It’s fair to say that the performance of my 2017 Bargain Shares Portfolio has exceeded my expectations at the halfway stage. In fact, the motley crew of 10 unloved small-cap companies I recommended investing in six months ago have produced a total return of 16.9 per cent on an offer-to-bid basis and including dividends paid, handsomely outperforming the 6.7 per cent return on a FTSE All-Share tracker, the index against which I benchmark the portfolio.
Furthermore, I have already banked some hefty profits as I advised selling two-thirds of the holding in Chariot Oil & Gas (CHAR:12.5p) in early April, at 17.5p a share, to crystallize an 111 per cent return on my recommended 8.29p buy-in price ('Bargain shares on a tear', 3 Apr 2017). I also decided to prudently sell half the holding in Manchester & London Investment Trust (MNL:385p) with the shares being bid in the market at 367p at the time, or almost 26 per cent higher than my original entry point of 291.65p ('Top-slicing and running profits', 26 Jun 2017).
What this means is that the cash released from those two holdings equates to 20 per cent of the original total investment made in the 10 companies if you weighted your investments equally, and the market value of the remaining holdings is a few percentage points shy of that initial capital outlay. In fact, that cash buffer is set to increase as I have decided to bank some more profits. That’s not to say there aren’t some repeat buying opportunities to exploit among the other constituents of the portfolio. There are several as I outline in my in-depth analysis below.
Interestingly, repeat buying opportunities are a recurring theme in my annual Bargain Shares Portfolios, highlighting the important point that if you take the time to do your own research to ascertain whether the companies meet your own specific investment criteria, then in many cases you will have a second, third or even fourth chance to buy in close to my recommended purchase price even if the share prices are marked up after the publication of my articles.
For example, a few weeks ago I noted the progress being made by 2016 Bargain Shares Portfolio constituent Bioquell (BQE:235p), a provider of specialist microbiological control technologies to the international healthcare, life science and defence markets (‘Bargain shares opportunities', 1 Aug 2017). However, investors were not acknowledging this when I updated the 2016 portfolio in February this year and it was still possible to buy the shares just above last year’s recommended average buy-in price of 125p. The share price is 88 per cent higher now following massive earnings upgrades, and has the potential to go higher still.
That’s not an isolated example, either, as another constituent of the 2016 portfolio, Minds + Machines (MMX:13.25p), a service provider in the domain name industry focused on the new top-level domain (TLD) space, has provided multiple buying opportunities too. Having advised purchasing the shares at 8p in February last year, after the immediate share price spike had subsided and the hot money exited, it was possible to buy in close to that recommended price level a few months later.
It was also possible to buy in around the 8.5p level in March this year after another bout of profit taking. Mind + Machines’ share price is 55 per cent higher now, reflecting both the strong operational performance of the company and the prospects for corporate activity that’s likely to unlock the hidden value in the balance sheet. In the event of a major transaction happening – and expect an update on how discussions are going in next month’s results release – then a target price around 18p should be achievable as I outlined a few weeks ago (‘Bargain shares opportunities', 1 Aug 2017).
Moreover, I feel there are some decent repeat buying opportunities among the special situations I included in my 2017 Bargain Shares Portfolio to support further outperformance of the portfolio even in a more volatile market environment.
2017 Bargain shares portfolio performance
|Company name||Market||TIDM||Opening offer price on 03.02.17 (p)||Bid price on 16.08.17 (p)||Dividends (p)||Total return (%)|
|Chariot Oil & Gas (see note one)||Aim||CHAR||8.29||11.75||0||87.9|
|Manchester & London Investment Trust (see note two)||Main||MNL||291.65||377||3.0||28.4|
|Cenkos Securities (see note four)||Aim||CNKS||88.425||90||5||7.4|
|H&T (see note five)||Aim||HAT||289.75||285||5.3||0.2|
|Tiso Blackstar (see note three)||Aim||TBG||55||50||0.28465||-8.6|
|BATM Advanced Communications||Main||BVC||19.25||17.75||0||-7.8|
|Deutsche Bank FTSE All-share tracker (XASX)||409||420||16.28||6.7|
|1. Simon Thompson advised selling two thirds of the Chariot Oil & Gas holding at 17.5p on 3 April 2017 ('Bargain shares on a tear', 3 April 2017). Return reflects the profit booked on this sale.|
|2. Manchester and London Investment Trust paid total dividends of 3p a share on 2 May 2017. Simon Thompson then advised selling half of the holding at 366.25p on 26 June 2017 ('Top slicing and running profits', 26 June 2017). Return reflects the profit booked on this sale.|
