How the 2017 Bargain Shares Portfolio fared

CHARIOT OIL & GAS (CHAR)

Aim: Share price: 22p

Bid-offer spread: 21-22p

Market value: £59m

Website: chariotoilandgas.com

It’s fair to say that investors have warmed to Aim-traded Chariot Oil & Gas (CHAR), an oil exploration company with activities in Morocco, Namibia and Brazil.

That’s because the company offers significant potential exploration upside from the forthcoming drilling programme by oil giant Eni at the Rabat Deep Offshore permits in Morocco. These have an independently audited gross mean prospective resource estimate of 768m barrels, and drilling is scheduled to start in the first quarter this year. Chariot holds a 10 per cent equity interest and has a capped carry for its share of an exploration well that will cost over $50m (£38.6m) to drill.

Chief executive Larry Bottomley notes that “success will materially de-risk other targets we have identified within our neighbouring Mohammedia and Kenitra permits in which Chariot holds a 75 per cent interest". Chariot is actively seeking partners to drill Prospect-S in Namibia (prospective resources of 459m barrels) in the first half of 2018, and Kenitra-A in Morocco (prospective resources of 468m barrels) in the first half of 2019.

It didn’t take long for Chariot’s share price to re-rate, gushing up from 8.29p to 17.5p within two months of publication of my 2017 portfolio, prompting me to top-slice the holding and bank some of the 111 per cent gain ('Bargain Shares on a tear', 3 Apr 2017). However, it has paid to retain an interest as the share price has subsequently risen to 22p, or 165 per cent higher than 12 months ago.

The point is that with the company’s £62m market capitalisation backed by net cash of $21.7m (£15.6m), a sum worth 5.6p a share, drilling success at the Rabat Deep Offshore permits could send the share price surging again, as could a successful partnering in Namibia and Kenitra-A in Morocco. In fact, I feel the 35p target price of brokerage FinnCap could easily come into play if drilling in Morocco hits pay dirt, so I would certainly run profits on the balance of your holdings.

CROSSRIDER (CROS)

Aim: Share price: 79p

Bid-offer spread: 76-79p

Market value: £107m

Website: crossrider.com

The recent pre-close trading update from Crossrider (CROS), a provider of security software and an online distribution platform, highlighted the dramatic change in the business in the past year, and supports my view that fair value for the equity is at least 100p, or double the buy-in price in my 2017 Bargain Shares Portfolio.

Underpinned by organic growth from its existing businesses, and acquisitions too, revenues surged by 16 per cent to $65.8m (£47m) last year, a performance that boosted cash profits by almost 30 per cent to $8.3m and is set to deliver a similar increase in both pre-tax profits and EPS to $6.3m and 3.9¢ (3p), respectively.

Crossrider’s main products are Reimage, a patented Microsoft-based product tool that enables users to clean up their computers; DriverAgent, a PC maintenance software products company offering a leading device driver search and update service, which scans computers for outdated drivers; and Cyberghost, a leading cyber security SaaS (software as a service) provider of secure virtual private networks (VPNs), which enable users to securely pass data traffic over public networks. This area of the market is predicted to grow at a compound annual growth rate of 20 per cent over the next five years, according to experts.

The $9.8m spent on the acquisition of Cyberghost (including earn-outs) has proved a shrewd investment after the business increased paying subscribers by 17 per cent to 167,000 in the first half of last year, and maintained its strong performance in the second half too. It’s easy to see why demand is so high in light of the threat posed by cybercrime to the security of personal data. For example, around 689m people are victims of cybercrime each year, and in excess of $16bn is lost to identity fraud. Not surprisingly, computer users are taking this threat seriously; in the US, a region accounting for a third of Crossrider’s overall revenue, over 40 per cent of working Americans have installed a virtual private network (VPN) on their laptop. It’s an increasingly profitable business as Crossrider has managed to cut Cyberghost’s cost of sales by 30 per cent since acquisition.

The forthcoming full-year results should also reveal a much higher contribution from Clearvelvet, a profitable programmatic video advertising company whose customers include the likes of Disney Corporation and Reckitt Benckiser, and one in which Crossrider raised its stake from 16.6 per cent to 50 per cent for a maximum consideration of $3.1m including earn-outs.

