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Gresham warrants offer a geared play

Simon Thompson highlights how the exercise of three warrant issues is set to boost Gresham House’s cash pile by £9m and could mean the company will have liquid assets of £40m by 2019

In last week’s column (‘Bargain shares: repeat buying opportunities’, 16 May 2018), I increased my target price to 500p for the Aim-traded shares of specialist asset manager Gresham House (GHE:450p), a constituent of my 2016 Bargain Shares portfolio.

I have mentioned the shareholder call warrants (GHEW:125p) before, and it’s worth highlighting them again. The company issued 1.07m of these warrants to existing shareholders in November 2014 on a one-for-five basis and they can be exercised at any time until 31 December 2019 at a price of 323.27p per ordinary share. They are currently trading on a bid-offer spread of 120p to 125p, although the spread has been as wide as 10p a share at times.

This means that with Gresham House's ordinary shares offered in the market at 450p, effectively there is no premium embedded in the warrant price. Moreover, if my 500p target price on the ordinary shares is achieved, then expect the 125p warrant price to rise to 177p, an increase of 41 per cent. The flipside is that warrants are less liquid. Still, it’s a great way to play the upside, which is why I rate these warrants a buy.

Admittedly, some readers have stated that their stockbrokers are unwilling to trade the warrants for them, citing the absence of a Key Information Document (KID), which is a requirement under the new Mifid rules. But there are clearly trades going through the market, so I would be interested from those of you who have traded them which brokers you are using.

Bargain Shares Portfolio 2016 performance 
Company nameTIDMOpening offer price (p) 5.02.16 Latest bid price (p) 21.05.18Dividends (p)Total return (%)
Bioquell (see note one)BQE1253050144.0%
VolvereVLE4199000114.8%
Bowleven (see note two)BLVN18.93539092.0%
Gresham HouseGHE312.5444044.8%
French ConnectionFCCN45.759029.1%
Juridica (see note three)JIL36.1143227.4%
Oakley Capital OCI146.51776.7525.4%
Gresham House StrategicGHS7969051515.6%
Mind + Machines (see note four)MMX87.502.8%
Walker CripsWCW44.9352.43-16.6%
Average return    47.9%
Deutsche Bank FTSE All-Share ETF index tracker (LSE:XASX) 34143547.9641.6%
      
Notes:
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 banking profits on half your holdings in Bowleven's shares at 33.75p, and running the balance ahead of drilling news at the Etinde prospect in Cameroon in the second quarter of 2018 (‘Hitting pay dirt', 9 Apr 2018). The total return reflects this share sale.
3. 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 selling the holding at 14p ('Taking Q1 profits and running gains', 4 Apr 2017), hence the price quoted in the table. Please note that Juridica has since paid out a further special dividend of 8p a share and current share price is 9p.
4. 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. Simon then advised selling the holding at 7.5p which is the exit price stated in the table ('Strategic acquisitions', 9 May 2018).
Source: London Stock Exchange share prices

I would also flag up that Gresham House issued 850,000 supporter warrants to the directors with the same exercise price and expiry as the shareholder warrants. The point is that Gresham House’s cash pile will get a £6.1m boost when these 850,000 supporter warrants and 1.04m outstanding shareholder warrants are exercised. In addition, Gresham House issued 909,908 LMS warrants to investment company LMS Capital (LMS:48.4p) and each one converts into one ordinary share until 30 June 2018 at an exercise price of 323.27p. LMS paid a warrant purchase price of 28p per LMS warrant, and I would expect these warrants to be exercised shortly given that Gresham House’s share price is 450p. Exercise of the LMS warrants will add a further £2.9m to Gresham House's growing cash pile.

Please note that I had taken the conversion of all these warrants into account when quoting the fully diluted EPS estimates of 12.8p and 20.4p, respectively, for 2018 and 2019. The conversion of the warrants is also embedded into Liberum’s forecasts, which suggest that Gresham House’s net funds and realisable assets could rise to £40m by the end of 2019, a sum worth 188p a share using an enlarged share count of 21.3m at the end of 2019. This implies that at the current share price of 450p Gresham House is being rated on a forward PE ratio of 13 for 2019. Buy.

 

 

■ 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.