|3. Tibo Blackstar paid an interim dividend of 0.28465p on 8 May 2017.|
|4. Cenkos Securities paid a final dividend of 5p on 26 May 2017.|
5. H&T paid a final dividend of 5.3p on 2 June 2017.
CHARIOT OIL & GAS (CHAR)
Aim: Share price: 12.5p
Bid-offer spread: 11.75-12.5p
Market value: £33.5m
The excitement surrounding Chariot Oil & Gas (CHAR:12.5p), a small-cap exploration company with activities in Morocco, Namibia and Brazil, relates to a farm-out deal for its Rabat Deep Offshore permits in Morocco, whereby a subsidiary of oil giant Eni acquired a 40 per cent operated interest in the licence and both Woodside and the Moroccan government retain 25 per cent equity interests.
Chariot's equity interest fell to 10 per cent, but it has a capped carry for its share of an exploration well which will cost over $50m (£38.6m) to drill, and was fully reimbursed for its back costs, too. Drilling is scheduled to start early next year to target the JP-1 Jurassic carbonate prospect which has gross mean prospective resources of 768m barrels located across a large 200 sq km area. According to analysts, the prospect could be worth 17p a share on a risked basis to Chariot's shareholders and as much as 87p a share on an unrisked basis, assuming of course the drilling programme hits pay dirt. To put these valuations into some perspective, Chariot’s share price is 12.5p, valuing the equity at £33.5m, and it also retains a cash pile of $25m, a sum worth 7.2p a share. In other words, there is the potential for a step-change in the company’s fortunes if all goes to plan.
Furthermore, Chariot also owns a 75 per cent interest in the adjacent Mohammedia JP-2 prospect, and the Kenitra Offshore Exploration Permit, formerly part of Rabat Deep. Material prospectivity has been identified in the JP-2 prospect and other areas in the shallower lower cretaceous play, and estimates indicate they hold a combined gross mean prospective resource of around 1bn barrels. The point being that a successful drilling programme on the JP-1 Jurassic carbonate prospect would improve the odds of one at the JP-2 prospect, especially as oil and gas majors are more inclined to farm in licences supported by low service costs and exploration success.
The company is not a one-trick pony, either. In Namibia, Chariot holds licences across four offshore blocks and has continued to mature its portfolio with the evaluation of 3D seismic data in the Central Blocks to delineate five structural prospects ranging from 283m to 459m barrels of gross mean prospective resources. A partnering process has now been initiated and the plan is to undertake drilling in the second half of next year. Farm-out discussions are also proceeding in the Southern Blocks, where it has an 85 per cent operated interest.
The important point being is that success on any one of these prospects has the potential to deliver upside worth more than the company’s current market value. Chariot’s board led by chief executive Larry Bottomley is sitting pretty as it has no unfunded work commitments throughout the portfolio, is maintaining a tight control of overheads, has negotiated favourable seismic rates, and has cash in the bank. So, ahead of the outcome on the aforementioned partnering discussions, and the commencement of the JP-1 drilling programme, I would definitely run profits on the balance of your holdings.
MANCHESTER & LONDON INVESTMENT TRUST (MNL)
Main: Share price: 385p
Bid-offer spread: 377-385p
Market value: £84.9m
Back in February, I was attracted to small closed-end investment trust Manchester & London (MNL:385p) because over half the investment portfolio was invested in US-listed shares with a distinct bias to the technology sector. Holdings in Amazon (US:AMZN), Microsoft (US:MSFT), Facebook (US:FB), Alphabet (US:GOOG), Apple (US:AAPL) and Yahoo (US:YHOO) made up 38 per cent of the portfolio at the time, and tech stocks accounted for over half the company’s net asset value (NAV) of £79m. Despite this hefty portfolio weighting, and benign outlook for equities generally, Manchester & London’s shares were trading 21 per cent below book value of 367p when I advised buying them at 291.65p, a valuation that seemed to discount any upside to these holdings whatsoever.