True, Crossrider’s share price has risen by almost half since I spotted the investment potential a year ago. However, it retains a rock solid balance sheet boasting net funds of $69.4m (£50m), a sum worth almost half its market capitalisation of £107m. This means that if the company can lift pre-tax profit to $8.3m in the 2018 financial year and drive up EPS to 5.1¢ (3.7p), as analysts predict, the shares are still only being rated on around 10 times prospective cash-adjusted earnings. With further bolt-on acquisitions on the cards to boost profits further, I continue to rate Crossrider’s lowly rated shares a buy.

CENKOS SECURITIES (CNKS)

Aim: Share price: 117p

Bid-offer spread: 113-117p

Market value: £64m

Website: cenkos.com

Profits at corporate broker Cenkos Securities (CNKS) recovered strongly last year, much as I had anticipated, a factor that has driven the share price sharply higher. In the six months to end-June 2017, the company reported a 156 per cent rise in pre-tax profit to £4.2m, buoyed by a 91 per cent increase in revenue to £29.2m, an outcome that prompted analysts at Edison Investment Research to hike their full-year EPS estimates by 11 per cent to 12.4p, up from 4.7p in 2016, based on full-year pre-tax profit rising by 90 per cent to £8.4m on revenue up a third to £58m.

With cash on the balance sheet worth 35p a share, and net trading positions worth a further 30.5p a share, analysts at Edison believe that shareholders can expect a hefty rise in the full-year payout from 6p to 11p a share, implying an increase in the final payout from 5p to 6.5p a share. The half-year dividend shot up by 350 per cent to 4.5p a share, taking the total dividends banked on the holding to date to 9.5p a share.

In the first nine months of 2017, Cenkos raised over £1.2bn of capital for clients, including £523m in the third quarter, a ramp up of business on the £702m capital raised in the first half. This trading backdrop is supportive of management’s earlier comments [at the time of the 2017 interim results] that it had made a good start to the second half and had an encouraging pipeline of transactions, too. Moreover, with equity markets remaining buoyant since then, it’s only reasonable to expect Cenkos dealmakers to be doing well.

So, with the shares rated on 10 times earnings estimates for 2017, the forecast final dividend of 6.5p a share equating to 6 per cent of the share price alone, and cash and trading positions equating to more than half of the market capitalisation, I continue to rate the shares a buy.

BATM ADVANCED COMMUNICATIONS (BVC)

Main: Share price: 26.25p

Bid-offer spread: 26-26.25p

Market value: £106m

Website: batm.com

Shares in BATM Advanced Communications (BVC), a provider of medical laboratory systems and network solutions, have soared in the past year and understandably so.

When I covered the half-year results at the end of August, and rated the shares a buy at 18p (‘Balancing risk and reward’, 30 Aug 2017), chief executive Dr Zvi Marom revealed during our results call that the company was in the running for some major orders. He has certainly delivered.

BATM’s networking & cyber division was awarded a five-year contract worth $35.8m (£25.7m) to provide information communication technology (ICT) services to an agency of a government defence department. Dr Marom points out that “this provides further validation of the strength of our offering”, adding that he “looks forward to expanding on this initial project as well as receiving contracts from new customers following the successful completion of proof-of-concept trials in multiple countries". It was not the only major contract win as a few weeks ago the company announced yet another contract, worth $4m in revenue this year, to supply a cyber communication technology solution to a government defence department.

This is the fourth such contract awarded to BATM by a national government. Dr Marom expects to receive follow-on orders after the completion of this contract, and points out that “interest in our cyber technologies' abilities to detect and investigate suspicious network activity and cyber threats continues to increase as government defence agencies seek to prevent potential cyber attacks on their infrastructure and important institutions as well as to secure their communications".

These and other contract wins underpin expectations that BATM can return to profitability, and support an anticipated ramp-up in profit this year when analysts forecast BATM making annual cash profits of $4.2m. If achieved, the shares will warrant a higher rating than the current price-to-book value of 1.6 times, especially as BATM owns hugely valuable stakes in joint venture partnerships, as I noted in my original analysis a year ago. The company also has a bumper cash pile that could now be as high as $28m, a sum equating to a fifth of its market value, following a recent overseas property disposal that raised $9.7m, or $5.8m above book value.

I maintain my conservative sum-of-the-parts valuation of 30p to 33p (‘Targeting a break-out’, 23 Oct 2017), and continue to rate BATM’s shares a buy.

