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Bargain Shares: golden opportunities

The surge in the gold price is shining off on two of Simon Thompson’s Bargain Share portfolio constituents. Our small-cap expert has also decided to bank huge profits on another of this year’s star performers

The latest monthly gold exchange traded funds (ETF) flows from trade body World Gold Council make for an interesting read. Global gold-backed ETF holdings hit a record level of 2,808 tonnes, rising by 2.75 per cent during September and up by 13.4 per cent in the year to date.

It’s worth noting that although the spot gold price ($1,486 per oz) is shy of the $1,700 per oz level which marked the last all-time high of gold-backed ETF holdings in late 2012, the gold price remains near all-time highs in all major G10 currencies, except the US dollar and Swiss franc. Positive sentiment is being buoyed by trading in the COMEX Gold futures market, the world’s leading benchmark futures contract for gold prices, with net long positions hitting all-time highs of 1,134 tonnes during the month.

Global monetary policy continued to influence gold price performance as many central banks around the world cut rates or expanded quantitative easing measures. The Federal Reserve (Fed) cut rates by 0.25 per cent in September, albeit that move was widely expected, and current Fed fund futures indicate a 73 per cent chance of another cut by the end of the year. Equally importantly, there are multiple other catalysts for holding gold as an asset class to support investor demand.

For instance, ongoing inquiries into whether to pursue impeachment charges against President Trump create both political uncertainty for the outcome of the 2020 US Presidential Election, and economic uncertainty, too, given it could tempt China to delay seeking a solution to its long running trade dispute with the country. Needless to say, the outcome of Brexit remains in the balance, adding further to investor uncertainty. In the event of the UK leaving the EU without any deal, undoubtedly this would have a negative economic impact on both sides of the Channel, and beyond.

Also, more than 80 per cent of global sovereign debt is trading with negative real rates, lowering the opportunity cost of holding gold. That’s not going to change any time soon. Moreover, the US stock market is trading back within 2 per cent of all-time highs, which given the equity market volatility we have witnessed over the past 12 months will tempt some investors to diversify their asset allocations by investing in gold to hedge against another bout of stock market risk aversion.

This backdrop helps explain why the sterling price of gold has been on a tear this year, taking out the £1,178-an-ounce all-time high hit at the peak of the eurozone debt crisis in September 2011 and, at £1,186-an-ounce, is up 18 per cent in the year-to-date. This is as I had predicted over the summer when I suggested buying shares (‘A golden opportunity’, 24 June 2019) in two listed plays on the gold price: Aim-traded pawnbroker H&T (HAT:395p), constituent of my 2017 Bargain Shares portfolio; and diversified financial services group Ramsdens (RFX:195p), a constituent of my 2019 Bargain Shares Portfolio. Shares in both companies have performed well, rising by 22 per cent and 6 per cent, respectively, in a down market since my June article.

Outperformance set to continue

The outperformance is more than justified. That’s because while I was taking in some autumn sun during the past fortnight, both companies have reported that their profits this year will exceed market expectations, helped in no small part by the buoyant gold price.

In the case of H&T, the company also announced the strategically compelling acquisition of 113 pledge books which have 35,000 customers from rival Albemarle & Bond for one times their book value, the consideration of £8m being settled through cash and existing banking facilities. House broker Numis Securities raised its 2019 pre-tax profit by 12 per cent to £19m, two thirds of the upgrade reflecting the positive impact from the gold price. Numis also hiked its 2020 pre-tax profit estimate by 22 per cent to £23m, of which half the upgrade is driven by the elevated level of the gold price entering into the 2020 financial year, and the balance reflects the positive contribution from both the Albemarle and The Money Shop acquisitions, the latter being completed over the summer.

On this basis, analysts at Numis expect earnings per share (EPS) of 39.8p in 2019, up from 29.8p in 2018, rising to 46.8p in 2020 to support respective payouts of 11.5p and 12p per share. This implies H&T’s shares are rated on a current year price/earnings (PE) ratio of 10 and offer a prospective dividend yield of 2.9 per cent. That’s still a low rating given there could be upside to these forecasts in the event of the gold price continuing to make headway, which is clearly positive for profits to be earned from gold scrap, the finance fees earned on pledges, and the lower risk of losing money on unredeemed pledges, too. H&T’s shares have produced a 42 per cent total return since the launch of my 2017 Bargain Shares Portfolio which is not only ahead of the portfolio’s 30.5 per cent total return in the past 32 months, but is more than double the 13.8 per cent total return on the FTSE All-Share and has smashed the one per cent total return on the FTSE Aim All-Share. Expect the outperformance to continue. Buy.