In the event, tech stocks 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. In fact, when I prudently decided to top-slice half the holding in Manchester & London in late June ('Top-slicing and running profits', 26 Jun 2017), the company’s NAV per share had risen by 18 per cent to 434p, slightly outpacing the rise in the Nasdaq 100 at the time. The share price had done even better, rising by 26.8 per cent to 370p, a performance helped by a narrowing of the share price discount to NAV as investors warmed to the portfolio’s tech stock bias.
However, although Manchester & London’s offer price has since risen from 370p to 385p, this is mainly down to a further narrowing of the share price discount to the underlying value of the company’s investments as NAV per share has risen just 1.5 per cent from 434p to 440p since I advised selling half the holding in June, reflecting in part a stalling in the US tech sector. The trust's holdings in Facebook, Amazon, Apple, Microsoft and Alphabet accounted for 38 per cent of the portfolio when the trust’s investment manager last published its monthly update. Moreover, given the high valuations of these specific holdings, the portfolio has an equally high ‘see through’ PE ratio of 25.
I am not sure how much more Manchester & London’s share price discount to NAV can narrow as it’s now down to 12.5 per cent and you need to factor in a small-cap liquidity discount to the trust’s shares. As a result, I feel any further share price upside will be determined solely by the investment performance of the portfolio, which has been modest for the past few months. It may continue that way given the potential for the share price discount to NAV to widen if risk appetite recedes given increased geopolitical tensions, a fact that will undoubtedly lead to profit-taking in the tech sector, too.
So, having seen the holding produce a total return of 28.4 per cent on an offer-to-bid basis in the past six months and after taking into account dividends paid, I feel it’s time to take profits on the balance of your holdings at the current offer price of 377p. Take profits.
Aim: Share price: 62p
Bid-offer spread: 60-62p
Market value: £89.9m
I last rated shares in Crossrider (CRS:62p), a provider of security software and an online distribution platform, a buy at the time of an upbeat pre-close trading statement (‘Exploiting value plays’, 25 Jul 2017), and have no reason to change that bullish view ahead of half-year results on Monday 11 September.
When I advised buying the shares, at 48p, six months ago, I noted that the company’s cash pile of £58m equated to 83 per cent of its market capitalisation of £70m, so effectively valuing its profitable and growing media and app distribution platform businesses at only £12m. At the time, analyst Gareth Evans at Progressive Equity Research believed that Crossrider could grow pre-tax profit to $6.7m (£5.1m) and produce EPS of 3.4¢ (2.7p) this year, implying a bargain basement rating of just three times cash-adjusted earnings estimates even though Crossrider is cashed up for further bolt-on acquisitions, and analysts are expecting a return to growth in 2017. On both counts the company is delivering.
The acquisition of CyberGhost in March looks a sound deal. The business is a leading cyber security SaaS provider, and a provider of secure virtual private networks (VPNs) for 1.5m active users, of which 145,000 pay for a premium version priced at $30.10 a year. The product enables users to connect through a secure tunnel to pass data traffic over public networks, an area of the market predicted to grow at a compound annual growth rate of 20 per cent over the next five years, according to industry experts. Bearing this in mind, in the recent pre-close trading update Crossrider’s directors noted that the acquisition is trading ahead of their original expectations which helps explain why analysts believe that CyberGhost could add $1.3m (£1m) to cash profit in its first full year post completion. It also means that the total acquisition price of €9.2m (£8.3m) including future earn-out payments is already looking very reasonable.
The performance of Cyberghost, and the ongoing growth in Crossrider’s app distribution division, which increased revenue by 13 per cent to $20.6m in the first half to account for more than two-thirds of the company’s total revenue, supports expectations that the company can lift its full-year pre-tax profit and EPS by 50 per cent to $7.3m and 4.6¢ (3.5p), respectively. Furthermore, because Crossrider is highly cash generative, net funds on the balance sheet ended the six-month period down only $4.2m to $67.9m, even though the company invested $6.4m in acquisitions.
In other words, strip out the current cash pile worth 37p a share, and the shares are effectively being rated on 7.5 times full-year earnings estimates, a valuation that fails to acknowledge the potential for the board to deploy its hefty cash pile on further value accretive acquisitions, nor the ongoing growth in the existing businesses which offers customers products such as Reimage, a patented Microsoft-based product tool that enables users to clean up their computers; and DriverAgent, a PC maintenance software products company offering a leading device driver search and update service, which scans computers for outdated drivers. It’s hardly surprising that the company is enjoying strong demand for these products in light of some high-profile major security breaches in the public sector and at multinational companies. This can only increase awareness of online security among internet users, and the need to protect their personal data with the latest software.
