2016 Bargain Shares Portfolio. In fact, I was so convinced of the likelihood of the large share price discount to book value to narrow further that I included the shares in this year's portfolio too at just shy of 29p. Interestingly, since I last advised buying ('Bargain shares on a tear', 3 Apr 2017), Crown Ocean Capital raised its stake from 22 per cent to 25 per cent. The new board has also issued an important corporate update, and one well worth flagging.
The key points to note are that in line with the new strategy of turning Bowleven into a holding company that does not expect to pursue any new exploration activity, UK headcount is being slashed from 18 to five employees, contractors will be used for any additional support needed to ensure a proper stewardship over the company's Etinde and Bomono assets in Cameroon, and headcount and costs in those operations will be streamlined. However, Bowleven will still retain the requisite technical capacity required to enable it to meet contractual obligations under the terms of the Etinde joint venture and to pursue the most efficient route to maximise value in relation to both Etinde and Bomono. The net result of which is that monthly overheads will be slashed to around $350,000 in the second half of this year, albeit at a one-off cost in the region of $3m-$4m.
I also understand that discussions are ongoing between the Etinde joint venture and the Cameroon authorities to agree plans for the development of the Etinde resources, and the joint venture has submitted a request to convene an Operating Committee Meeting to agree the forward plan. Bowleven remains in discussions with the Cameroon authorities in relation to the outstanding approval of the Bomono Farm-In which will allow Bomono hydrocarbons to be produced into the Victoria Oil and Gas (VOG), Gas du Cameroon, pipeline and to connect Bomono into the domestic gas market through the existing pipeline infrastructure.
Importantly, once all the development options for the gas monetisation of both the Etinde and Bomono assets have been determined and costed, Bowleven's board anticipates being in a position to determine the cash requirements of the business and whether there are surplus assets that can be returned to shareholders. Clearly, there will be surplus cash to return to shareholders given that the company had net funds of $90m at the end of March 2017, a sum worth 21.6p a share, and has access to a $40m net drilling and testing carry (worth 9.6p a share) which is expected to cover its share of two appraisal wells on Etinde. In addition, Bowleven is in line to receive a further $25m (worth 6p a share) on achieving the final investment decision (FID) at the Etinde project. This means that exploration assets with a book value of $217m at the end of 2016, a sum worth 52p a share, are in the price for free.
Ultimately, anyone buying Bowleven's shares has to ascertain a likely break-up value of the company in the event of a sale of the Bomono and Etinde assets. My view remains that 50p a share is not an unreasonable estimate including the current cash pile as it effectively places a value on the company's two main assets at half their carrying value in the accounts. Please note that I have ignored the 9.6p a share of value in the drilling and testing carry at Etinde, and the potential cash windfall of 6p a share on the FID, in my calculations.
So, ahead of the next update on the likely level of cash return to shareholders, I continue to feel that Bowleven's shares are very undervalued, and worth buying at 30.75p.
How Simon Thompson's 2016 Bargain Shares Portfolio has performed
|Company name||TIDM||Opening offer price (p) 5.02.16||Latest bid price (p) 30.05.17||Dividends (p)||Total return (%)|
|Mind + Machines (see note three)||MMX||8||11||0||40.8%|
|Bioquell (see note one)||BQE||125||163||0||30.4%|
|Juridica (see note two)||JIL||36.1||14||32||27.4%|
|Oakley Capital (see note 5)||OCL||146.5||172||4.5||20.5%|
|Gresham House Strategic||GHS||796||860||0||8.0%|
|Walker Crips (see note 4)||WCW||44.9||38.25||1.85||-10.7%|
|Deutsche Bank FTSE All-share ETF index tracker (LSE:XASX)||341||416||16.28||26.8%|
1. Simon Thompson advised buying Bioquell's shares at 149p in February 2016. Bioquell bought back 50 per cent of shares in issue at 200p each in June 2016 through a tender offer and Simon recommended buying back the shares in the market at 145p to give an average buy-in price of 125p ('Bargain shares updates', 22 Jun 2016).
2. Simon Thompson advised buying Juridica's shares at 41.2p in February 2016. Juridica subsequently paid out a special dividend of 8p a share in June 2016 and Simon recommended buying shares in the market at 61p using the cash proceeds to take the average buy-in price to 36.1p ('Brexit winners', 1 Aug 2016). Juridica then paid out a special dividend of 32p a share in September 2016 and total return reflects this distribution. Simon advised to sell at 14p ('Taking Q1 profits and running gains', 4 Apr 2017).
3. Simon Thompson advised buying Mind + Machines' shares at 8p in February 2016. Mind + Machines subsequently bought back 13.22 per cent of the shares in issue at 13p a share. The total return reflects this capital distribution.
