Private equity investment company LMS Capital (LMS:53.5p) has convened an important general meeting on 28 November, so that shareholders can vote on the appointment of its investment manager.
Having considered the proposals from 42 per cent shareholder Robert Rayne who wishes to appoint an internal investment manager, and from top-rated fund manager, Gresham House Asset Management (GHAM), which has the current mandate, the majority of the board concluded that GHAM should continue as the appointed investment manager for the next five years. The recommendation of the directors also factors in a reduction in the annual management fee attributable to the cash balance of the company’s portfolio (see below), and the adoption of a progressive dividend policy, starting in 2020, targeting an initial yield of 4 per cent of net asset value (NAV). All the independent directors voted unanimously in favour of reappointing GHAM.
But Mr Rayne is not keen on this arrangement and has written to LMS’ shareholders outlining his alternative which would see the appointment of an internal investment management group, of which he will be part of. Mr Rayne claims that this would result in a lower cost structure, albeit no specific figures are given in his proposal. He is also proposing the immediate return of £3.5m (4.25p a share) of LMS’ cash pile of £28.5m and a further £4m (4.95p a share) by 30 June 2020, plus the adoption of a targeted dividend yield of 3 per cent of NAV.
Having considered both options, I believe the best way forward is to reappoint GHAM’s incumbent investment team that is successfully managing Gresham House Strategic (GHS), one of the top-performing small-cap funds in 2019, and has access to both the Livingbridge and Baronsmead Venture Capital Trust teams, thus creating additional investment opportunities of unquoted stocks to cherry pick.
I would also flag up that LMS has benefited from a near doubling of the share price of Gresham House (GHE) since GHAM was appointed investment manager in 2016. Indeed, LMS’s stake in Gresham House is now worth £6m, or more than 10 per cent of LMS’s NAV of £58.7m (72.7p a share). LMS also owns a valuable £1.5m holding in Nasdaq-quoted Solaredge Technologies (US:SEDG), a company which offers an inverter solution for a solar photovoltaic system. Effectively, this means that cash and these two listed holdings back up £36m of LMS’s market capitalisation of £43.2m, effectively meaning that the balance of LMS’s portfolio (mainly legacy holdings in UK and US funds and unquoted investments) are in the price for £7.2m, or 68 per cent below their carrying value of £22.7m at 30 September 2019.
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 would recommend voting in favour of re-appointing GHAM at the forthcoming general meeting, having first suggested buying LMS shares, at 49p, in my April Alpha small-cap report.
Marwyn fails to make headway
Shares in Europe's largest car auction operator, BCA Marketplace (BCA), delisted last Thursday after private equity group TDR Capital completed its £1.9bn takeover. I had been playing the bid situation through the ordinary shares of Marwyn Value Investors (MVI:116.5p), a closed-end investment company. Marwyn will receive £60.1m (96.75p a share) of cash next week from the disposal for its ordinary shareholders, a hefty sum in relation to the company’s net asset value (NAV) of £101m (162.4p a share).
However, despite the bumper cash windfall, Marwyn’s share price has failed to make headway from the 127p level at which I suggested buying in the summer (‘A smart way to play the BCA takeover’, 21 June 2019). In fact, the share price is trading on a 28 per cent discount to book value even though the BCA cash proceeds back up 83 per cent of Marwyn’s market capitalisation of £72.3m. Effectively, this leaves three holdings worth a combined 65p a share in the price for 19.75p a share: Zegona Communications (ZEG:95p), an investor in the European telecoms sector that in turn owns high-yielding shares in Spanish telecoms group Euskaltel (MCE:EKT); and two cash shells: Wilmcote (WCH:52.5p), and Safe Harbour (SHH: 132.5p).
In my view, the key reason for the ongoing deep share price discount is because Marwyn’s NAV per share has actually reversed from 193p to 162p since my article was published in late June after the company wrote off its £15m (22.7p per Marwyn share) investment in unlisted Le Chameau, the French premium rubber boot and luxury goods company, and Wilmcote terminated discussions on a potential acquisition. It has proved costly, too, as Wilmcote’s cash reserves have plunged from £10.2m to £0.9m after settling transaction-related expenses.
So, although there is still long-term value on offer in Marwyn’s shares, I now feel that investors are going to take a cautious approach to any new investments made in light of the hefty impairments on the holdings in Le Chameau and Wilmcote. In the circumstances, I would close out the position. Sell.
Exploiting Checkit’s tender opportunity
Technology group Checkit (CKT:55p) has now sent out the circular to shareholders with details of a proposed £81m cash tender offer at 65p, on the basis of two shares repurchased for every three held. I covered the investment case a few weeks back (‘Checkit’s global sales opportunity’, 23 October 2019) when I advised tendering your allocation to give yourself a free ride on the balance of your holding, having first suggested buying the shares, at 44p, in my November Alpha Report.
However, there is no harm in tendering above your basic entitlement as some shareholders may decide not to participate, thus offering a risk-free opportunity to sell an excess allocation well above the market price with a view to repurchasing the shares back at a lower price in the market once the tender process has completed. Please note that you need to be on the share register at close of business on 22 November 2019 to participate in the tender.
■ 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.
