It always pays to take note when the insiders are heavily buying shares in their own company. That’s because more often than not it’s a precursor to positive news emerging in the months ahead.
Bearing this in mind, I was intrigued when Phillip Rose, a director of Alpha Real Trust (ARTL:160.5p), an investor in high-yielding property and asset-backed debt and equity investments, splashed out £1m buying shares at 133p last summer to raise his stake six-fold to 1.3 per cent of the issued share capital.
It was not difficult to see why as the shares were trading 25 per cent below net asset value of 178p even though there was a realistic possibility that Alpha would realise some hefty gains on its investment portfolio. I had no hesitation reiterating my buy recommendation, at 133p at the time (‘Alpha’s capital creation’, 1 October 2018). It proved the right call as a quarterly trading update has revealed that Alpha’s net asset value (NAV) per share soared by 15 per cent to 205.6p in the final three months of 2018, buoyed by the disposal of a five-storey data centre in Frankfurt, Germany encompassing 450,000 sq ft, and a 664 unit private rental sector development in Monk Bridge, Leeds. The data centre was sold for €20m more than the €24.8m (£22.1m) carrying value in Alpha’s September 2018 accounts, and the Leeds site realised £15.4m, or £3.1m above book value, having been re-valued significantly since acquisition at the end of 2015.
This means that Alpha’s proforma net cash of £71.2m equates to exactly half its latest net asset value of £143m (205.6p a share), so with the shares kicking on to an all-time high of 160p, other assets worth 103p a share are in the price for a bargain basement 57p a share. That’s anomalous given that Alpha owns a 30 per cent stake, worth £19.9m, in the H2O shopping centre in Madrid which continues to benefit from record visitor numbers and reported like-for-like sales growth of 3 per cent in 2018.
The company has also been scaling up its high-yielding mezzanine debt portfolio which has doubled in value to £24.6m since June 2018 and now accounts for 17 per cent of the total investment portfolio. These secured real estate loans are typically made over a two-year term on a maximum loan-to-value ratio of 75 per cent and generate an annual income between 9 and 16 per cent. The plan is to recycle more of the burgeoning cash pile into this high yielding income stream.
Moreover, there is real potential to bank further gains from the build-to-rent portfolio. That’s because Alpha owns the Unity and Armouries residential private rented sector (PRS) 90,000 sq ft scheme in Birmingham which has planning consent for 162 residential apartments and has a gross development value (GDV) of £35m. The land is in its accounts for £4.8m, and I am sure Alpha will not be short of buyers and/or joint venture partners to develop the scheme.
Alpha is also generating a high investment return on last summer’s acquisition of an 11.8 acre freehold industrial facility close to Hamburg, Germany. The building is leased to Veolia, an international industrial specialist in water, waste and energy management, at an annual passing rent of €900,000 (£800,000) and with periodic inflation linked adjustments over the unexpired 24-year lease term. The tenant is responsible for building maintenance. Alpha part funded the €17m (£14.5m) purchase price through a €9.5m fixed rate 10-year loan, so is earning a solid index-linked return on its equity.
If you followed my advice to buy Alpha’s shares, at 80p, three years ago ('High-yield property play', 10 February 2016), you will have made a 100 per cent capital gain and booked 11 quarterly dividends of 0.6p too. There is good news on the income front as the board have just raised the quarterly payout to 0.8p a share (next ex-dividend date of 28 March 2019), implying the shares offer a prospective dividend yield of 2 per cent.
Please note that following the introduction of MIFiD II, your broker may require you to pass a sophisticated investor assessment prior to being able to deal the shares. It would pay to do so because with Alpha’s shares trading on a 22 per cent discount to NAV, and the investment risk firmly skewed to the upside, new share price highs beckon. Buy.
Miton posts earnings beat
I also feel that you should stay long of asset manager Miton (MGR:57p), shares of which have increased by 147 per cent in value since I first highlighted their potential at 23p ('Poised for a profitable recovery', 4 April 2015), and the board have also paid out dividends per share of 3.67p. The 2018 annual payout of 2p a share announced this morning is 43 per cent higher year-on-year and has an ex-dividend date of 11 April 2019.
The board can certainly afford to be generous, having increased both pre-tax profits and fully diluted EPS by more than a third to £9.2m and 4.61p in 2018 on net revenue up by a quarter to £27.5m. That result represented a £700,000 beat on the profit estimate of house broker Peel Hunt I highlighted in my last article when I suggested Miton’s shares were still worth buying at 54p (‘Profit from unwinding of recessionary risk’, 21 January 2019). Year-end net cash increased by 28 per cent to £25.5m, a sum worth 14.75p a share.
