Private equity investment company LMS Capital (LMS:55p) has reappointed top-rated fund manager Gresham House Asset Management (GHAM) for the next five years, alongside adopting a progressive dividend policy, starting in 2020, targeting an initial yield of 4 per cent of net asset value (NAV). The new arrangement is subject to shareholder approval at a forthcoming general meeting, much as I had anticipated when I suggested buying the shares at 52p (‘Exploit LMS’s ‘margin of safety’, 14 Aug 2019), having first highlighted the investment case in my April small-cap report when LMS’s shares were offered in the market at 49p.
The key point is that GHAM is heavily cashed up to invest LMS’s estimated net cash of £26.9m (33.3p a share), having kept its powder dry until it was reappointed. Also, GHAM’s investment team has been boosted this year by the addition of the Livingbridge and Baronsmead Venture Capital Trust teams, thus creating additional investment opportunities of unquoted stocks to cherry pick.
By my reckoning, LMS’s listed investment portfolio is currently worth over £8m (10p), and it holds £30m (37p) in US and UK funds and unquoted investments. This means that the cash pile and quoted investments back up 80 per cent of the company’s £44m market capitalisation, so only a fraction of the value of its US and UK portfolio of funds and unquoted investments is being reflected in the price. This is despite the fact that GHAM plans to continue divesting LMS’s legacy portfolio and target new investments in smaller private companies that are worth £50m or less. This segment of the private equity market is off radar for venture and early-stage funding providers and sub-threshold for mid-market private equity investors, thus creating an opportunity to generate superior long-term returns.
I maintain my 65p-a-share target price based on a 15 per cent discount to my live NAV per share estimate of 77.3p. Buy.
Volvere cashed up for acquisitions
In the summer, I advised tendering your basic entitlement (41.18 per cent of your holdings) in Aim investment company Volvere (VLE:1,250p) after the board announced a £16.6m cash return (‘Takeover, tender and hitting target prices’, 4 Jun 2019). The tender offer was pitched at 1,290p a share and represented a 208 per cent premium to the 419p entry level in my 2016 Bargain Shares Portfolio. It was a sensible approach to adopt as this means that you have banked 126 per cent of the capital you originally invested and still have a free carry on a shareholding that is worth 168 per cent of the original investment made.
Adjusting for the cash return, Volvere has net cash of £16.75m (915p a share) after accounting for all borrowings and finance leases, the sum being earmarked for the next turnaround situation of co-founders, Jonathan and Nick Lander. 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 been clearly successful as Volvere has just reported a record NAV per share of 1,356p, which means that 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.
| Simon Thompson's Bargain Shares Portfolio 2016 performance | |||||
| Company name | TIDM | Opening offer price (p) 5.02.16 | Bid price (p) 30.09.19 | Dividends (p) | Total return (%) |
| Bioquell (see note one) | BQE | 125 | 590 | 0 | 372.0% |
| Volvere (see note six) | VLE | 419 | 1200 | 0 | 195.2% |
| Gresham House | GHE | 312.5 | 575 | 3 | 85.0% |
| Oakley Capital | OCI | 146.5 | 224 | 13.5 | 62.1% |
| Bowleven (see note two) | BLVN | 18.935 | 10.7 | 15 | 57.0% |
| Gresham House Strategic | GHS | 796 | 1060 | 43.35 | 38.6% |
| 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 | 34.2 | 0 | -25.2% |
| Walker Crips (see note five) | WCW | 44.9 | 25 | 5.59 | -31.9% |
| Average return | 78.3% | ||||
| FTSE All-Share Total Return | 5180 | 7542 | 47.8% | ||
| FTSE Aim All-Share Total Return | 747 | 990 | 36.5% | ||
| Notes: | |||||
| 1. Simon Thompson advised buying Bioquell's shares at 149p in February 2016. Bioquell bought back 50 per cent of its 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 Jun 2016). The company was taken over at 590p cash per share in Jan 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 Feb 2016. Juridica subsequently paid out a special dividend of 8p a share in Jun 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 Aug 2016). Juridica then paid out a special dividend of 32p a share in Sep 2016 and total return reflects this distribution. Simon advised selling the holding at 14p ('Taking Q1 profits and running gains', 4 Apr 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 4 Mar 2019 at 25p ('Bargain Shares Portfolio updates', 4 Mar 2019). This is the exit price quoted in the table. | |||||
| 6. Simon Thompson advised rendering 41.18 per cent of your holdings back to company at 1,290p a share. Tender completed 19 Jun 2019 ('Tenders, takeover and hitting target prices', 3 Jun 2019). Return is adjusted to factor in this capital return. | |||||
| Source: London Stock Exchange share prices | |||||
I also note that the recent trading performance of Volvere’s one remaining investment, an 80 per cent stake in Leamington Spa-based food manufacturing business Shire Foods fully justifies its £7m (371p) carrying value. Revenue of £10m in the first half was a record and the business improved its operating profit by £410,000 year on year.