In my view, a target price of 100p is not an unreasonable valuation if Crossrider’s cash pile can be deployed shrewdly. Buy.
MANAGEMENT CONSULTING (MMC)
Main: Share price: 7.75p
Bid-offer spread: 7.6-7.75p
Market value: £33.5m
There has not been much news flow from Management Consulting (MMC:7.75p), a business focused on implementing performance improvements for its corporate clients, since I commented on the company’s full-year results ('Bargain shares on a tear', 3 Apr 2017).
The key bull point behind my original buy recommendation was the potential for the company to increase order input in its remaining operating business, Proudfoot, to a level sufficient to generate the revenue required to return the company back to profitability. If that can be achieved then the company will warrant a rating above its last reported net funds of £38m, a sum worth 7.5p a share and more or less where the share price is now. Admittedly, first-quarter revenue was not yet at levels needed for a move into the black, but they are certainly moving in the right direction.
We will have to wait until next month’s half-year results for the next trading update, but even if Proudfoot trades at levels seen in the first half of 2016 when it reported a £1.9m operating loss on revenue of £25.7m, this is not going to dent that hefty cash pile too much. It will be interesting to see whether clients in the natural resources sector are feeling more optimistic as this segment accounts for almost half of Proudfoot’s revenue, so improvements in the trading outlook here will be critical in cutting operating losses. Ahead of next month’s half-year results, I would continue to hold on to the shares if you followed my advice to buy six months ago.
Aim: Share price: 228p
Bid-offer spread: 220-228p
Market value: £43.6m
Avingtrans (AVG:228p), a maker of critical components and services to energy, medical and industrial sectors, has announced the acquisition I was hoping for when I suggested buying the shares in February.
Having successfully built up and then sold off its aerospace unit for £65m in March 2016, reaping a hefty profit of £27.5m on the disposal, and subsequently rewarded loyal shareholders with a capital return through a tender offer, the company had net cash of £26.1m, a sum worth 143p a share, to deploy to scale up its operations. It’s using this substantial balance sheet strength to acquire specialist engineer Hayward Tyler (HAYT:50p) in an all-share deal that will give Hayward Tyler’s shareholders 37.6 per cent of the enlarged share capital and values the target at £28m, or a modest premium to its last reported NAV. I highlighted an arbitrage opportunity to exploit in Hayward Tyler’s shares when I commented on the deal (‘Exploiting value plays', 25 Jul 2017).
The takeover looks certain to succeed as it should offer Hayward Tyler’s beleaguered shareholders some upside to their investment after the heavily indebted company, whose net borrowings of £22.1m equated to 100 per cent of shareholders' funds at the end of March 2017, suffered difficult trading last year and only managed to report cash break-even on revenue of £62.7m for the full year. However, buoyed by a robust order book north of £50m, increased scale resulting from being part of an enlarged entity, no funding constraints on investment, and scope to remove duplicated costs, Avingtrans' shrewd management team should be able to lift Hayward Tyler’s margins back to a level to produce a decent financial return for all shareholders. Moreover, the combined entity will have modest levels of borrowings in relation to pro-forma net assets of £67.2m, and retain cash in the bank and ample headroom on existing banking facilities in order to pursue both organic and further acquisitive growth opportunities.
The deal should complete at the end of this month, after which the embargo on analysts publishing forecasts will be lifted. I expect upgrades on finnCap’s previous estimate which pointed to Avingtrans delivering a sixfold rise in pre-tax profit to £1.3m on revenue of £31m in the 12 months to the end of May 2018. Importantly, the company’s businesses have been winning a raft of contracts that support the forecast growth including a three-year contract worth £3.5m to provide composite components for airport scanners with Rapiscan, a leading security screening provider based in California; and a lucrative 10-year contract with Sellafield, worth £47m, to provide waste storage containers for the Cumbrian nuclear power station.
The potential for Hayward Tyler to boost shareholders' returns has not been lost on investors, as Avingtrans' share price is now a fifth higher than it was when I published my portfolio in February. However, there is scope for even more upside as I have a conservative looking target price of 275p to value the enlarged group’s equity at £84m, or less than one times’ its combined annual sales and is based on Hayward Tyler’s cash profit margins returning to north of 10 per cent of annual sales, a performance that was comfortably achieved in its 2015-16 financial year before the company got into difficulty. Buy.