Over 80 per cent of the 16 funds Miton manages are in their first or second quartile by investment performance, a factor that helped drive a 30 per cent increase in average assets under management (AUM) to £4.37bn in 2018. LF Miton UK Multi-Cap Income Fund was amongst the leading funds in the UK Equity Income sector. It pulled in net inflows of £400m and with no monthly outflows to end the year with AUM of £1.26bn, representing a 6 per cent market share and highlighting investor appetite for Miton’s active style of investment management.
The same is true of Miton’s US Opportunities Fund which has returned 105 per cent since launch in March 2013, a performance that is even more impressive when you consider it has little in the way of exposure to the major FAANGS technology stocks that have been the key drivers of the US market indices. The US Opportunities Fund increased AUM by almost two-thirds to £626m in 2018 and is the second-best performer in the IA US Smaller Companies sector since inception.
Miton’s European Opportunities Fund is proving equally popular, enjoying net inflows of £210m last year to double AUM to £364m and is the top performer out of the 107 funds in the IA Europe ex UK sector. This augurs well for future fund flows now that the fund has a three-year track record, so can be recommended by a bigger pool of investment advisers. Not that Miton is resting on its laurels as it has been launching new and differentiated strategies to meet clients' needs including the LF Miton US Smaller Companies Fund and the LF Miton UK Balanced Fund.
Since the financial year-end, Miton’s AUM has risen by 4.3 per cent to £4.56bn, albeit net flows are neutral so this is a reflection of the market performance. Bearing this in mind, I am maintaining the investment thesis that I outlined in my January article, so I anticipate a further unwinding of the risk factors that have been subduing equity valuations since the autumn and the ongoing recovery in global stock markets to continue. That possibility is certainly not in the price given that Miton’s shares trade on a modest cash-adjusted PE ratio of 9 for the year just ended, and offer a 4.2 prospective dividend yield based on the payout being raised by a fifth to 2.4p a share this year. Buy.
Oakley’s high growth set to continue
Shares in private equity investment company Oakley Capital (OCI:193p) are trading at an all-time high post another bumper set of annual results.
Oakley’s NAV per share increased by 16.5 per cent to 281p on a total return basis, buoyed by eye-catching gains on disposals from an equity portfolio of 11 private companies that continues to gain traction. Indeed, those companies increased their average cash profits by 39 per cent last year. The realisations were completed at a combined 36 per cent premium to book value, adding 14p to NAV per share, including the disposal of stakes in Italy’s leading online comparison website, Facile.it, Germany-based online price comparison website Verivox, internet dating site Parship Elite and Damovo, a leading European communications company.
The valuation uplift on Oakley’s equity portfolio added a further 29p to NAV per share, mainly reflecting investment gains from: Inspired, a global education group that educates over 31,000 pupils across 42 schools and has a sizeable platform to pursue further acquisitions in Asia; Career Partner Group, one of the fastest growing and most highly ranked private providers of higher education and personnel development in Germany; and WebPros, formerly known as Plesk, a software platform that operates on more than 350,000 servers globally, supporting in excess of 10m websites and 18m email boxes. WebPros has been making strategic acquisitions to scale up too.
Education has become a significant sector for Oakley in recent years and now accounts for 30 per cent of the company’s NAV. The focus has been on investments in premium private schools, higher education and after-school tutoring. Analysts at house broker Liberum Capital rightly point out that education assets have many attractive characteristics making the sector an interesting area in which to invest.
For instance, demand for education is growing strongly in both emerging and developed markets, and supply is limited by public spending constraints and high barriers to entry. Moreover, there is potential for value to be added through consolidation, technology and economies of scale. Also, education markets are typically non-cyclical, as parents place great importance on the investment they make in their children’s education.
Digital Consumer is another key area targeted by Oakley. For instance, it holds investments in European real estate websites Casa.it in Italy and atHome.lu in Luxembourg. Oakley invests in businesses that have strong brand awareness, and attract lower-cost, direct traffic to their websites, thus helping to drive improved profitability. They are typically highly cash generative and can scale up quickly once they hit an inflexion point. Strong underlying structural market growth, asset-light business models that produce strong cash conversion, and the ability to accelerate performance through effective management, are key characteristics of the businesses Oakley looks for in this particular area. Investments made in the consumer segment account for 37 per cent of Oakley’s latest NAV, and the TMT sector a further 20 per cent.
Oakley’s investment managers are clearly doing well by adopting this investment approach, and so too is the share price which has risen from the 146.5p mark when I included the shares in my market-beating 2016 Bargain Shares portfolio. The board have rewarded shareholders with total dividends of 11.25p a share in this three-year period too, excluding the 2018 final dividend of 2.25p a share which has an ex-dividend date of 4 April 2019. The dividend yield is 2.3 per cent.
