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Bargain Shares: result updates

Simon Thompson assesses the latest results and newsflow from several constituents of his market-beating annual Bargain Shares portfolios
May 23, 2019

The midas touch of Volvere’s (VLE:1,160p) founders, Jonathan and Nick Lander, shone like a beacon in the Aim-traded investment company’s latest annual results. In their respective roles of chief executive and finance director, the Landers invest in distressed and undervalued businesses with a view to turning them around and exiting at a hefty profit. They have a mightily impressive track record – Volvere’s book value per share has increased at a compound annual growth rate of 17 per cent since the company listed its shares, at 100p, on Aim in December 2002.

They certainly surpassed themselves last year, delivering a 90 per cent increase in the company’s net asset value (NAV) per share to 1,250p, driven by last autumn’s disposal of its largest investment, Impetus Automotive, a provider of consulting services to the automotive sector (‘Bargain Shares: On the M&A beat’, 22 October 2018). The company received net proceeds of £26.1m from that sale, representing 21 times the £1.25m capital Volvere originally invested in March 2015. Even after returning £6m to shareholders, the company still posted a record NAV of £40.4m, which includes a bumper net cash pile of £32.1m (1,030p a share) to target new acquisition opportunities with.

An improved financial performance from Leamington Spa-based food manufacturing business, Shire Foods, a company in which Volvere holds an 80 per cent stake, more than justifies the £6.9m carrying value of that investment. Shire’s pre-tax profit rose by a third to £854,000 on revenue of £18.3m in 2018. Moreover, last week Volvere sold its 100 per cent holding in software firm, Sira Defence, for £3m, representing a 50-fold increase on book value of £60,000. After accounting for transaction costs and management bonus payments, Volvere's proforma cash pile rises to £34.6m (1,110p) and its NAV per share increases to 1,330p.

Volvere’s shares have risen by 162 per cent on an offer-to-bid basis since I advised buying, at 419p, in my 2016 Bargain Shares portfolio and with the Landers scouring the market for their next turnaround situation,it's worth running profits.

 

Crystal Amber’s net asset value set to soar

Earlier this month I explained why Aim-traded shares in clean energy investment company Leaf Clean Energy (LEAF:120p) offered significant upside even after the price had trebled in value, and in the process rewarding investors following my earlier advice (Bargain shares: Small-cap buying opportunities, 7 May 2019).

At the time, I estimated that even after making allowances for performance fees for Leaf’s investment managers, shareholders could expect a cash payout of at least 140p a share when Invenergy Wind LLC, North America's largest independently owned wind power generation company, settles the damages Leaf is entitled to in relation to the court-ordered redemption of its 2.3 per cent equity stake in Invenergy Wind LLC.

Taking into account pre- and post-judgement interest, I reckon the imminent court judgement by the Delaware Court of Chancery will be in the order of $116.2m, and interest on that sum will accrue at the rate of $25,000 thereafter. The point being that sterling has tumbled by 4.5 per cent against the US dollar since my article was published three weeks ago, so the implication is that Leaf’s shareholders can now expect an even bigger sterling payout than I had anticipated. In fact, based on the current exchange rate of £1:US$1.26, and 52.7m Leaf shares in issue, the award could now be worth £92.2m, or 175p per Leaf share.

So, even though Leaf’s share price has trebled in value since I first advised buying at 38p (‘Pointing to a successful outcome’, 19 April 2016), I feel there is easily potential for a further 20 per cent-plus upside, and perhaps even more if sterling continues its ugly descent. Clearly, investment managers at Weiss Asset Management LP are confident as they have just raised the fund’s shareholding in Leaf from 16.38 per cent to 29.58 per cent. Buy.

This is all rather good news for shareholders in Crystal Amber (CRS: 224p), a constituent of my 2018 Bargain Shares portfolio. It’s not the only good news for the activist investor as shares in Crystal Amber’s largest holding, Hurricane Energy (HUR:58p), an oil explorer that has a huge resource base in a strategically important part of the North Sea, have surged by 23 per cent in value on positive newsflow since I highlighted their investment potential in the same article as Leaf Clean Energy. This has boosted Crystal Amber’s NAV per share by around 11p. Crystal Amber has recently raised its stake in Hurricane from 4.87 to 5.51 per cent, a holding worth £64m, or a quarter of Crystal Amber’s portfolio.

Moreover, shares in Allied Minds (ALM:84p), an early-stage investor in lifesciences and technology, have soared by 31 per cent in value in the past few weeks. This is another one of the activist investor’s top 10 holdings. Crystal Amber is making overtures to Allied Minds’ board to reduce its running costs and has identified a US-based lawyer with direct experience of running off and realising assets in a US-based, London-listed investment company. Crystal Amber clearly sees value in this special situation as it has added to its holding since mid-May, raising its stake from 2.8 to 4.1 per cent. The fund’s investment managers estimate that Allied Minds’ NAV per share currently stands at around 123p, or 46 per cent above the current share price.

By my reckoning, Crystal Amber’s spot NAV per share has risen by 11 per cent to 250p since 30 April 2019, which means that the shares trade on an unwarranted 11 per cent discount to NAV. Buy.

 

Bloomsbury’s tales make for a profitable read

Bloomsbury Publishing (BMY:230p), the company best known for publishing author JK Rowling’s Harry Potter series of best-selling books, has reported a 9 per cent rise in full-year adjusted pre-tax profits to £14.4m on relatively flat revenues of £162m, a performance ahead of market expectations.