CENKOS SECURITIES (CNKS)
Aim: Share price: 91p
Bid-offer spread: 90-91p
Market value: £51.3m
Shareholders in corporate broker Cenkos Securities (CNKS:91p) are facing up to some major boardroom changes. Former chief executive and 8.79 per cent shareholder Jim Durkin announced his retirement in mid-May and has just been replaced by Anthony Hotson, who knows the company and its culture well having been a non-executive director since May 2012.
It may seem an odd appointment as Mr Hotson is the current deputy director of the Centre for Financial History and a senior member of Darwin College, Cambridge. However, he has extensive experience in financial services, having previously worked for the Bank of England, consultancy group McKinsey & Company and investment bank SG Warburg. He subsequently held non-executive positions at Henderson, London Life and Towry Law. His appointment was announced in early July and became effective a fortnight ago after the Financial Conduct Authority (FCA) gave its approval.
However, no sooner had that appointment been sanctioned by the regulators, then Cenkos’s finance director Mike Chilton handed in his notice to take a break from work, having joined Cenkos in 2011. He will remain an employee of the company until 30 September, so he will be around for the publication of the half-year results. Cenkos has started the search for a replacement, but this is hardly ideal and follows an annus horribilis in 2016 when corporate broking fee income was badly impacted by the fall-off in fundraisings on Aim, and an FCA fine for regulatory breaches dating back to the summer of 2014.
In the circumstances, it’s hardly surprising that Cenkos’s share price has reacted negatively to the boardroom changes, falling back to just above my recommended buy-in price of 88.5p when I published the portfolio in early February, having hit highs around 120p just before the news of Mr Durkin’s unexpected departure in May. I last advised buying the shares as a recovery play at 97p, having taken into full account Mr Durkin’s departure ('Top-slicing and running profits', 26 Jun 2017). At the time I noted that the company had been involved in 16 major transactions, raising almost £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:160p).
Since then, Cenkos has raised a further £331m in six equity transactions and a £177m convertible bond issue to take this year’s running total to in excess of £1bn of equity raised for clients, a level that compares well with the £1.3bn equity raised for clients in the whole of 2016. This gives some substance to a strong profit recovery on which I had based my original buy recommendation.
Cenkos’s corporate finance business generates around three-quarters of its total revenue, so we will have to wait until next month’s half-year results to see whether Cenkos’s pipeline of corporate fundraisings is supportive of the company hitting Edison Investment Research's forecasts. These suggest full-year revenue could rise by almost a fifth to £52m to drive up pre-tax profit by more than 75 per cent from £4.4m to £7.8m and lead to a more than doubling of EPS to 11.2p. Bearing this in mind, the board is duty bound to inform the market immediately if the company is trading materially above, or below, market profit forecasts. Cenkos is in a closed period ahead of next month's results and I have given the board the opportunity to comment on current trading prior to publishing this article. The fact that they feel there was no need to make such an announcement to the London Stock Exchange should be seen as a positive.
Furthermore, if the company can generate decent earnings growth this year, and with a 42p a share cash pile on its balance sheet, a sum worth almost half the current market capitalisation, then it’s reasonable to expect a decent hike on the 6p a share dividend declared for the last financial year. In fact, Edison expects a full distribution, and is forecasting an 11p a share dividend. This implies the shares are trading on less than five times earnings estimates after stripping out cash on the balance sheet, and offer a prospective dividend of 12 per cent, suggesting investors are sceptical of the business hitting Edison's numbers, or are simply unwilling to place a higher valuation on the company given the senior management changes.
Clearly, this miserly valuation is anomalous if Cenkos’s trading levels have held up and its pipeline is supportive of hitting Edison's forecasts. So, having taking all the above factors into account, I would certainly recommend holding on to your Cenkos shares if you have been following my advice, and I look forward to interviewing the directors at the time of next month’s half-year results. Hold.
