Bargain Shares: Another chance to bag some bargains Part II

Amber alert for more gains

The Aim-traded shares of activist fund manager Crystal Amber (CRS:220p) are starting to gain traction. I included them, at 207p, in my 2018 Bargain Shares portfolio as a way of playing the recovery potential of the company’s largest holdings: Hurricane Energy (HUR), an oil explorer that has a huge resource base in a strategically important part of the North Sea, van hire company Northgate (NTG), foreign currency payment services provider FairFX (FFX), media group STV (STVG) and cyber security firm NCC (NCC).

It’s worked a treat as the company’s net asset value (NAV) per share rose by 8.3 per cent in the first quarter of 2018, a further 8.1 per cent in April, and by 4.5 per cent in the first two weeks of May. I estimate spot NAV per share is 233p, up 22 per cent since the start of 2018. With further gains likely from its investment portfolio, Crystal Amber’s share price is set to continue to gain traction. Buy.

Gresham House makes game-changing acquisition

I included shares in specialist asset manager Gresham House (GHE:424p) in my 2016 Bargain Shares portfolio at 312p and last rated them a buy at 410p, with a target of 460p (‘On the earnings beat’, 5 March 2018). The company has since made an important acquisition, part-funded by a £15m placing at 410p a share, prompting a reassessment.

Gresham House is acquiring FIM Services, a specialist alternative fund manager specialising in forestry and renewable energy. The £25m consideration includes a £4m earn-out payment subject to achieving revenue targets over the next two years. Founded in 1979, Oxford-based FIM had assets under management (AUM) of £893m encompassing 83,000 hectares of forestry (AUM of £635m) and 127MW of renewable energy generating assets in offshore wind farms and ground-mounted solar parks. It’s a profitable niche too: FIM’s two largest timber funds both have produced an average internal rate of return of 11.4 per cent since 2008 and 2010, respectively. FIM reported a pre-tax profit of £3.3m on revenue of £6.3m in 2017, so the £25m consideration looks a fair price.

Having acquired renewable energy fund manager Hazel Capital last autumn, the FIM acquisition makes strategic sense as it more than trebles Gresham House’s renewable AUM to £344m. It also means that Gresham House’s forestry funds now account for £918m of the company’s £1.5bn AUM, thus scaling up an asset class that offers substantial tax benefits for UK investors as forestry is free from income and capital gains tax, and qualifies for 100 per cent relief from inheritance tax once held for two years.

Gresham House’s AUM could get a further uplift (of around £85m) later this year when its British Strategic Investment Fund, a closed-ended Guernsey Limited Partnership which invests in relatively illiquid investments in UK housing and infrastructure-related assets, has final close.

Factoring in the contribution from FIM, analysts at Liberum Capital estimate that Gresham House will deliver pre-tax profits of £2.58m on revenues of £12m in 2018, rising to pre-tax profits of £4.95m on revenues of £16.4m in 2019. On a fully diluted basis, expect EPS of 12.8p in 2018, and 20.4p in 2019. Net cash could be around £19.2m by the year-end, excluding £9m of realisable assets that include a holding worth £6.5m in Aim-traded investment company Gresham House Strategic (GHS:850p), another constituent of my 2016 Bargain Shares portfolio and one in which Gresham House has the investment mandate. 

This means that Gresham House’s net cash and liquid assets could equate to 161p a share by the year-end, implying the shares are rated on a cash-adjusted forward PE ratio of 13, falling sharply in 2019 as EPS ramps up and cash builds. My new target price is 500p and I rate Gresham House shares a buy.

The same is true of shares in Gresham House Strategic, which are priced 30 per cent below NAV of 1,211p even though it has delivered 9 per cent NAV growth in the first four months of this year. GHS’s holding in Aim-traded technology company IMImobile (IMO:276p), a £172m market cap company that helps businesses engage with their customers across all mobile devices by offering smart software products based on proprietary technology, has been performing really well. GHS’s holding is now worth 545p a share, and GHS also holds cash of 100p a share. This means other investments worth 566p a share are in the price for 200p. Ahead of full-year results on 19 June, GHS’s shares rate a buy.

End game in dispute for PV Crystalox

The end game in a contract dispute is in sight for solar wafer maker PV Crystalox Solar (PVCS:22.5p). The company has received an initial payment of €14.5m (£12.7m) from one of its customers, a leading photovoltaic company that failed to purchase wafers in line with its obligations under a sales contract, as part of a €36.5m arbitration award made by the International Court of Arbitration of the International Chamber of Commerce (ICC). Discussions are ongoing between the two parties to agree a payment schedule for the outstanding amount.