Simon Thompson's 2017 Bargain shares portfolio performance
Company nameTIDMOpening offer price on 03.02.17 (p)Latest bid price on 14.10.19 (p)DividendsTotal return (%)
BATM Advanced Communications (see note seven)BVC19.2537.70110.3
Kape Technologies (formerly Crossrider)KAPE47.9803.5574.4
Chariot Oil & Gas (see note one)CHAR8.294.2049.8
H&T HAT289.7538527.142.2
Avingtrans AVG2002657.236.1
Cenkos Securities (see note two)CNKS88.4251069.530.6
Manchester & London Investment Trust (see note three)MNL291.653773.028.4
Bowleven (see note four)BLVN28.910.55152.6
Management Consulting Group (see note five)MMC6.18360-3.0
Tiso Blackstar Group (see note six)TBG5518.00.54-66.3
Average    30.5
FTSE All-Share Total Return  64857378 13.8
FTSE AIM All-Share Total Return 977987 1.0
Notes:      
1. Simon Thompson advised selling two-thirds of the Chariot Oil & Gas holding at 17.5p on 3 April 2017 ('Bargain shares on a tear', 3 April 2017). Return reflects the profit booked on this sale. Simon subsequently advised using some of the proceeds from the share sale to participate in the one-for-8 open offer at 13p a share in March 2018 which is taken into account in the total return ('On the earnings beat', 5 Mar 2018). Simon turned buyer of the shares at 4p on 17 April 2019 ('Chariot's North African adventure', 17 April 2019).
2. Simon Thompson advised selling the Cenkos Securities holding at 106p on 3 April 2017 and the 106p price quoted in the above table is the exit price on the holding ('A profitable earnings beat', 3 Apr 2017).
3. Manchester and London Investment Trust paid total dividends of 3p a share on 2 May 2017. Simon Thompson then advised selling half of the holding at 366.25p on 26 June 2017 ('Top slicing and running profits', 26 June 2017), and selling the remaining half at 377p ('Bargain shares second chance', 17 August 2017). The 377p price quoted in the table is the final exit price.
4. 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.
5. Simon Thompson advised to sell Management Consulting's shares at 6p in February 2018 (‘How the 2017 Bargain share portfolio fared’, 2 February 2018). The price quoted in the table is the 6p exit price.
6. Tiso Blackstar has transferred its UK listing to the Johannesburg Stock Exchange. Price quoted is sterling equivalent bid price at current exchange rates. 
6. Simon Thompson advised banking profits on half your holdings in BATM shares at 49.9p, and running the balance for free ('Bargain Shares: Exploiting pricing anomalies and top-slicing', 3 December 2018). Simon then advised reinvesting the profits back into the shares at 43.5p ('BATM armed for a re-rating', 11 July 2019). Total return takes into account these trades.
Source: London Stock Exchange share prices.

Ramsdens’ board also came out with a trading statement and one which revealed that the company will make an additional £600,000 gross profit from scrapping some of its slower moving jewellery stock in order to take advantage of the relatively high gold price. Taking this one-off gain into account, analysts at house broker Liberum Capital now expect the business to deliver an 18 per cent increase in pre-tax profits and EPS to £7.93m and 20.6p, respectively, in the 12 months to 31 March 2019, to support a dividend per share of 7.4p.

Strip out net cash of 26p a share and Ramdens’ shares are effectively priced on a current year PE ratio of 8, a rating which fails to acknowledge that forecasts are heavily de-risked given the seasonal bias to profits (the first half accounts for typically 75 per cent of the full-year outcome), and solid organic growth prospects, too. Furthermore, with the benefit of a cash-rich balance sheet, the directors have the firepower to continue making bolt-on acquisitions, having acquired 22 Money Shop stores and 17 loan books since March. New highs beckon for the Aim-traded shares which have produced an 18 per cent total return since portfolio launch on 1 February 2019. Strong buy.

