Bargain Share Portfolio updates

Three of the company’s 24 litigation projects completed in the latest six-month trading period, of which a single case in Australia accounted for the lion’s share of the gains. That case alone produced revenue of A$9.7m (£5.2m) and a cash profit of A$4.1m, a healthy 88 per cent return on the capital LCM had invested and over a typical 27-month investment period. An international arbitration case settled in double quick time and produced an eye-catching cash profit of A$1.6m in just nine weeks, representing a 57-fold increase on capital invested. The returns from both cases helped the company deliver an interim pre-tax profit of A$2.7m.

LCM has $20.7m of litigation investments on its balance sheet, all of which are conservatively valued, and a net cash pile of A$52m to help fund the balance of the A$70m investment required in its committed portfolio. It also has a pipeline of 64 projects requiring an estimated investment of A$409m, of which eight are corporate portfolio investments, a segment of the market the company is actively targeting. Bearing this project pipeline in mind, LCM is in the process of raising a third-party fund which will be managed by the company in return for a management and performance fee. It shouldn’t have any problems given that LCM has generated a running internal rate of return of 78 per cent on settled cases and a return on invested capital of 117 per cent in the past 7.5 years. Expansion into the European market has been facilitated through the opening of London office, and its Asian presence has been stepped up with a Singapore office at the tail end of last year, thus enhancing its geographic reach.

Admittedly, forecasting the timing and the returns from litigation investments are notoriously difficult, but given the track record of LCM’s astute management team, it’s only reasonable to assume that LCM will continue to deliver a hefty return for shareholders in the coming years to warrant paying two times book value for the shares at this stage. Add to that upside from third-party funds to scale up the operation, the declaration of a maiden interim dividend of around 0.27p a share, and strong structural growth drivers underpinning demand for litigation funding, and I have no hesitation reiterating my earlier buy advice, having included LCM’s shares in my market beating 2019 Bargain Share Portfolio around the current offer price. Buy.

Ramsdens’ smart bolt-on acquisition

Middlesbrough-based Ramsdens (RFX:170p), a diversified financial services company whose main activities encompass foreign currency exchange, retail jewellery, pawnbroking and a precious metals buying and selling service, has acquired 18 stores trading as The Money Shop for £1.5m in cash. The acquired stores are primarily located in the North West of England and Scotland and will be rebranded as Ramsdens over the coming weeks. The acquisition boosts Ramsdens' presence in the UK market to over 150 stores.

Chief executive Peter Kenyon believes there is significant potential to build upon the company’s existing foreign exchange proposition in these new stores, to improve their performance through the expertise of the Ramsdens’ shrewd management team, and to enhance their growth potential by introducing its growing jewellery retail offering into the majority of the acquired stores.

The bolt-on deal is also earnings enhancing as it will add around £600,000 to operating profits in the financial year to end 31 March 2020. Analysts at Liberum Capital now expect pre-tax profits and EPS to both increase by 11 per cent to £7.3m and 18.9p, respectively, to support a payout of 7.8p a share in the 2019-20 financial year. I would also flag up that Ramsdens’ balance sheet is cash rich with proforma net funds likely to be around £9.3m post the acquisition, a sum worth 30p a share. This cash pile not only provides ample firepower for the management team to cherry pick further earnings accretive bolt-on purchases, but also means that Ramsdens’ double digit earnings growth is being valued on a cash-adjusted forward price/earnings (PE) ratio of 7.4.  Add to that a prospective dividend yield of 4.6 per cent, and I see 50 per cent share price upside, having included the shares in my 2019 Bargain Share Portfolio at just below the current offer price. Buy.

Jersey Oil & Gas commences drilling

Shareholders in Jersey Oil & Gas (JOG:247p), a UK North Sea-focused upstream oil and gas company that owns an 18 per cent interest in the P2170 licence (Blocks 20/5b & 21/1d), Outer Moray Firth, can expect results in mid-April from an appraisal drilling programme that has just commenced on the flagship Verbier discovery in Block 20/5b. Initial operator estimates suggest gross recoverable resources associated with the Verbier discovery is between 25m and 130m barrels of oil equivalent (boe) with an estimated mean of 69mboe. The purpose of the appraisal well is to accurately determine the potential volume range in the discovery. 

Management estimates of the value potential for the estimated recoverable oil volume ranges, together with an opinion that all outcomes are potentially commercially viable, suggest a net present value (NPV) in excess of £30m attributable to Jersey Oil and Gas at the low end of the range, and a NPV in the order of £200m at the top end. Neither scenarios factor in valuation upside potential of the Cortina prospect, located on the licensed acreage, which is estimated to hold mean prospective resources of 124mboe, or for that matter additional prospectivity across the licence area.