MANCHESTER & LONDON INVESTMENT TRUST (MNL)

Main: Share price: 479p

Bid-offer spread: 476-479p

Market value: £107m

Website: manchesterandlondon.co.uk

Shares in closed-end investment trust Manchester & London (MNL) have surged by 65 per cent in the past 12 months, a performance that reflects the company’s hefty weighting to US-listed shares and a distinct bias to the technology sector. Investments in tech stocks accounted for over half the company’s net asset value (NAV) a year ago, including stakes in Facebook (US:FB), Amazon (US:AMZN), Apple (US:AAPL) Microsoft (US:MSFT), and Alphabet (US:GOOG), the parent of Google.  

The investment managers at Manchester & London built up this hefty weighting in the belief that “over the next decade we will see dramatic growth in the following themes: the internet of things, electric vehicles, robotics, cloud computing, internet retailing, wearables and the shared economy”. It proved to be a wise call because the sector was the momentum trade of 2017, and one driven by secular growth.

Manchester & London also has a strong bias towards global healthcare and pharmaceutical investments based on the “exciting prospects for healthcare over the next decade due to genomics, immunology and biologics.” The managers anticipate strong public service pricing pressures, but also expect this to lead to further consolidation to remove duplicated cost structures. Hence their strategy is to hold growth-based, multi-product companies that are potential consolidation targets.

When I spotted the investment potential, the shares were trading on a 21 per cent discount to NAV of 368p. Since then, its NAV has increased by 31 per cent to 474p a share. The fact that Manchester & London’s share price has done far better, rising by 65 per cent, reflects a marked improvement in investors’ perception to the portfolio mix and the growth potential of the investee companies. Indeed, Manchester & London’s share price discount to NAV has been wiped out completely.

Admittedly, I decided to bank profits on the holding last summer at 366p ('Top-slicing and running profits', 26 Jun 2017), and also at 377p ('Bargain Shares: second chance', 17 Aug 2017). As a result I crystallised a total gain of 28 per cent over the first six-month holding period. With hindsight, I banked profits too soon. However, if you are of the opinion that the US tech sector will continue to attract investor interest then there is potential for further share price gains. Hold.

H&T (HAT)

Aim: Share price: 355p

Bid-offer spread: 349-355p

Market value: £133m

Website: handt.co.uk

Pawnbroker H&T (HAT) has issued two earnings upgrades in the past few months, making it four since I included the shares in my 2017 Bargain Shares Portfolio. The key drivers behind the succession of earnings beats include the expansion of the company’s lower interest rate personal loan product, which has almost doubled the personal loan book to £18.3m year on year; an 11 per cent rise in its pawnbroking pledge book to £46.1m last year, mainly reflecting the higher gold price; an improved concession format in its stores; and higher loans made on quality watches. Also, by offering customers access to cheaper loans, H&T has diversified its client base and attracted those who are trying to rebuild their credit score.

To put the scale of the earnings growth into perspective, when I suggested buying the shares 12 months ago, analysts predicted the company would deliver adjusted EPS of 25p in 2017, up from 20.9p in 2016. However, following last month’s earnings beat, pre-tax profits are set to surge by at least a third to £13m in 2017 and produce EPS of around 29p, and possibly more. Furthermore, the profit momentum shows no sign of losing steam; analyst Andrew Watson at broking house N+1 Singer is pencilling in 2018 EPS of 31p, implying H&T’s shares are currently being rated on 11.5 times earnings estimates. They also offer a decent dividend yield of 3.2 per cent based on a 2018 payout of 11.5p a share. My minimum target price is 400p, but this could prove conservative if, as I suspect, there could be another round of earnings upgrades when H&T issues full-year results next month. Buy.

AVINGTRANS (AVG)

Aim: Share price: 227p

Bid-offer spread: 222-228p

Market value: £70.5m

Website: avingtrans.plc.uk

Avingtrans (AVG), a maker of critical components and services to energy, medical and industrial sectors, was a classic Benjamin Graham value play when I included the shares in my 2017 Bargain Shares Portfolio.

The board’s investment strategy is to acquire assets, restructure them to improve efficiency, and then sell them on to release the hidden value in the balance sheet. The directors have been rather successful, having sold off the company’s industrial division, Jenatec, to Kuroda of Japan for £13.75m in 2012, and its aerospace unit for £65m in March 2016 to book a hefty pre-tax profit of £27.5m. Following a tender offer at 200p a share, this left the company with £28m of net cash to invest. This meant that 12 months ago we were effectively getting £10.1m of fixed assets in the price for free, in addition to £4.6m of current assets. It was an anomalous valuation given that the board planned to deploy the company’s hefty cash pile on making earnings-accretive acquisitions to complement the decent growth prospects of its retained operations.