Bloomsbury’s 2020 digital strategy is a key driver of future growth and the outlook here is positive, with the company on track to deliver £5m of operating profit and £15m of revenues by the 2021-22 financial year. The strategic initiative aims to accelerate growth of digital revenues and reposition the business from primarily being a consumer publisher to a digital B2B publisher in the academic and professional information market. In the financial year to end-February 2019, digital revenues increased by 42 per cent on a like-for-like basis, and academic and professional segments, an area management is targeting to diversify the sales mix, grew revenues by 13 per cent to deliver over 20 per cent of the group’s pre-tax profit.

Cash conversion rates remain eye-wateringly high, which enabled Bloomsbury to fund the £5.8m acquisition of London-based academic publisher IB Tauris in May 2018, raise the annual payout by 6 per cent to 7.96p, covered almost two times by earnings per share (EPS) of 15p, and still increase the net cash pile from £25.4m to £27.6m (36p a share). The final dividend of 6.75p a share goes ex-dividend on 25 July.

Expect a repeat performance this year as analysts at Peel Hunt are pencilling in pre-tax profits of £15.7m and EPS of 16.1p and a further hike in the payout to 8.4p a share. On this basis, Bloomsbury’s shares are rated on a forward cash-adjusted price/earnings ratio of 12, offer a prospective dividend yield of 3.7 per cent and are priced on 1.2 times book value of 191p. I maintain the view that these modest valuation multiples fail to take into full account the ongoing margin expansion from digital initiatives that could see the company’s EPS rise to almost 18p in the 2020-21 financial year.

So, having included the shares in my 2019 Bargain Shares portfolio at around the current level, I have no hesitation in maintaining my buy recommendation.

 

U+I lowers guidance

Investors may have been disappointed by the annual results from U+I (UAI:165p), a specialist property developer and investor in regeneration projects.

Development and trading gains of £42.8m fell shy of the £45m-£50m guidance and missed Peel Hunt’s £47.4m forecast. The directors have lowered guidance for the current financial year and now expect to book gains in the order of £35m to £45m, or £10m less than previously forecast. However, they have also raised their 2020-21 forecasts by the same amount, so effectively have deferred rather than lost these profits. The board has reiterated tits target of generating a long-term 12 per cent post-tax total return and 10 per cent average investment return.

The weak market sentiment towards retail property is not helping as U+I’s investment portfolio, worth £154m at the March year-end after adjusting for acquisitions and disposals, suffered a capital decline of almost 5 per cent. Peel Hunt is factoring in a similar capital decline this year, too, which is why after taking into account the aforementioned development and trading gains, and 9.9p-a-share forecast dividend, that the brokerage expects a flat March 2020 NAV per share of 288p, albeit rising to 300p by March 2021.

This means that U+I’s shares, which I recommended buying, at 205p, in my 2018 Bargain Shares portfolio, since when the company has paid out dividends of 17.9p, excluding the declared supplemental and final dividends worth a total of 7.6p a share, are trading on a 43 per cent discount to NAV and offer a 6 per cent prospective dividend yield. That seems a really harsh valuation, given that analysts predict that U+I will still make EPS of 16p this year, and 22p in the 2020-21 financial year to support a dividend per share of 11.9p next year.

In other words, even after taking into account more challenging markets that are being undermined by the ongoing political and economic uncertainty caused by the Brexit delays, U+I should realistically generate net profits of £49m over the next two financial years, the equivalent to 23 per cent of its market capitalisation of £212m, and return £28m (21.8p a share) of that cash to shareholders.There is obvious value on offer here. Buy.

Bargain Shares portfolio 2016 performance 
Company nameTIDMOpening offer price (p) 05.02.16 Latest bid price (p) 23.05.19Dividends (p)Total return (%)
Bioquell (see note one)BQE1255900372.0%
VolvereVLE41911000162.5%
Gresham HouseGHE312.5550076.0%
Bowleven (see note two)BLVN18.93514.051565.8%
Oakley Capital OCI146.520713.550.5%
Gresham House StrategicGHS796107032.2538.5%
Juridica (see note three)JIL36.1143227.4%
Mind + Machines (see note four)MMX87.502.8%
French ConnectionFCCN45.742.20-7.7%
Walker Crips (see note 5)WCW44.9255.59-31.9%
Average return    75.6%
FTSE All-Share Total Return  51807321 44.1%
FTSE AIM All-Share Total Return 7471090 48.1%
      
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 June 2016). Company was taken over at 590p cash per share in January 2019.
2. Simon Thompson advised banking profits on half your holdings in Bowleven 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 company subsequently paid out a special dividend of 15p a share on 8 February 2019. 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 August 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 April 2017), hence the price quoted in the table.
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 advised selling the entire holding at 7.5p which is the exit price stated in the table ('Strategic acquisitions', 9 May 2018).
5. Simon Thompson advised selling Walker Crips shares on Monday, 4 March 2019 at 25p ('Bargain Shares Portfolio updates', 4 March 2019).
Source: London Stock Exchange share prices

This article has been republished on Tuesday, 28 May to incorporate Volvere's subsequent disposal of its subsidiary Sira Defence.

 

■ Simon Thompson's new book Successful Stock Picking Strategies and his previous 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.