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Four companies offering value opportunities

Who is trading on anomalous discounts to the value of their underlying assets?

Aim-traded BigBlu Broadband (BBB:70p), a provider of alternative superfast satellite, fixed wireless and 4G/5G broadband products in 13 countries and the largest satellite broadband company outside North America, has seen a surge in demand across the business as millions of workers in Europe and Australia – the company’s two target markets – are forced to work at home.

Having made 21 acquisitions since I highlighted the investment potential when the shares were trading, at 82p ('Blue-sky tech play', 21 March 2016), BigBlu is now in organic growth mode, targeting 27m potential customers in Europe and a further 1m in Australia who only have download speeds of less than 4 MBps (megabits per second). Underlying revenues increased by 11 per cent in the 12 months to 30 November 2019, reflecting 6 per cent growth in average revenue per user to £44 per month, and 10,000 net new additions to lift the customer base to 110,000. Adjusted cash profit of £10.2m on revenue of £62.1m was slightly ahead of analyst estimates, highlighting a rise in gross margin from 41 to 44 per cent, and operational efficiency savings.

Last year’s churn rate improved slightly to 20 per cent and retention rates should be enhanced further by the concerted approach from European governments to provide faster broadband to households in rural areas. In the UK, around 10 per cent of UK homes are unlikely to receive commercial access to full fibre, which is great news for Quickline, the largest rural fixed wireless broadband provider in the UK.

Quickline raised £8m of new equity last year, and secured a £4m credit facility to accelerate the build out of new infrastructure (masts, and customer equipment) with a view to quadrupling its customer base to 30,000 by 2022. BigBlu retains a 69 per cent stake in the business, and a valuable one at that as Quickline could potentially be making cash profit of £6.5m on a 50 per cent sales margin by 2022 if it hits its targets (‘BigBlu’s accelerated growth strategy’, 29 August 2019).

BigBlu’s customer connections are also set to benefit from the company’s partnership with Eutelsat (NYSE/Euronext: ETL), one of the world's leading satellite operators with a powerful fleet of satellites serving users across Europe, Africa, Asia and the Americas. The launch of Eutelsat’s “Konnect” satellite in October will provide retail satellite broadband customers across 15 European markets with 100 Mbps internet speeds for the first time ever.

Importantly, BigBlu is well funded, having agreed a new £30m revolving credit facility with HSBC last year. The company’s net debt of £14.2m is at a comfortable level, equating to 1.4 times last year’s annual cash profit. Recurring revenue accounts for 80 per cent of the total, thus providing stable cash flow, too.

Trading on 8.5 times adjusted EPS of 8.2p for the 2019 financial year, the potential for BigBlu to scale up its business – finnCap is expecting pre-tax profit to rise from £4.5m to £5.6m this year – is being underpriced, so much so that my target price is double the current share price. Buy.

 

Oakley’s results highlight huge ‘margin of safety’

Private equity investment company Oakley Capital Investments (OCI: 193p) delivered the storming set of annual results I had anticipated (‘A lesson in value creation’, 3 February 2020), producing a net asset value (NAV) return of 25 per cent in 2019. Even after taking into account the change in the investment landscape since financial markets crashed, the ‘margin of safety’ embedded in Oakley’s current valuation is huge, a point also highlighted in a post results trading update.

After adjusting for £4.8m of cash used last week repurchasing 1.5 per cent of the issued share capital in a net asset value accretive share buy-back (enhancing NAV per share by almost 3p), Oakley retains £152m (78p a share) of net cash, a sum equating to 40 per cent of its market capitalisation of £377m. Strip out net cash from the end 2019 NAV of £686m (345p a share), and Oakley’s portfolio of debt securities, equity and fund investments are in the price for £225m, or 58 per cent below their book value of £534m.

Furthermore, a high proportion of the investments have defensive characteristics, benefiting from strong structural market growth, asset-light business models and high cash conversion rates. Over 70 per cent of portfolio companies operate a subscription-based model or recurring revenue business model, so are less vulnerable to temporary declines in customer demand; and two-thirds of the portfolio deliver products or services digitally or can shift to online delivery in a short time frame.

It’s worth considering that appreciation of the euro enhances the sterling value of directly held overseas investments and the group’s interests in the euro-denominated Oakley funds. I reckon that euro strength has added £26m to NAV since the start of 2020, a sum that completely offsets the drawdown in the listed portfolio. Of course, the stock market de-rating will lead to a shrinkage of private equity valuation multiples, but with Oakley’s portfolio in the price for less than half of book value then that’s more than priced in.

For instance, a 15 per cent negative movement in the value of funds and unquoted investments clips £75m (38p a share) off NAV, but Oakley’s share price is already discounting a 50 per cent plus drawdown. That’s simply not going to happen given the starting valuation multiples. Indeed, the portfolio companies are valued on an average of 12 times enterprise value to cash profits, well below the private sector average, and have an average net debt to cash profit ratio of 3.7 times (the lowest amongst Oakley’s peer group). Oakley has a significant amount of liquidity to meet its fund commitments.