The one they settled on was former Aim-traded specialist engineer Hayward Tyler, a supplier of motors and pumps to customers in the nuclear, power generation and oil and gas sectors. The takeover completed last autumn. It was an obvious target for several reasons. Firstly, the company was too highly leveraged – Avingtrans used its cash pile to pay off £21.5m of expensive debt it assumed on acquisition. And with the backing of Avingtrans’ solid balance sheet there are now no financial constraints impeding progress at Hayward Tyler, another reason behind its recent underperformance.

Secondly, Hayward Tyler has profitable operations in Vermont, in the US, where it is a top-rated supplier to the nuclear industry, providing a new geographic location for Avingtrans, which has a strong position at Sellafield where it has a lucrative 10-year contract worth £47m to provide waste storage containers for the Cumbrian nuclear power station. 

Thirdly, there is scope to restore Hayward Tyler’s profitability by taking out costs from the business, improving the supply chain management and removing duplicated overheads. Analyst Jo Reedman at broking house N+1 Singer believes that £3.2m of costs can be taken out in the financial year to end-May 2018, doubling to £6.6m the year after, and is assuming that Hayward Tyler will make a nine-month operating profit contribution of £1.6m in 2018, rising to £3m on £61.6m sales in the 2019 financial year. Hayward Tyler’s operating profit margins were as high as 9.4 per cent in 2016 prior to getting into difficulty, thus offering scope to increase margins even more. Importantly, I understand from the directors that the acquisition is bedding down well and Avingtrans continues to win new contracts across its enlarged business, announcing another £7m of awards in a pre-close trading update ahead of interim results on Wednesday, 28 February 2018.

Fourthly, there is the possibility of Hayward Tyler’s profitable US operations benefiting from the corporation tax cuts announced by the US Republican administration.

So after factoring in cost savings, and a restructuring of Hayward Tyler, analysts at N+1 Singer anticipate Avingtrans’ cash profits rising eightfold to £5.6m on revenue of £79.9m in the 12 months to the end of May 2018, increasing to cash profits of £7.6m on revenue of £95m the year after. On this basis, the company is rated on an enterprise value to cash profit multiple of 10 times, a hefty discount to the sector average. I maintain my 275p target price and rate Avingtrans’ shares a buy.

BOWLEVEN (BLVN)

Aim: Share price: 32.35p

Bid-offer spread: 32-32.35p

Market value: £105m

Website: bowleven.com

Bowleven (BLVN), the Africa-focused oil and gas exploration group, made it into both my 2016 and 2017 Bargain Shares Portfolios and the shares continue to offer substantial upside potential. If anything, the investment case has strengthened in the past 12 months given that the oil price has more than doubled to $70 a barrel since hitting multi-year lows in January 2016, thus supporting the economic viability of its projects. The valuation is well underpinned too.

Led by activist and 25.8 per cent shareholder Crown Ocean Capital, the board is pursuing a strategy of turning Bowleven into a holding company that does not pursue any new exploration activity; is streamlining costs, with monthly overheads slashed to $350,000; and is relying on contractors for any additional support needed to ensure a proper stewardship over the company's Etinde and Bomono assets in Cameroon. As a result net funds declined only slightly to $86m (£60.5m) in the financial year to end-June 2017, a sum representing 57 per cent of the company’s market capitalisation.

In addition, Bowleven has a $40m (£30m) 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 (£18m) payment on achieving the final investment decision at the project. Current plans are for the final locations for two wells to be decided in the first quarter this year, mobilisation of a rig in the second quarter, and drilling to commence thereafter. Analyst Daniel Slater at brokerage Arden Partners points out that, although drilling capital expenditure has not been disclosed, Bowleven has a “net carry across the two wells of $40m for its 25 per cent liability, implying gross costs could reach $160m before it would have to contribute any cash. Given the shallow water location and current state of the rig market, we expect Bowleven to be fully carried on the two wells.”

Mr Slater’s valuation of the existing discovered resource on Etinde is 47p per Bowleven share on a risked basis, and 104p a share unrisked, and notes that the forthcoming appraisal programme should provide distinct catalysts. He also points out that the shares are allowing only about 25 per cent of the risked value for discovered Etinde resources, and arguably minimal value for the appraisal wells themselves. I agree and continue to rate Bowleven’s shares a buy ahead of news on the drilling programme. Buy.