It was the potential for a transformational drilling campaign that attracted me to Jersey Oil & Gas when I suggested buying the shares at the 200p level in my 2019 Bargain Share Portfolio. Clearly, other investors can see the attraction too as the share price is now 19 per cent higher on an offer-to-bid basis. Of course nothing is guaranteed in the oil exploration industry, but with the company holding net cash of £22m at the end of June 2018 – more than double its £9m to £11m share of the cost of drilling the Verbier appraisal well – then even if the prospect only has 25mboe of gross recoverable resources, representing the low end of the estimated range, this is still worth £30m to Jersey Oil and Gas shareholders. That sum and surplus net cash of £11m (after expensing the appraisal drilling costs) backs up three quarters of the company’s current market value of £53m.

However, based on gross recoverable resources of 77.5mboe in a mid-case scenario (of which 14mboe are attributable to Jersey Oil and Gas) and $7 per barrel of oil with first production in the second half of 2021, analysts have an unrisked NPV estimate of 417p a share for Verbier alone, a sum 70 higher than the current share price. Also, if the company hits pay dirt on Verbier, then there will be a positive read-across for prospectivity across both Cortina and Meribel, other two P2170 licence prospects. Buy.

Inland Homes enhancing shareholder value

Inland Homes (INL:63.5p), a south-east of England-focused housebuilder and brownfield land developer, reports interim results on Thursday, 7 March 2019, so after Investor Chronicle goes to press.

Ahead of the results analysts estimate that Inland can raise full-year pre-tax profits and earnings per share (EPS) by 6 per cent to £20.5m and 7.7p, respectively, on revenues of £185m in the 12 months to the end of June 2019. On this basis, the shares are priced on a forward price/earnings ratio (PE) of 8 and offer a prospective dividend of 4 per cent based on a hike in the payout from 2.2p to 2.6p a share.

It’s worth noting that the company has just facilitated the purchase for an investor of a six-acre site in the London Borough of Hillingdon which has capacity for over 400 homes and business space. The plan is to secure viable planning permission on the site and then negotiate a major partnership housing agreement with either a housing association or a build to rent investor. Inland will earn a management fee and a share of the profits, highlighting how it is successfully navigating through the housing market by de-risking its forward pipeline of projects.

It’s also worth noting that the planning application for 1,853 dwellings and 18,000 sq metres of commercial space at the company’s Cheshunt Lakeside development is due to be heard in March. This is a major redevelopment project that could produce material gains for shareholders. I can also reveal that Inland has obtained a resolution to grant planning consent for 60 homes on a 5.9 acre site in Meppershall, Bedforshire. The point is that even though Inland’s shares have risen by 8 per cent on an offer-to-bid basis since I included them in my 2019 Bargain Share Portfolio, they are still priced on a deep 38 per cent discount to last reported EPRA net asset value of 102p, an industry measure that is calculated in accordance with the methodology of the European Public Real Estate Association. That's unwarranted. Buy.

Walker Crips downgrades second half guidance

My 2016 Bargain Share Portfolio has returned 66 per cent in the past three years, well ahead of the respective 39.6 and 41.1 per cent total returns on both the FTSE All-Share and FTSE Aim All-Share indices. Moreover, I have banked profits or top-sliced a number of the holdings so have taken out 85 per cent of the initial capital invested, so my risk-adjusted return is far more favourable and means your recycled cash can be recycled into other new investment opportunities.

However, as is the case with any portfolio, not all the shares selected will be winners. This is certainly the case with the portfolio laggard, small-cap stockbroker and asset and wealth manager Walker Crips (WCW:28p).

I last updated the investment case post the interim results at the end of last year (‘Bargain Shares: Exploiting pricing anomalies and top-slicing’, 3 December 2019) when the directors were guiding investors to expect an improved second half performance after a disappointing first half. That’s not going to happen as the challenging market back drop has impacted the level of volume-driven broking commission Walker Crips has earned and also the intended launch date of planned new initiatives. The board are guiding investors to expect a full-year performance much lower than the prior year to 31 March 2018 when Walker Crips reported a pre-tax profit of £0.9m on revenues of £30.5m. The shares have sold down and the company’s market value of £11.2m is now little more than half net asset value of £21.8m. Walker Crips held cash and trading investments of £6.8m at the half-year end so there are no financial concerns.

There is no getting away from the fact that this has been an incredibly frustrating holding as even after accounting for the receipt of 5.59p a share of dividends, the investment is 31 per cent in the red. Furthermore, the long awaited profit recovery required to narrow the share price discount to book value is proving elusive which is why I feel that it’s best to crystallise the loss.

■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.

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