The photovoltaic company has the right to receive the outstanding 22.9m wafers under the contract, and both parties are exploring options to eliminate the wafer deliveries for a corresponding reduction in the award. This explains why PV Crystalox only recognised a net €20.5m of the award in its 2017 annual accounts. In addition, a further €3.1m was awarded to PV Crystalox in March 2018 and will be recognised in the first half, as will interest on the outstanding balance of the larger arbitration award.

By my reckoning, PV Crystalox currently has net funds of 22.5p a share, excluding 5p a share of outstanding award payments to be made. Ultimately, a cash return to shareholders is the end game. So, having included the shares at 19p in my 2014 Bargain Shares portfolio, and last rated them a hold at 21p (‘Small-cap earnings beats’, 21 March 2018), I can see light at the end of the tunnel. Hold.

Oakley insider’s major buying spree

I am not the only one who sees value in private equity investment company Oakley Capital (OCI:177p). Director Peter Dubens has splashed out £9m on 5.4m shares to take his stake to 7.5m shares. It’s easy to see why, as I estimate the shares are rated on a 26 per cent discount to spot NAV, compared with a peer group average of 13 per cent, having taken into account recent gains from disposals, the payment of a final dividend and marking to market value Oakley’s stake in Aim-traded Time Out (TMO:95p), the media business.

That discount is harsh considering Oakley holds some smart-looking TMT investments, including European real estate websites Casa.it in Italy and atHome.lu in Luxembourg; Italy's largest car insurance broker and price comparison website, Facile.it; and Plesk, a software platform that supports the operations of more than 10m websites. Around 70 per cent of the portfolio has been held for at least two years, thus offering scope for NAV growth through realisations and operational performance. Indeed, analysts at brokerage Liberum Capital are forecasting a year-end NAV of 264p, rising to 286p by December 2019.

Having included the shares at 146.5p in my 2016 Bargain Shares portfolio, received dividends of 9p and last advised buying at 165p (‘Bargain Shares: Beating the market’, 12 March 2018), I feel Mr Dubens’ lead is worth following. I am also reassured by the board’s commitment not to issue any equity at a discount to NAV, one reason why investors have been cautious in the past. Buy.

Arbuthnot's robust trading

A robust trading update from Arbuthnot Banking Group (ARBB:1,530p), a constituent of my 2015 Bargain Shares portfolio, has sent the shares up to my long-term target price of 1,533p, justifying my last buy advice at 1,280p (‘Bargain Shares: Beating the market’, 12 March 2018). Longer-term holders are also doing well as Arbuthnot has paid out dividends per share of 416p in the past three years, reducing the break-even point to 1,043p. The ongoing re-rating is warranted.

Having increased its loan book by £300m to £1.05bn in 2017, of which half the growth came from a doubling of the commercial loan book to £300m, customer loans and deposits at the end of April have increased by 18 per cent and 37 per cent, respectively, year on year. Arbuthnot is well funded to continue to recycle low-cost capital into lending at a favourable net interest margin. The bank earned an average gross yield of 5.27 per cent on its loan portfolio last year, or 10 times its cost of funds. Customer deposits of £1.4bn at the start of 2018 covered the loan book 1.3 times over, and the bank boasts a core tier one capital ratio of 17.3 per cent.

Around 61 per cent of lending is on residential property (buy-to-let mortgages account for 30 per cent of the loan book, owner-occupiers 24 per cent and development loans 7 per cent), and a further 17 per cent is on commercial property. It’s very secure as the average loan-to-value ratio is only 53 per cent and borrowers offer personal guarantees, so impairments are incredibly low; just £51,000 was impaired in the second half of 2017. That’s reassuring given that 48 per cent of the loan book is secured on London property, a market that has been under pressure.

Based on a £1.3bn year-end loan book, analyst Mark Thomas at equity research firm Hardman & Co believes that Arbuthnot should be able to increase pre-tax profits by 17 per cent to £8.9m this year and lift EPS at a similar rate to 56.3p. That looks achievable, as do expectations that pre-tax profits and EPS can ratchet up to £15.4m and 94p, respectively, in 2019 based on a closing £1.5bn loan book. An 18.6 per cent stake in challenger bank Secure Trust Bank (STB:2,000p) backs up £69m of Arbuthnot’s £228m market value too.

A return to the April 2017 share price high of 1,600p looks on the cards, and perhaps higher still. Run profits.

■ Simon Thompson's new book Successful Stock Picking Strategies was published on 15 March and can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source and is priced at £16.95 plus £2.95 postage and packaging. 

Simon's second book Stock Picking for Profit has now been reprinted and is available to purchase online at www.ypdbooks.com for £16.95, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order.