MANAGEMENT CONSULTING (MMC)

Main: Share price: 6.5p

Bid-offer spread: 6-6.5p

Market value: £32.9m

Website: mcgplc.com

As its name implies, Management Consulting's (MMC) business is focused on implementing tangible performance improvements for its corporate clients so that they can achieve their objectives with greater speed, predictability and control.

It’s a slimmed-down version of its former self, having raised around £200m of cash by selling off a number of profitable operations to de-gear its balance sheet and leave the company with just one operating unit, Alexander Proudfoot. This business has been around for 66 years, during which time it has completed more than 16,000 projects across the globe. However, it has been lossmaking in recent years, a reflection of commodity sector clients tightening their budgets as this segment accounts for about a half of the company’s revenues.

The rationale for including the company in the portfolio was therefore based on the recovery potential. Namely, with costs being taken out of the business – at the interim stage the directors confirmed annualised cost savings of £4.7m had been secured, with plans in place to deliver further savings in the second half of last year – then an uptick in business activity would narrow operating losses. A cash pile worth £38m at the end of 2016 provided solid asset backing.

The problem is that the turnaround is taking longer than anticipated. First-half operating losses did narrow by a third to £4.6m last year, but with slippage on some large projects in North America in the second half, and one project not going ahead at all, analysts at broking house Peel Hunt now expect the company to post an underlying pre-tax loss of £8.8m for the full year. This is a slight improvement on the £10m loss in 2016. Given the scale of the losses, the cash pile declined to £28.4m by the end of June 2017 and is expected to decline further to £24m at the end of 2017, a sum worth 4.5p a share.

The good news is that the level of proposals in the lossmaking North American operation is starting to improve, and the part of the business servicing the needs of natural resources companies is picking up new clients. This explains why analysts at Peel Hunt forecast a small pre-tax loss of £900,000 on revenues of £49m in 2018, albeit this estimate factors in a £6m increase in annual revenues. If the company can hit those forecasts then the shares, which are slightly adrift of my buy-in price 12 months ago, are worth holding on to for recovery given that net cash on the balance sheet accounts for around three-quarters of the current share price. However, the shares are unlikely to make progress until there is concrete evidence of a turnaround, and that could take much of this year.

In the circumstances, I would advise crystallising the small loss on this holding and recycling your capital into my 2018 Bargain Shares Portfolio, the constituents of which offer potential for more immediate capital upside. Sell.

TISO BLACKSTAR (TBGR)

Aim: Share price: 45p

Bid-offer spread: 40-45p

Market value: £122m

Website: tisoblackstar.com

The laggard in last year’s portfolio is Aim-traded South Africa-focused investment company Tiso Blackstar (TBGR). The share price is down 20 per cent in the past 12 months, and the company’s market value of £128m is 42 per cent below its last reported net asset value (NAV) of £210m.

The poor share price performance reflects the painful progress being made on selling off non-core holdings in order for the group to become a single-sector investor in the media industry, building on its wholly owned investment in The Times Media Group (TMG), the premier news group in South Africa. Titles owned include Business Day, Financial Mail and The Sunday Times. Apart from newsprint, TMG’s activities also encompass television, films and radio stations. Not that its media operations have underperformed, quite the contrary. Cash profits from media operations shot up a third to £23.8m in the financial year to end-June 2017.

However, the R1.5bn (£88.3m) proposed disposal of Tiso’s 22.9 per cent stake in KTH, another South African investment company, has dragged on, which has subdued investor sentiment. The acquirer will now settle the consideration in instalments over a period of 12 to 18 months, the cash proceeds from which will wipe out all of Tiso’s borrowings, leave it with cash to invest and enable the board to declare a special dividend of around 0.88p a share. Shareholders received a final dividend of 0.25p a share in December, in addition to an interim payout of 0.28p a share in May.

Other non-core assets include a 51 per cent stake in Robor, a specialist steel manufacturer. Robor reported a cash loss of £1.7m, reflecting declining domestic demand, hardly an ideal backdrop for realising value from the business. At least Tiso’s Consolidated Steel Industries subsidiary performed well despite shrinkage in the country’s construction and steel fabrication industries, reporting cash profits of £5.3m in the 12 months to end-June 2017, up 61 per cent year on year.

So, although the transformation of the company into a single-sector investor in the media industry is taking longer than expected, I still believe that with a clean balance sheet a narrowing of the share price discount to NAV is likely. If you followed my advice a year ago, I would hold on to the shares. Hold.