Aim: Share price: 29.5p
Bid-offer spread: 29.25-29.5p
Market value: £95.8m
Namely, activist shareholder Crown Ocean Capital is running affairs, having taken a 25 per cent stake in the company and ousted the former board. The plan now is to turn Bowleven into a holding company that does not pursue any new exploration activity; reduce monthly overheads significantly; and use contractors to ensure a proper stewardship over its Etinde and Bomono assets in Cameroon. Once all the options for the gas monetisation of those assets have been quantified, I expect some of the company’s net funds of £69m, a sum equating to three-quarters of the current market capitalisation, to be returned to shareholders.
I have good reason to think this way as Bowleven has a $40m net drilling and testing carry to cover its share of two appraisal wells on Etinde, thereby reducing its cash requirements, and is entitled to an additional $25m (£19m) payment on achieving the final investment decision at the project. It’s also in discussions with the Cameroon authorities to enable Bomono hydrocarbons to be directed into the Victoria Oil & Gas (VOG:50p) Gas du Cameroon pipeline for the domestic gas market, thereby monetising its asset. That leaves exploration assets with a carrying value of $217m in the accounts, a sum worth £167m, woefully undervalued. My break-up value of 50p a share is not out of place and I continue to rate Bowleven’s shares a buy ahead of the company's results in early November. Buy.
Aim: Share price: 290p
Bid-offer spread: 285-290p
Market value: £107m
Shares in pawnbroker H&T (HAT:290p) have more or less flatlined since I rated them a buy in early February, and subsequently reiterated that view at the time of the full-year results ('Five value opportunities', 15 Mar 2017). However, the company continues to look significantly undervalued in my view.
A new format for pawnbroking services focused on higher-value loans at lower interest rates, the sharp depreciation in sterling, which has enhanced the value of dollar-denominated gold assets, and robust growth in its short-term high interest personal loan product, were key drivers behind the improved performance last year when H&T reported a 40 per cent-plus increase in both pre-tax profit and EPS to £9.7m and 20.88p. Analysts expect the momentum to be maintained this year, too, not an unreasonable expectation in light of the fact that new areas of business activity are clearly paying off including a move into retail foreign exchange and a 'we buy anything' buyback product. I would also flag up that the sterling value of gold has risen by a further 5 per cent this year to £991 per ounce and is now within 17 per cent off its all-time high reached during the eurozone debt crisis in 2011. This is clearly good news for the profits earned from gold purchasing and pawnbroking scrap.
These drivers underpin analysts' recently raised expectations following this week's cracking half year results that this year's EPS can grow by 15 per cent to 24p and support a 20 per cent hike in the dividend to 11p, implying H&T's shares are rated on around 12 times earnings estimates and offer an attractive 3.8 per cent prospective dividend yield. Importantly, the lowly-geared balance sheet is rock solid with the pledge and loan book largely financed by the company’s equity, leaving ample headroom on a £30m low-cost bank facility with Lloyds Banking to fund further expansion. Priced on a very modest premium to book value, I feel the current rating fails to take into account the real possibility of the company delivering another year of significant earnings growth.
Offering around 30 per cent upside to my 375p fair valuation, H&T's shares rate a repeat bargain buy.
TISO BLACKSTAR (TBGR)
Aim: Share price: 53p
Bid-offer spread: 50-53p
Market value: £140m
The directors of Aim-traded South Africa-focused investment company Tiso Blackstar (TBGR:53p) continue to make solid progress 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. However, the company’s share price has retreated since I last advised buying at 64p ('Bargain shares on a tear', 3 Apr 2017), and it’s now possible to buy in just below my original 55p entry point. I feel it’s worth doing just that.
The company’s founder and former non-executive director Andrew Bonamour has recently taken up the reins and become chief executive in order to drive through the transformation. It’s a sensible move as he has held positions in investment banking and corporate finance where he originated and played a lead role in leveraged buy-outs, mergers and acquisitions, and restructurings.
Importantly, he will have substantial funds to deploy on acquisitions as Tiso Blackstar has finally signed a conditional sale agreement for the disposal of its 22.9 per cent stake in KTH, another South African investment company. Although the sale process was expected to originally close in May, the R1.5bn (£88m) net proceeds will in sterling terms bring in £2m more cash than was originally expected and the company has also picked up £600,000 of dividends in the meantime. The cash proceeds will wipe out head-office borrowings of around £24m, so reducing interest costs, and leave the £146m market cap company cashed up to invest in the media sector. Expect further disposals as other non-core assets up for sale include a stake in Robor, a specialist steel manufacturer, and Consolidated Steel Industries, which has performed particularly well.