4. Walker Crips has paid out a dividend of 1.85p since 5 February 2016.
5. Oakley Capital paid a maiden dividend of 4.5p on 30 January 2017.
Strategic review presents buying opportunity at Mind + Machines
Bowleven is not the only company in my 2016 Bargain Shares Portfolio that has been benefiting from corporate activity. The same is true of Mind + Machines (MMX:11.25p), a service provider in the domain name industry focused on the new top-level domain (TLD) space. I last advised buying the shares at 9p a few months ago ('Eight small-cap plays', 27 Mar 2017), having first included them, at 8p, in last year's portfolio. I also advised tendering 13.2 per cent of your holdings back to the company at 13p last summer, the proceeds from which I then advised using to exploit the unwarranted subsequent pullback in the share price earlier this year ('How the 2016 Bargain Share Portfolio fared', 3 Feb 2017).
That decision has paid dividends after the company's board announced at the tail end of last week that it has appointed US investment bank, Headwaters MB, to review various strategic options to maximise value for shareholders. It's well placed to do so, having restructured the business into a pure-play registry business offering lucrative income from a valuable portfolio of 29 TLDs. Annual operating costs have been slashed by half to a run rate below $6m since the start of 2016, and with billings doubling to $15.8m last year, the company turned in underlying cash profits of $3.6m, a move into profitability that is sustainable.
Indeed, the company's .vip domain registrations are set to continue the heady growth rates seen since launch 12 months ago and surpass the 1m mark sometime this year, up from the current level of 817,000. Registrations are up 40 per cent so far this year and the company is targeting other territories within Asia following .vip's success in China. There is potential for further growth outside Asia to build the US and European portfolio which is already showing 37 per cent registration growth year-to-date with existing and committed registrations now around 350,000. For example, the launch of the company's .boston TLD is scheduled for release in September.
The point being that the monetisation of the portfolio is not being reflected in the share price, one reason why Minds + Machines attracted a major investment from Goldstream Capital Management, a company owned by Hony Capital, a leading Chinese private equity company, which invested £5.5m to acquire 42m shares priced at 13p last summer. Indeed, Minds + Machines retains net cash and trade receivables of $23.2m, a sum worth 2.6p a share, and its conservatively valued portfolio of 29 TLDs is in the books for $45.6m, or 5.1p a share. This means that the shares are only rated on a modest premium to book value even though the company has turned profitable, posting underlying cash profis of 0.5¢s (0.4p) a share in 2016, and has some very valuable geographic TLDs to monetise including: .london, .miami and .bayern.
The bottom line is that the strategic review may include, but not be limited to, an acquisition by or sale/merger of the company and one that I fully expect to value the equity way in excess of the 13p a share Goldstream Capital Management paid last year for its 6 per cent stake. Buy.
Volvere shares hits record high
The top performer in my 2016 Bargain Shares Portfolio is Aim-traded investment company Volvere (VLE:780p). Having first advised buying at 419p, I last recommended running profits on the holding at 585p at the time of a bullish pre-close trading update ('Eight small-cap plays', 27 Mar 2017), and they have subsequently surged by a third to take the total gain on the holding to 81 per cent in only 16 months.
The company's 2016 financial results, released last Friday, didn't disappoint and revealed an 8 per cent rise in net asset value per share to an all-time high of 617p in the 12 months to the end of December 2016, and a near 50 per cent rise in pre-tax profit to just shy of £2m last year. The company's balance sheet remains incredibly strong with net cash and marketable securities accounting for £20m of Volvere's net asset value of £26m, so even after accounting for borrowings of £3m, the shares are backed by net cash of 416p a share.
The key take for me was the performance of Impetus Automotive, a provider of consulting services to the automotive sector in which the company has an 80 per cent stake. In its first full-year under Volvere's ownership, Impetus delivered £1.49m of pre-tax profit on revenue of £17.4m before inter-group management and interest charges, an eye-catching financial performance that reflects an improved client focus, staff efficiency and better back-office systems. Moreover, as part of a plan to widen Impetus's service offering, the business has recently assumed responsibility for the management and delivery of a large automotive manufacturer's learning and development activities in the UK. As a result, Impetus's financial contribution is expected to increase further this year. It's proved a bargain buy as Impetus still only accounts for £1.9m of Volvere's net asset value of £26m, so it is being very conservatively valued in the accounts at less than two times its annual post-tax profit.
Volvere's wholly owned digital CCTV viewing business, Sira Defence and Security, is making good progress, too, posting a 33 per cent increase in pre-tax profit to £160,000 on 23 per cent higher revenue of £380,000. This business is attributed no value in the accounts which is clearly anomalous.
Admittedly, profits slipped at frozen pie and pasty maker Shire Foods, a company in which Volvere has an 80 per cent shareholding. Higher raw material costs following sterling's devaluation, and the decision of a customer to bring manufacturing in-house impacted the performance, but the business still turned in £1.15m of pre-tax profit on relatively flat revenue of £15.2m. A carrying value of £5.7m for this business seems far too low to me.
