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MXC returns to trading profitability

The technology-focused merchant bank has banked a hefty profit on its stake in Tax Systems and is earnings decent fee income from partnerships that are backed by some heavyweight operators
May 9, 2019

It’s taken time, but investors are warming to the merits of Aim-traded shares of MXC Capital (MXCP:85p), a technology-focused merchant bank run by a management team that backs investee companies they represent. I last outlined the investment case six months ago when I suggested buying the shares (‘MXC cashed up to do deals’, 7 November 2019) ahead of December’s annual results at the equivalent of 65p a share (there was a 50-for-one share consolidation in February 2019). There has been some positive news flow on several fronts that has driven the re-rating.

Firstly, having sold off the company’s shareholding in Castleton Technology (CTP), a provider of technology products and services to the social housing and not-for-profit sectors, at a bumper profit last summer, MXC subsequently increased its holding in Tax Systems (TAX), a leading supplier of corporation tax software to the large corporate sector and the accounting profession in the UK. It proved the right call as that company was taken over by a private equity firm last month. MXC realised £24.2m in cash and made a cash profit of £9.3m on its holding in Tax Systems, representing a 62 per cent gain on its invested capital. As a result MXC had net funds of £23.5m when it released its half year results yesterday, a significant amount in relation to its net asset value of £62.3m, or 97p a share.

Secondly, MXC’s two partnerships are now generating over £1m of fee income. One is with a subsidiary of Liberty Global, the international TV and broadband company, and the other is with Ravenscroft an independently owned investment services group based in the Channel Islands with £4.7bn of assets under administration for private and institutional clients. MXC acts as consultant to Ravenscroft in its role as investment manager to the GIF Technology & Innovation Fund in which the States of Guernsey and MXC are invested. The fund was started with an initial investment pool of £38m of which MXC contributed £5m. Eight investments have been made to date, another four are close to completion and the aim is to be fully invested by year-end.

The joint venture with Liberty Global to create an IT services provider focused on small- and medium-sized business customers within the UK through a series of acquisitions is starting to gain momentum too, having made two new investments earlier this month: Koris Communications, a managed communications provider offering cloud solutions with a specialist focus on Mitel telephony and Skype for Business solutions; and 365 ITMS, an IT services company providing networking, security services. Both joint venture partners have to date invested £3.5m each in the three acquisitions made.

So, with MXC returning to cash profitability in the first half to end February 2019, and Ravenscroft and Liberty Global backing the company – Ravenscroft has paid £2.25m for a 25 per cent stake in MXC’s transactional businesses, so clearly sees value in MXC’s deal makers – then there is potential for the share price to return to a decent premium to net asset value if MXC can achieve its target of delivering a 2.2 times return on capital over the next four to five years.

The proviso being that MXC can replicate the success it enjoyed with Castleton and Tax Systems and stay clear of the poor investments – Redcentric (RCN), a UK IT managed services provider that hit major trouble a couple of years ago being the major one – that blotted its copy book previously. Moreover, given the improvement in trading prospects, and reflecting MXC’s strong balance sheet, the directors are now looking at introducing a capital return programme. 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.