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Marwyn’s buying opportunity

The share price of the closed-end investment company has failed to match the recovery of its holdings this year, thus offering a value opportunity to exploit
June 4, 2018

I feel that investors are being overly harsh in their valuation of Marwyn Value Investors (MVI:132p), a closed-end investment company listed on the Specialist Fund Market of the London Stock Exchange.

The company makes its investments through an open-ended Master Fund domiciled in the Cayman Islands, which was launched in early 2006 with backing from more than 60 leading institutions and alternative funds including Marwyn Value Investors. The company paid out total dividends of 8.3p per share and nudged up net asset value (NAV) per share to 214.8p in 2017, to produce a total return of 5.8 per cent.

Admittedly, the equity market turmoil in the first quarter of 2018 led to a 14 per cent slump in Marwyn’s NAV to 185p by the end of March 2018. However, investors have overreacted as Marwyn’s share price plunged to a six-year low of 124p even though its funds have delivered a 172 per cent total NAV return from inception in February 2006 to the end of March 2018. Moreover, Marwyn’s share price has failed to react to the strong share price recovery in the value of some of its six holdings, five of which are listed on the London Stock Exchange.

In fact, I estimate that spot NAV has increased by 10 per cent to 203.6p a share from the March low, which means that the shares are rated on a thumping 35 per cent share price discount, despite the company’s long-term track record of delivering outperformance from its portfolio. I also estimate that cash on the balance sheet accounts for £42.4m of Marwyn’s spot NAV of £144.1m. Based on 70.77m ordinary shares in issue, Marwyn has a market value of £93.4m. Strip out net cash and this means investments worth £102m are effectively in the price for £51m.

To give you some idea of the scale of the undervaluation, Marywn’s shareholding in Europe's largest car auction operator, BCA Marketplace (BCA:191p), is worth £48.8m alone. BCA is a £1.5bn market capitalised company that recently announced trading ahead of market forecasts, and lower than expected debt levels, too. This means that Marywn’s stake in Zegona Communications (ZEG:123p), an investor in the European telecoms sector, is effectively in the price for free. The shareholding is worth £28.7m, or 40p per Marwyn share.

There is material upside to Zegona’s share price, too. That’s because Zegona owns 26.8m high-yielding shares in Spanish telecoms group Euskaltel (MCE:EKT – €8.00), which are worth €214.4m (£188m), significantly more than Zegona’s own £153m market capitalisation. Furthermore, Zegona has net cash of €10m (£8.8m) on its balance sheet and is due contingent consideration of €5m (£4.4m) from the disposal of its holding in Telecable de Asturias, the leading quad-play telecommunications operator in northwest Spain, to Euskaltel last summer.

Importantly, the outlook for telecommunications businesses in Spain is positive, which provides Euskaltel with a solid foundation for growth. The broader Spanish economy performed well in 2017, growing by 3.1 per cent, and economists predict GDP growth of 2.6 per cent in 2018. Most players in the Spanish telecoms market are seeking to build profitable growth, and all of the major Spanish operators have been increasing prices. On an enterprise value to cash profit basis, Euskaltel is rated on a 10 per cent-plus discount to its peer group average rating of 9.4 times, suggesting the current valuation is not excessive.

Marywn also owns stakes that have a combined value of £22m in three cash shells: Wilmcote (WCH:119p),  a company that has been established to acquire and develop target businesses in the downstream and specialty chemicals sector by capitalising on structural trends and consolidation in fragmented markets; newly floated Safe Harbour (SHH: 129p), a company led by former directors of the FTSE-100 UK distribution conglomerate Bunzl (BNZL) and logistics groups Stobart (STOB), which intends embarking on an acquisition-led buy-to-build strategy in the distribution sector; and Gloo Networks (GLOO), a company in which Marywn has a £3m stake, the value of which will be crystallised when Gloo returns its cash pile back to shareholders shortly, having been unsuccessful in its acquisition strategy. All three stakes are in the price for free, too.

The bottom line is that having last rated Marwyn’s shares a buy at 170p (‘Seeking value’, 4 Sep 2017), since when the board have paid out three quarterly dividends of 2.064p a share, I feel that they offer a great buying opportunity priced on a 35 per cent discount to my estimate of spot NAV of 204p, and underpinned by a 6.2 per cent dividend yield. A target price range between 180p and 190p is not unreasonable. 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.