Importantly, profit is going in the right direction, with the group reporting an 8.5 per cent increase in cash profit to £15.9m in the first half of its financial year. Shareholders are rightly getting a share of this cash: the board has already paid out a half-year dividend of 0.28p a share, and plans to make a special payout of around 0.94p a share when the KTH sale completes. Admittedly, the shares are below the radar, but the transfer to a primary listing on the main board of the Johannesburg Stock Exchange completed last month, thereby improving liquidity in the shares, which should increase investor interest in due course. The company retains its London listing.
By my reckoning, after stripping out the carrying value of the non-core holdings in Robor and CSI, this implies all of Tiso Blackstar's media interests are effectively being valued at only £110m, a modest valuation given they generated combined cash profit of £13.4m in the first half alone. That’s anomalous and with the shares priced on a 32 per cent discount to book value using the latest exchange rates, I continue to rate them a value buy.
BATM ADVANCED COMMUNICATIONS (BVC)
Main: Share price: 18p
Bid-offer spread: 17.75-18p
Market value: £72.6m
Shares in BATM Advanced Communications (BVC:18p), a company focused on network solutions and biomedical laboratory systems, are the laggard in this year’s portfolio, but that’s not to say the company hasn’t been making progress operationally.
For example, the company’s pathogenic waste treatment and sterilisation business, which has been renamed ‘Eco-med’, has won three major contracts worth $6.75m since launching its innovative biological waste solution at the end of last year. Developed for the biopharmaceutical industry by one of the world’s largest manufacturers of vaccines for animal health, the solution automates the entire process of disposing of biohazardous waste safely and enables the treatment of the waste on-site, thereby mitigating the risk of cross-contamination. It treats the remaining by-products of bovine processing, and produces protein and fat products suitable for use in producing other commercial products, such as high-grade domestic animal food. During the treatment process, no hazardous materials, chemicals or methods are used and it is completely eco-friendly, with no environmental hazards or damage.
I would also flag up that Eco-med launched a mobile version of the agri-waste product a few months ago, and since then has won its first order. BATM chief executive Dr. Zvi Marom is confident of an uptick in orders, and justifiably so given the global market for this particular solution is largely untapped.
Also of keen interest is the progress being made by BATM’s 95 per cent-owned subsidiary, Adaltis, an Italian manufacturer of medical diagnostics equipment after a highly experienced chief executive was recruited to take the business to the next stage in its development. Egens, a leading biotechnology company, acquired a near 5 per cent stake in Adaltis last year that placed a notional valuation of $58m on the business, and has an option to purchase a further 10 per cent of the shares within 90 days of the publication of its 2016 and 2017 accounts.
Interestingly, Adaltis holds a licence for the importation, marketing and sale in China for its diagnostic kit for hepatitis C. More than 60m people are estimated to be affected by hepatitis C in China, but most of the diagnosis to date has been undertaken by locally-developed instruments and reagents, with very few foreign companies providing solutions. A joint venture between Adaltis and Egens has a major distribution agreement with Sino Pharm – a prominent Chinese medical and healthcare group – to distribute Adaltis HCV (Hepatitis C) diagnostic kits nationwide.
The bottom line is that the progress BATM has been making is yet to be reflected in its valuation. That’s because BATM's own market capitalisation of £72.6m is fully backed by net cash of $22m on the company’s balance sheet, property assets of $17.7m and the investment in Adaltis, thus leaving its cyber and bio-medical businesses in the price for free. And it’s not as if these operations don’t have decent trading prospects.
True, analyst Robin Speakman at house broker Shore Capital only expects the company to break even this year, but this largely reflects ongoing investment and expensed research and development spend, the effect of which is to lay a solid platform for profitable growth in the coming years. Mr Speakman is penciling in a pre-tax profit of $1.6m in 2018, but this is an operationally geared business so any uptick in contract wins could provide considerable upside to forecasts.
So, although the shares are trading just below the price when I last updated the investment case ('Five value opportunities', 15 Mar 2017), and are shy of the 19.25p entry level in this year’s portfolio, I feel there is scope for BATM’s management team to build the contract pipeline across its businesses and convert rising sales into even faster rising profits in due course.
In some respects, there are similarities here with Bioquell, which has reaped substantial returns from a growing order book and well received new product launches. Buy.