The Landers are really smart investors and I would continue to hold Volvere’s shares ahead of news on their next acquisition. The general UK economic and political uncertainty is likely to provide rich pickings for them to take advantage of. Hold.
Shore Capital exits Aim
Aim-traded investment bank and asset manager Shore Capital (SGR:137.5p) has reported a solid set of half-year results. Pre-tax profit increased by £2.7m excluding reorganisation costs associated with the acquisition of Stockdale Securities, a deal I covered at the time of the annual results (‘Cashed up Shore Capital completes Stockdale acquisition’, 2 April 2019), on revenue up 12 per cent to £24.3m. With the benefit of a low tax charge, adjusted earnings per share (EPS) outpaced profit growth, up by a third to 9.9p, to comfortably cover a held half-year payout of 5p a share.
The group’s asset management operation now has in excess of £1bn of assets under management, which helped drive up divisional adjusted pre-tax profit contribution (pre-central overheads of £1m) by 15 per cent to £1.5m on revenue up 10 per cent to £8m. In turn, this has reduced reliance on Shore Capital’s capital markets business, which produced a stable pre-tax profit of £2.7m on revenue of £15m. Shore Capital’s Principal Finance unit reported a loss of £452,000, but this business holds a valuable 59.94 per cent stake in Spectrum Investments, the parent of DBD, the company that has 32 regional radio spectrum perpetual licences in Germany. These licences have been reallocated from the 3.5 GHz frequency band to the 3.700-3.730 GHz frequency band at no cost, thus enabling their use for 4G and 5G services. There is potentially substantial hidden value here.
Given this positive backdrop, and the fact that Share Capital’s directors and management see value in the shares (they have acquired 14 per cent of the share capital since 2017 and now hold two-thirds of the equity), it may seem odd that the board is proposing to delist the shares from Aim, subject to 75 per cent of shareholders consenting at a general meeting on Tuesday 15 October. Shore Capital will retain its Bermuda Stock Exchange listing (SGR.BH) to enable shareholders to maintain their holdings in Isa wrappers as it is deemed a designated stock exchange by UK tax authorities.
The motives for the delisting are: a lack of liquidity in the UK market that has in turn led to a mispricing of the shares; the disproportionate cost and management time associated with listing the shares on Aim for the benefit received; and the fact that Shore Capital already has substantial capital to meet its growth ambitions, so doesn’t need to raise equity capital in the London markets. Indeed, the company’s market capitalisation of £29.5m is fully backed up by a rock-solid debt-free balance sheet that includes: net cash and gilts (£17.8m); quoted equities (£4.7m); holdings in its Puma Funds (£5.2m); and unquoted holdings (£1.7m). Effectively, this leaves the Spectrum licences (book value of £2.3m) in the price for free as well as £17.5m net held in its stockbroking subsidiary and around £8m of additional net assets, too.
Admittedly, dropping the Aim listing is not ideal, but with Shore Capital’s shares offering an historic dividend yield of 7.3 per cent, rated on a modest 12-month rolling price/earnings (PE) ratio of nine and on almost half book value of 266p, the rationale I outlined when I included them in my 2018 Bargain shares portfolio still holds even if the share price lost a fifth of its value on news of the delisting. Clearly, Michael van Messel, a senior executive of the company, sees value as his wife recently invested £268,267 to take their beneficial holding to 765,844 shares, or 3.55 per cent of the issued share capital.
Moreover, with management so heavily invested in the shares there is every incentive for the board to maintain the healthy dividend, which in turn offers yield support from income investors, while the low price-to-book value and earnings multiples highlight potential for a share price recovery. Hold.
■ 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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Simon Thompson has been named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards, a prestigious event celebrating the best and rewarding the finest professionals and companies that work within the AIM and NEX communities. It is attended by institutions, fund managers, brokers and advisors operating in the sub-£100m market cap quoted company sector.