Including the 2.25p a share final pay-out (ex-dividend: 2 April), Oakley will have paid out 15.75p a share of dividends since I suggested buying the shares, at 146.5p, in my 2016 Bargain Shares Portfolio. From my lens, the pull-back in the share price offers a buying opportunity.

 

Add cash rich Parkmead to your watchlist

The 70 per cent slump in the oil price this year has pummelled share prices across the energy sector. Parkmead (PMG:25p), a small-cap oil and gas exploration and development company, has seen its share price fall 50 per cent from January’s highs around 50p, so wiping out all the gains made since I included the shares, at 37p, in my 2018 Bargain Shares Portfolio.

Even if you ascribe nil value to the company’s portfolio of 30 exploration and production blocks in the North Sea (book value of £34.9m, or 32p a share), Parkmead’s market capitalisation of £26.6m is now almost 90 per cent backed by net cash of £22.2m (20.5p a share) and 20 per cent below tangible net book value of £33m (30p a share).

One reason for the miserly valuation is because gas prices have plunged to the lowest level in more than a decade and impacting profits from Parkmead’s low-cost onshore gas portfolio in the Netherlands. This part of the business still reported positive operational cash flow of £920,000 and a gross profit of £800,000 in the six months to end December 2019, albeit that represented a near 80 per cent decline year-on-year. Strip out a £1.3m non-cash impairment charge, and the company posted a small first half pre-tax loss of £126,000.

The short-term decline in energy prices aside, the UK will still need to rely on gas for decades to come while renewable energy supply is being scaled up. Bearing this in mind, Parkmead holds a 15 per cent stake in the Platypus field in the UK Southern North Sea, located 10 miles north west of the West Sole gas field. Discovered in 2010, and successfully appraised with a horizontal well in 2012 (flow tested at a rate of 27m cubic feet of gas per day), the co-venturers (CalEnergy Gas, Zennor Petroleum, Dana Petroleum and Parkmead) have submitted a Field Development Plan draft and Environmental Statement to the UK’s Oil & Gas Authority. The development concept involves a subsea tie-back to the Cleeton platform located 15 miles away to slash initial capital expenditure and field operating cost. Platypus is expected to produce 47m cubic feet of gas per day at peak production, and have a field life of 20 years. It is a valuable strategic asset.

Parkmead’s current market value also fails to attribute any value to 2,320 acres of land and property in Aberdeenshire, which have been valued at £7.5m (7.5p a share) and offers potential for the installation of wind turbines, a solar farm and a biomass production facility. Indeed, 1,238 acres of land is adjacent to the Mid Hill Wind Farm which operates 33 Siemens wind turbines with a total generating capacity of 75MW.

Given its cash rich balance sheet and asset backing, I can see Parkmead’s share price recovering sharply in a more benign market environment. Hold.

 

Honeycomb attempts to abort loan book purchase

Shareholders in specialist residential development finance company and asset manager Urban Exposure (UEX:33p) have voted in favour of the £113.8m (71.7p a share) disposal of the company’s loan book to Honeycomb Holdings, a subsidiary of Pollen Street Capital, a specialist finance lender. They have also approved the sale of its asset management company to the founders for £1.6m (1p a share).

The loan book sale was meant to complete today and the proceeds then distributed to shareholders by way of a first capital distribution of 72p a share on 7 May 2020, and a final distribution of 1p a share by April 2021. However, in light of current market conditions, Honeycomb no longer wants to proceed with the purchase on the terms it agreed in the share purchase agreement dated Tuesday, 10 March 2020 and has issued a notice of termination to Urban Exposure. Clearly, Urban Exposure’s shareholders want Honeycomb to fulfil its obligations, as do the directors who “consider that the termination is without merit and reserve their position to take all measures to enforce the company's rights under the purchase agreement”.

Honeycomb does have the right to terminate the acquisition between exchange and completion if there is a material adverse change in the financial condition of Urban Exposure’s loan book (defined as a reduction in NAV in excess of £10m), or if there is a material breach of the purchase agreement. There is a consideration adjustment mechanism incorporated into the purchase agreement under which Urban Exposure could have to reimburse Honeycomb (including by way of deduction from the consideration payable) up to £10m (6.3p a share) in the event of a deterioration in the loan portfolio due to a default on any of Urban Exposure’s loans.

Bearing this in mind, it’s unlikely that Urban Exposure’s loan portfolio has deteriorated ‘markedly’ since the parties announced the purchase agreement only a few weeks ago, suggesting that the company is in a far stronger position than the market gives it credit to enforce Honeycomb to complete the purchase.

So, having previously advised voting in favour of the disposals, and after taking into account that Urban Exposure’s loan book is worth more than double its market capitalisation of £52m, I would strongly advise holding on and awaiting further developments. 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].

Special offer: Both books can be purchased for the special price of £25 plus discounted postage and packaging of only £3.95. The books 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. Details of the content of both books can be viewed on www.ypdbooks.com.

Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.