So, with Oakley’s equity portfolio performing well, disposals being made well above book value, and the shares priced on a deep 31 per cent below NAV, representing an unwarranted discount to a peer group average share price discount of 21 per cent, the shares remain firmly on my buy list. I last advised buying them at the current price ahead of the annual results, and have no reason to change my positive stance (‘Exploit Oakley’s deep discount to book value’, 6 February 2019). Buy.
Jarvis Securities delivers bumper second half
I turned buyer of Aim-traded shares in Jarvis Securities (JIM:510p), a financial services outsourcer and retail client stockbroker, at 460p last summer since when the board has paid out dividends of 19.5p a share (‘Jarvis offers medium-term value’, 15 August 2018). I suggested buying the shares last at 490p ahead of the annual results, having noted that the board raised the payout to a record high of 24.5p a share for the 2018 financial year (‘Take note at Jarvis’ dividend hikes’, 6 February 2019). It was a sure fire signal that the business had recovered strongly in the second half of 2018 after restructuring its commercial fee tariffs to take into account the additional costs incurred as a consequence of implementing the new Markets in Financial Instruments Directive (Mifid II).
Despite incurring the first half shortfall, annual pre-tax profits of £4.3m and EPS of 31.8p on revenues up 6.6 per cent to £10m almost matched the record performance in 2017. Moreover, chairman Andrew Grant painted a positive outlook picture, noting that 2019 will benefit from the fee tariff changes implemented in June 2018 as well as the additional services its corporate clients are taking as a result of new regulations. Indeed, fee revenues increased by half to £2.2m last year.
Jarvis has two business units: a corporate division, which provides outsourced and partnered financial administration services to a number of third-party organisations and has cash under administration in excess of £150m, all of which is placed on short-term deposit with triple-A-rated banks; and a broking operation that has more than 100,000 retail clients who use its ShareDeal-Active and X-O low-cost online share trading services.
Mr Grant also noted that Jarvis “continues to receive enquiries from potential commercial clients attracted by our competitively priced service”, adding that “our retail client numbers are also increasing, which in turn improve both the balance of cash under administration and interest income earned”. Interest earned from treasury and cash deposits rose from £3.8m to £4m in 2018. Jarvis’ free cash pile of £4.6m equates to 42p a share, thus offering ample capital to grow the business organically.
So, offering a 5 per cent prospective dividend yield, and trading on a PE ratio of 15 based on WH Ireland’s 2019 EPS estimate of 34.2p, I continue to rate the shares a buy.]
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Investing for double-digit annualised gains
Insurance sector investment company BP Marsh & Partners (BPM:280p) has issued a robust pre-close trading update ahead of its annual results on Tuesday, 11 June 2019.
I anticipate corporate news flow emerging before then from BP Marsh’s largest shareholding, LEBC, a privately owned independent financial advisory firm that has been generating explosive earnings growth from developing its traditional advice model and growing corporate project work (‘LEBC’s record profits to boost LEBC’, 11 December 2018). The holding is important as the company’s 59.3 per cent stake in LEBC is worth £36.8m, so accounts for 41 per cent of BP Marsh’s £88.3m equity portfolio and 30 per cent of its last reported net asset value (NAV) of £120m, a sum worth 333p a share. Net of cash on LEBC's balance sheet, the investee company was last valued by BP Marsh on 13 times operating profit, a rating that doesn’t seem punchy to me especially if LEBC decides to go down the IPO route.
I also note that BP Marsh’s 44.3 per cent stake in CBC, a Lloyd's insurance broker, is in the books for £2.88m, implying an equity valuation of £6.5m for the business as a whole. To put the valuation into perspective, CBC has just reported a 50 per cent increase in annual cash profits to £1.26m on revenues of £5.89m, so BP Marsh’s investment is effectively valued in its books on a modest five times cash profits. An uplift on revaluation beckons.
It’s worth pointing out that BP Marsh has added to its second largest holding, Nexus Underwriting, an independent speciality managing general agency that has been making some shrewd acquisitions. BP Marsh now holds an 18.5 per cent stake in Nexus with a carrying value of £24.5m, implying an equity valuation of £131m, or 10 times the cash profit of £13.1m Nexus reported in 2018. There should be further investment upside here too.
Shares in BP Marsh have produced a 243 per cent total return since I first advised buying at 88p ('Hyper value small-cap buy', 22 January 2012), representing a compound annual growth rate of almost 20 per cent. The obvious catalyst for a further narrowing of the current 16 per cent share price discount to NAV would be a corporate liquidity event from LEBC. In the meantime, BP Marsh is sensibly using some of its £7.9m cash pile to fund small NAV accretive share buy backs to create a floor under the share price, in addition to making new investments. The board have committed to declaring a 4.76p a share annual dividend for the financial year just ended. Buy.
■ 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.
