Shares in private equity investment company Oakley Capital (OCI:234p) have been on a tear this year, rising by 30 per cent, and the holding has now produced a total return of 66 per cent since I included the company in my 2016 Bargain Shares Portfolio. It’s easy to understand why.
Net asset value (NAV) per share has shot up from 281p to 318p since 31 December 2018, driven by the rerating of Time Out (TMO), the media and entertainment business that is pursuing an expansion of its Time Out Market concept, and the part divestment (at 80 per cent above book value) of one of Oakley’s investee companies, Inspired, a co-educational, non-denominational, independent school group. Stakes in both companies account for that accounts for 14 per cent each of Oakley’s NAV.
Education remains a key area for Oakley, accounting for around a quarter of NAV. Investment is primarily made in premium private schools, higher education and after-school tutoring. That’s because demand is growing strongly, supply is limited by public spending constraints, there are high barriers to entry, and markets are typically non-cyclical.
Importantly, Oakley continues to find new investment opportunities to exploit at sensible valuations even though Prequin, the financial data and information group, estimates that private equity funds have a record $2,200bn of available capital to invest globally, and the sector is likely to attract significant further inflows while it continues to outperform most other asset classes. Indeed, Oakley has signed five deals to invest £85m of capital on an average enterprise value to cash profit multiple of 11.2 times, well below peer group comparable ratings of 13.4 times, and below the average multiple of 12 times on its existing portfolio of 15 companies. The new investments include marine e-learning technology groups Seagull and Videotel, Spanish ERP software company Ekon, and Spanish leading insurance and financial product price comparison websites, Rastreator & Acierto.com.
The investment in Videotel and Seagull looks particularly interesting as the two companies have established themselves as the best-in-class providers of e-learning to the maritime sector globally, providing ships with comprehensive and up-to-date compliance, risk and safety training that ensures adherence to International Maritime Organisation requirements. The digital transformation taking place in the shipping industry, as well as the complex regulatory framework, offers a major opportunity for e-learning providers.
The joint venture with insurance group Admiral (ADM) and Spanish insurance group Mapfre (MAP:BME) to combine Rastreator and Acierto.com is equally promising. That’s because ‘digital consumer' is another key area for Oakley, and in particular, 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 characteristics Oakley’s investment managers look for.
| Bargain Shares Portfolio 2016 performance | |||||
| Company name | TIDM | Opening offer price (p) 05.02.16 | Closing bid price (p) 13.09.19 | Dividends (p) | Total return (%) |
| Bioquell (see note one) | BQE | 125 | 590 | 0 | 372.0% |
| Volvere (see note six) | VLE | 419 | 1100 | 0 | 181.2% |
| Gresham House | GHE | 312.5 | 540 | 3 | 73.8% |
| Oakley Capital | OCI | 146.5 | 230 | 13.5 | 66.2% |
| Bowleven (see note two) | BLVN | 18.935 | 10.45 | 15 | 56.3% |
| Gresham House Strategic | GHS | 796 | 1030 | 43.35 | 34.8% |
| Juridica (see note three) | JIL | 36.1 | 14 | 32 | 27.4% |
| Mind + Machines (see note four) | MMX | 8 | 7.5 | 0 | 2.8% |
| French Connection | FCCN | 45.7 | 37 | 0 | -19.0% |
| Walker Crips (see note five) | WCW | 44.9 | 25 | 5.59 | -31.9% |
| Average return | 76.4% | ||||
| FTSE All-Share Total Return | 5180 | 7506 | 47.2% | ||
| FTSE AIM All-Share Total Return | 747 | 1004 | 38.2% | ||
| 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). This is the exit price quoted in the table. | |||||
| 6. Simon Thompson advised rendering 41.18 per cent of your hodings back to company at 1290p a share. Tender completed 19 June 2019 ('Tenders, takover and hitting target prices', 3 June 2019). Return is adjusted to factor in this capital return. | |||||
| Source: London Stock Exchange share prices | |||||
It can be highly profitable, too, which is why Oakley's stakes in European real estate websites Casa.it in Italy and atHome.lu in Luxembourg (accounting for 6 per cent of NAV) have increased in value by 60 per cent since Oakley first invested in December 2016. In fact, portfolio gains are across the board as Oakley’s half-year results for the six months to the end of June 2019 revealed a thumping 25 per cent gain in the underlying fair equity value of its 15 portfolio companies, and a 31 per cent year-on-year increase in the cash profits they generate.
So, with investee companies continuing to perform well, exits being made at substantial premiums to book value, and private-equity deal activity also being stimulated by the low interest rate environment, I can Oakley’s outperformance is set to continue. On a 27 per cent discount to spot NAV after factoring in the 12 per cent rise in Time-Out’s share price since 30 June 2019, and offering a 1.9 per cent dividend yield, I continue to rate the shares a buy.
■ Simon Thompson's latest 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 £3.25 [UK]. Postage and packaging is only £3.95 for purchases of both books.
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