Banking profits

My 2019 Bargain Shares Portfolio has held up remarkably well in a down UK stock market since I updated the performance at the half year stage. In fact, it has only given up one percentage point of its performance since 31 July 2019. Moreover, the total return of 27.8 per cent since February’s launch compares favourably with the 3.5 per cent loss on the FTSE Aim All-Share Total Return index during the same eight month period, perhaps the most appropriate index to benchmark performance by, given that my portfolio has an entirely small-cap bias and is chock-full of Aim-traded companies. The FTSE All-Share is up by 7.7 per cent on total return basis, so my portfolio is also outperforming its larger peers.

Key to portfolio management is managing risk and taking a sensible approach to banking profits, and curtailing losses, too. For instance, I decided to bank the 140 per cent paper gain last month on Aim-traded TMT Investments (TMT:450¢)a venture capital company that invests in high-growth, internet-based companies across a variety of sectors, as I believed the good news was priced in ('Takeovers, tender offers and taking profits', 9 September 2019).

I am now doing the same with the other star of this year’s portfolio, Futura Medical (FUM:34.5p), a pharmaceutical company that is developing a portfolio of innovative products based on its proprietary, transdermal Dermasys drug delivery technology focused on sexual health and pain. I would stress that nothing has changed fundamentally since my last article when the shares were bid in the market around the current level (‘Futura outlines roadmap ahead’, 16 September 2019).

Simon Thompson's 2019 Bargain Shares portfolio performance
Company nameTIDMMarket value Opening offer price 01.02.19Bid price   14.10.19 DividendsPercentage change
TMT Investments (note one)TMT$163m250¢580¢20¢140.0%
Futura Medical FUM£70m14.85p34p0p129.0%
InlandINL£164m57.75p79p0.85p38.3%
Ramsdens HoldingsRFX£59m165p190p4.8p18.1%
Bloomsbury PublishingBMY£177m229p237p6.75p6.5%
Augmentum FintechAUGM£126m102.4p108p0p5.5%
Mercia TechnologiesMERC£85m29.57p28p0p-5.3%
Litigation Capital ManagementLIT£78m77.5p71.4p0.28p-7.5%
Jersey Oil & GasJOG£39m205p177p0p-13.7%
Driver GroupDRV£26m74p49p0.5p-33.1%
Average      27.8%
FTSE All-Share Total Return index6,8527,378 7.7%
FTSE AIM All-Share Total Return index1,023987 -3.5%
Note 1: Simon advised taking profits on TMT Investments at 580c a share on Monday, 9 September 2019 ('Takeovers, tender offers and taking profits', 9 September 2019).
Source: London Stock Exchange opening offer prices at 8am on 1 February 2019 and bid prices at 9.45am on 14 October 2019.

I also stand by my previous assertion that if data from Futura’s European study into erective dysfunction is positive, and I would stress that it’s not a binary event as only one of the 20 realistic outcomes would definitely mean its product cannot be launched commercially, then I can see strong demand for the shares in the fundraising which will be needed to fund a confirmatory Phase III study in 2020. I am also comfortable with Liberum Capital’s blue-sky fully de-risked target price of 137p, implying a target market capitalisation of £280m, given the product could be making peak annual sales of £500m by 2028, thus generating Futura huge royalties from any outlicensing deal. I made this specific point during the summer (‘Beating the market’, 12 August 2019).

But I am also aware that having first advised buying Futura’s at 14.85p, repeated that advice in April at 14.75p ('Futura’s blue-sky opportunity', 15 April 2019), and again at 30.5p early in the summer (‘Futura’s huge potential draws investor interest’, 20 June 2019), that there is potential for my 129 per cent paper gain to be eroded in the event the data from the European study is not well received, or if the fundraising proves to be dilutive to existing shareholders.

I may live to regret doing this as Futura still has potential to be a multi-bagger, but I am adopting a more cautious stance and have decided to bank profits on the holding.

■ 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.

Details of the content of both books can be viewed on www.ypdbooks.com. They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential, too.

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.