Of course, other investors have recognised the value on offer which is why the shares have run up to 780p to value the company's equity at £31.8m, or a 22 per cent premium to the last reported book value of £26m. Effectively, net of cash on the balance sheet, the three above businesses are being valued at £14.8m in total. That's hardly a stretched valuation as it equates to only two times their combined book value and little over five times their aggregate pre-tax profis of £2.8m before accounting for inter-company management charges. Run profits.
Oakley Capital's buying spree
Shares in private equity investment company Oakley Capital (OCL:173p) have risen a further 11 per cent since I last advised buying at 155p ('Investment company watch', 25 Apr 2017) and are trading close to a two-year high. The price move looks justified as last month's results revealed the the company's net asset value rose by 16 per cent to 231p a share in 2016 and it has since paid out a maiden dividend of 4.5p a share and committed to a dividend policy of the same order. It also reflects improved investor sentiment towards the company, buoyed by the announcement of no fewer than three acquisitions in the past month, and a well attended capital markets day with the management of all the underlying assets presenting and providing information to Oakley's shareholders.
One of the recent acquisitions is Schuelerhilfe, a leading provider of after-school tutoring to over 125,000 primary and secondary school students in Germany and Austria through a network of over 1,000 branches. Oakley is attracted to this sector because of the growing and non-cyclical demand from parents for tutoring services to help children meet annual exam requirements. The acquisition also fits with Oakley's model of partnering with exceptional entrepreneurs and builds on the company's exposure to education through its extremely successful investment in international schools business, Educas.
Oakley has also taken an interest in Plesk, one of the most widely used software platforms for simplifying the lives of web professionals. Plesk's key features include the automation and management of domain names, email accounts, web applications, and programming languages. Providing strong security across all layers and operating systems, the Plesk software platform operates on more than 350,000 servers globally, supporting the operations of more than 10m websites and 18m email boxes. An enterprise value to cash profit multiple of 7.5 times is a fair valuation for this business in my view.
The latest acquisition involves Oakley taking a stake in TechInsights, a leader in the intellectual property and technology services market. Offering a skill base of highly skilled engineers, as well as a proprietary database of technical intelligence, clients of the company include the top 10 semiconductor companies. A specialised workforce, proprietary equipment and extensive technical library create significant barriers to entry and reinforce its position as the specialist of choice to provide evidence of intellectual property use and competitive technical intelligence.
Clearly, Oakley's managing partner Peter Dubens sees value in his company's shares as he has purchased a further 190,000 shares at a cost of £301,000 in the past month to lift his stake to 2.1m shares, a holding representing 1.04 per cent of the equity. Trading on a 25 per cent discount to end 2016 book value, with the portfolio performing well and sterling's ongoing weakness set to lift the carrying value of Oakley's overseas investments even further, I feel the shares are still worth buying.
Gresham House Strategic anomalously priced
Investors are missing a trick at Gresham House Strategic (GHS:880p). The company's net asset value per has surged by 11 per cent to £43.5m since the end of March this year, but the share price is little changed since I last advised buying ('Value opportunities', 11 Apr 2017).
This means that the shares are effectively trading 26 per cent below book value of 1,191p even though a third of the ungeared portfolio is in cash and a further 40 per cent is invested in Aim-traded technology company IMImobile (IMO:191p), a business that helps companies engage with their customers across all mobile devices by offering smart software products based on proprietary technology. Shares in that company are trading close to an all-time high following a well received trading update at the end of April. Gresham House Strategic previously realised some of the hefty paper gain on the holding by transferring up to £7.5m worth of IMImobile shares into a Strategic Co-Investment Agreement with Gresham House Strategic Public Equity Fund LP at 193.5p a share.
The point being that the interest in IMImobile and cash on the balance sheet now equates to almost all of Gresham House Strategic's market capitalisation, so the balance of its equity portfolio, worth around 300p a share, is in the price for free. These holdings include plant hire company Northbridge Industrial Services (NBI:123p); book publisher Quarto (QRT:255p); asset manager Miton (MGR:40p); and Aim-traded shares newly listed Warpaint London (W7L:315p), a specialist supplier of colour cosmetics and owner of the W7 brand. I maintain a favourable stance on the first three companies and although I have yet to carry out research on Warpaint I note that the share price has trebled since the company listed on Aim in November.
For good measure, when Gresham House Strategic announces its full-year results at the end of this month the board intends to seek shareholder approval to distribute 15p per share as a final dividend. So, with the full-year results set to highlight the sharp increase in net asset value from 998p a share at the end of March 2016, the company successfully recycling its cash on new investments, and the share price on the verge of breaking out, then I feel the shares are worth buying.
Finally, in the past eight days I have updated 20 of the 50 companies on my watchlist that have made announcements after I went on vacation at the start of May. I will endeavour to update the remainder as soon as possible.
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
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com for £14.99, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source. Simon has published an article outlining the content: 'Secrets to successful stockpicking'