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Top-slicing and running profits

For example, earlier this month I highlighted newly listed diversified financial services group Ramsden (RFX:153p) as a company worthy of your consideration ('A jewel in the north', 12 Jun 2017), and I am currently carrying out due diligence on another small-cap ahead of its Aim flotation. I have also been running through my watchlist and feel the time is right to crystallise some more eye-catching profits.

 

Burford Capital's huge gains

Burford Capital (BUR:895p), a global finance company focused on investing in litigation cases and one of the largest companies listed on Aim, has realised $66m (£52m) by selling off a further 15 per cent of its participation interests in an investment relating to the 2012 expropriation by Argentina of a majority interest in YPF, the New York Stock Exchange-listed energy company formerly owned by Repsol, the Spanish energy major.

At the time of the expropriation, Repsol owned more than 50 per cent of YPF, and the Petersen Group, another Spanish company, owned 25 per cent. After suing, Repsol settled its claims and received a payment of $5bn (£4bn) from Argentina and YPF. Burford is providing financing to the liquidators of the Petersen Group, which went bankrupt after the expropriation, and who are proceeding with claims worth $3bn against both YPF and Argentina. Burford is entitled to 70 per cent (less expenses to take its recovery levels below 60 per cent) in the YPF-related claim.

It's been the most successful investment in the company's history as Burford has now realised $106m of capital by selling off 25 per cent of its economic interest in the multibillion-dollar legal case, a sum equating to six times its original investment, and still retains 75 per cent of its original economic entitlement. Analysts Justin Bates and Portia Patel at broking house Liberum Capital believe that the retained economic interest could be worth $1.25bn (£992m) in the event of a successful outcome in the courts. They also point out that Burford has agreed not to reduce its interest in the Petersen claim to below 65 per cent until 2019, and will retain at least a 50.1 per cent economic entitlement, which "suggests that the secondary market sales have concluded for the next 18 months".

The upshot is that after factoring in gains from the Petersen case, analyst Neil Welch at investment bank Macquarie believes that the company's pre-tax profit will more than double to $213m this year to deliver diluted EPS of 94¢ (74p) and support a 15 per cent hike in the payout per share to 10.5¢. On that basis, the shares are trading on 12 times earnings estimates and are rated on three times likely year-end book value. That may seem a modest rating, but Burford's income can be chunky and it's worth noting that Macquarie is pencilling in EPS of 78¢ in 2018, implying that the shares are rated on a forward PE ratio of 16. Moreover, there is no guarantee that it will reap a cash windfall from the Petersen case, to which Mr Welch attributes a 69p option value in his 12-month target price of 1,093p.

So, having seen Burford's shares hit an all-time high of 985p after I last advised running profits ('Running profits and banking gains', 5 Jun 2017), I feel it's prudent to top-slice by selling two-thirds of your shares and running the balance for free. This means that for every £10,000 of capital invested when I first advised buying at 146p a couple of summers ago ('Legal eagles', 8 Jun 2015), you get back £40,800 of cash and still retain shares worth £20,400 to keep some skin in the game. The company's half-year results will be released on Thursday 27 July.

 

Bargain shares update

A couple of months ago, I advised top-slicing the holding in Aim-traded oil exploration company Chariot Oil & Gas (CHAR:14.5p) to crystallise two-thirds of the 111 per cent gain achieved on the investment after I advised buying the shares in my 2017 Bargain Shares Portfolio ('Bargain shares on a tear', 3 Apr 2017).

I feel it's sensible to do the same with another holding in the same portfolio, Manchester & London Investment Trust (MNL:372p). The investment has produced a total return of 28 per cent, a performance reflecting the heavy technology bias in Manchester & London's portfolio and to the US giants, in particular, which have been behind the 19 per cent year-to-date rally in the Nasdaq 100. In fact, the trust's holdings in Facebook, Amazon, Apple, Microsoft and Alphabet (Google's parent) - the so-called FAAMG stocks - accounted for almost 40 per cent of the portfolio at the end of May. As a result of this hefty weighting, the trust's net asset value per share has risen by 18 per cent to 434p since I initiated coverage in early February, the other 10 percentage points in the total return being a narrowing of the trust's share price discount to book value.

Bearing this in mind, I would flag up that after some notable profit-taking in the US tech sector recently the investment manager stated in its monthly report that "it's far too soon to ascribe any moves to more than a pullback that may well extend to double digits or more. However, we are certainly concerned and we are not buying the dips...(yet)". My concern is that with equity markets hitting record highs and volatility at a 23-year low in the US, then any further spike in risk aversion will punish tech stocks most. That's not only because valuations are sky high, but they have been the momentum trade of the year and one predicated on secular growth and an unwinding of the reflation trade that characterised the initial surge in US equity markets after last autumn's US presidential election. Indeed, in a note to clients, equity strategists at Wall Street investment bank Goldman Sachs point out that the correlation of the FAAMG stocks to the growth, volatility and momentum factors are in the 92nd, 90th and 96th percentile respectively.

In the circumstances, I see no harm in taking some money off the table to crystallise part of your 28 per cent paper profit by selling half your holdings. This way you recoup 64 per cent of your invested capital and still maintain some tech exposure and any further narrowing of the trust's discount to book value.

 

Hitting target prices

Shares in Watkin Jones (WJG:195p), a construction company specialising in purpose-built student accommodation, have hit the 195p target I highlighted when I recommended running profits at 176p ('Hitting target prices', 2 May 2017), having first advised buying around the 103p mark when the company listed on Aim last year ('A profitable education', 3 Apr 2016). The board has also paid out 6.2p a share in dividends, including the recent half-year payout of 2.2p a share, so the holding is showing a 100 per cent return.

The latest share price push was driven by news of the forward sale of six developments to an institutional investor, which means that all of its developments due for completion by September 2018 have been forward sold, thus de-risking expectations of the company delivering the 10 per cent-plus rise in pre-tax profit, EPS and dividends, as analysts expect. On that basis, the shares are rated on 13.3 times EPS estimates for the 2018 financial year, and offer a prospective dividend yield of 3.7 per cent. That still seems a fair rating to me, especially with net cash set to rise fivefold to £60m by September 2018 - a sum worth 23.5p a share - as developments complete.

So, with forecasts de-risked, I am upgrading my target price to 225p, bang in line with analysts at broking house Peel Hunt, but at a 10 per cent discount to Jefferies, which has just initiated coverage. Run profits.

 

Broking for growth

The pre-close trading update from Aim-traded stockbroker and private wealth manager WH Ireland (WHI:135p) is worth noting.

In particular, the company's corporate and institutional broking division "has seen a significant increase in transactional revenue, accelerating the client-driven activity in the second half of last year". I understand from the directors that "the pipeline of new business is at the highest that it has been for several years, reflecting not just an increased appetite for new issuance by existing clients, but also the result of new growth initiatives beginning to contribute to revenue". In the second half of the 2016 financial year, the division reported a trading profit of £273,000, reversing a first-half loss of £1m when market activity was subdued and the broking house was unable to undertake regulated activities for a 72-day period after being fined by the Financial Conduct Authority (FCA). In other words, when the company reports its half-year results at the end of July expect year-on-year comparisons to be very favourable.

WH Ireland's private wealth management arm also enjoyed a strong first half, with its assets under management (AUM) and administration rising to in excess of £3bn, up from £2.87bn at the end of November 2016. Importantly, higher-margin discretionary AUM is the fastest-growing segment within this business, building on last year's robust performance when AUM shot up by a third to £1bn. This makes the implied valuation of the business in WH Ireland's market capitalisation of £37.5m incredibly low compared with peers.

In fact, analysts John Borgars and Gilbert Ellacombe at equity research firm Equity Development arrive at a sum-of-the-parts valuation that's double WH Ireland's market capitalisation based on: a valuation of 4 per cent of discretionary funds under management; 2 per cent for advisory; 0.5 per cent for execution-only; and after factoring in net funds of around £10m on the balance sheet. Corporate activity in the sector is also supportive of a higher valuation for the equity: a few months ago financial services group Mattioli Woods (MTW:795p) acquired a stake in Amati and paid the equivalent of 5.5 per cent of AUM.

So, even though WH Ireland's shares have doubled since I initiated coverage ('Broking for success', 1 Aug 2011), offering 30 per cent upside to the 175p target price I outlined when I covered the annual results ('Full house', 28 Feb 2017), I continue to rate them a buy.

I am also maintaining a positive stance on corporate broker Cenkos Securities (CNKS:97p), another constituent of my 2017 Bargain Shares Portfolio. Including dividends, the holding is up 13 per cent, although the share price was higher before chief executive Jim Durkin announced his retirement ('Four undervalued growth plays', 24 April 2017). A departure date has not been set and Mr Durkin will remain in the role until a suitable successor has been appointed. This announcement overshadowed news at last month's annual meeting that "the company continues to trade well and our pipeline of potential new business activity remains encouraging".

Corporate finance and placing revenues typically account for around three-quarters of Cenkos's revenue, so it's worth flagging up that the company has been involved in 16 major transactions raising more than £700m for clients in the first half of 2017, up from £529m in the same period last year, including the IPO of transport group Eddie Stobart Logistics (ESL:157p). This adds weight to Edison Investment Research's forecast that Cenkos's full-year revenue can rise by 19 per cent to £52m to drive up pre-tax profit from £4.4m to £7.8m and more than double EPS to 11.2p.

So, although the retirement of the chief executive is hardly ideal, I feel investors are being overly conservative in their valuation: Cenkos's shares are priced on only nine times forecast earnings and 1.8 times book value. Moreover, last year's payout of 6p a share is likely to be raised sharply this year given its cash pile is worth 42p a share. Buy.

 

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'