UK and eastern European property fund manager and investor First Property (FPO:37p) has now completed the disposal of its stake in the CH8 Tower in Warsaw, Poland, realising net cash proceeds of £17m and generating an eye-catching internal rate of return (IRR) of 63 per cent since its acquisition in 2014. The company currently holds free cash of £25m, a healthy sum in relation to its market capitalisation of £40m. The plan is to enter co-investment partnerships with clients to leverage up £100m of combined equity firepower and target £300m of property acquisitions.
First Property is a shrewd operator, which is why adjusted net asset value (NAV) has quadrupled since I included the shares, at 18.5p, in my 2011 Bargain Shares Portfolio, and the holding has produced a 160 per cent total return including cumulative dividends of 12.1p a share.
Furthermore, there is still a glaring valuation anomaly still to exploit even after the 40 per cent rerating since my last article (‘Exploiting market mis-pricing’, 26 March 2020). That’s because I reckon the company has £13m-£14m of equity in its remaining eight directly owned high-yielding properties in Poland and Romania. They are attracting new tenants, too. Teconnex, a world leader in jointing technologies, has just signed a lease on 6,300 square metres of space in a warehouse First Property owns in Tureni, Romania.
First Property also owns investments worth £30.3m (27p a share) in 10 of the 13 funds it manages and associates. Effectively, you are getting a free ride on these investments and a fund management business that manages £602m of third-party assets even though the company has a track record of outperformance, delivering an IRR of 25 per cent (including dividends) since 2006.
On a price/earnings (PE) ratio of 7.5 for the year just ended, offering a 4.7 per cent dividend yield, and on a 40 per cent discount to book value, the shares are worth buying ahead of the annual results. Buy.
Venture Life huge Chinese sales agreement
Aim-traded Venture Life (VLG:59.5p), a developer, manufacturer and distributor of products for the self-care market, has announced its largest ever contract award, an exclusive 15-year agreement worth €168m (£147m) with its existing Chinese distribution partner.
This is the minimum amount the partner needs to purchase to retain its exclusive distribution rights in China, Macau and Hong Kong for Venture’s Dentyl brand (mouthwashes, toothpastes, tooth whiteners and fresh breath beads) and some other products. Since the start of 2020, Venture has received orders of €7m from the distribution partner after demand surged on the back of a new marketing initiative (funded by the partner), both before and after the outbreak of Covid-19.
Analysts at Cenkos Securities estimate that the single agreement has a net present value of £21m (15p a share) based on a maintained gross margin of 40 per cent, additional operating costs being borne by the Chinese partner, and after applying a discount rate of 12.4 per cent to the cash flows generated. That’s a material sum in relation to the £4.2m Venture paid for the Dentyl brand in 2018, and the company’s market capitalisation of £52m. It also means that Venture will start each year with a contracted order book of £10m from this agreement alone.
There are not many companies that could double profits in 2020, but Venture is one of them. Even before the latest contract win, the order book was 2.5 times higher than at the same stage last year, and that excludes a contribution from the acquisition of PharmaSource, a distributor of a range of medical device products (fungal nail infections, wart removal and women's health). To put Venture’s top-line growth into perspective, Cenkos expects 2020 revenues to increase by a quarter to £25.3m. So, with gross margins being maintained on a relatively fixed cost base, earnings per share (EPS) should almost double to 4.3p as operational leverage kicks in.
Venture’s strong trading performance has not gone unnoticed. Last week, the share price hit the 66p target price I outlined in my May 2019 Alpha Report, delivering a 46 per cent return, during which time the FTSE Aim All-Share index has shed 16 per cent of its value. The Chinese distribution agreement has added further value, and de-risked the investment case, too. On a cash-adjusted 2020 forward PE ratio of 12.5, my new target price is 75p. Buy.
BATM wins huge ventilator order in fight against Covid-19
Shares in BATM Advanced Communications (BVC:52p), a provider of medical laboratory systems, cyber security and network solutions, have rallied since I last suggested buying, at 41.5p, after the company announced it had developed a new diagnostics kit to detect Covid-19 (‘Coronavirus winners’, 9 Mar 2020).
The re-rating is warranted as BATM has since announced a €29m (£25.5m) order for delivery of 1,000 critical care medical ventilators from an [undisclosed] European government in the fight against Covid-19. A quarter of the machines will be delivered in the first half, and the balance in the third quarter, from BATM’s subsidiary in Hungary. Dr Zvi Marom, chief executive of BATM, expects the order to be expanded, too.
In addition, BATM has been ramping up delivery of its Covid-19 diagnostics kits used by medical facilities and has confirmed that the development of its kit for home use, in partnership with Novamed, should complete within three months. This is a huge untapped market given the need to test billions of people as part of the ‘test, trace and isolate’ programmes being carried out throughout the world.
The benefit of having a diversified revenue stream is that growth in BATM’s bio-medical division can mitigate the impact of any temporary postponement of projects [due to the Covid-19 lockdown] in the networking and cyber security division. Disruptions were minimal in the first quarter, but restrictions on travel to a customer’s premises will clearly have some impact, although it’s impossible to quantify whether it will be material. That said, the need for BATM’s government client base to protect their networking infrastructure from cyber threats is not going away, and nor are BATM’s growing number of contract awards. Any project delays will be purely a Covid-19 timing issue.
The shares have produced a total return of 190 per cent since I included them in my 2017 Bargain Shares portfolio. After factoring in the ramp up in diagnostic kit and ventilator sales, and scope for these contracts to be expanded, I raise my sum-of-the-parts valuation to £286m (65p a share). Buy.
Jarvis earnings upgrades
A trading update from Aim-traded Jarvis Securities (JIM:505p), a financial services outsourcer and retail client stockbroker, has prompted analysts to push through yet more earnings upgrades. WH Ireland lifted its 2020 pre-tax profit forecasts by 10 per cent to £5.5m, implying 15 per cent year-on-year growth, to produce earnings per share of 40.6p, up from 35.8p. Expect a sharply higher payout of 30p a share, too.
The volatile market conditions have resulted in far higher trading volumes from the 100,000-plus retail clients who use Jarvis’s ShareDeal-Active and X-O low-cost online share trading services. At the same time, the company’s corporate division continues to perform well. It provides outsourced and partnered financial administration services to pension funds and wealth managers looking to make cost savings in this area. Expect further client wins as the year progresses. Interestingly, WH Ireland has embedded a degree of “conservatism” into its new forecasts, so there is a realistic chance of further earnings upgrades as the year progresses.
Jarvis’s share price has rallied 20 per cent since I highlighted the investment opportunity (‘Stockpicking for bear market gains’, 16 Apr 2020), and a successful chart break-out above the 500p resistance level looks likely. On a modest PE ratio of 12.5 and offering a near 6 per cent prospective dividend yield, the rerating has further to run. I raise my target to 600p. Buy.
Conygar cashed up to realise value in Nottingham
Aim-traded property vulture fund Conygar (CIC:116p) has reported flat NAV of 178p a share in the six months to 31 March 2020, even though the company was hit by a 10 per cent valuation downgrade on its 90 per cent let Cross Hands retail park in Carmarthenshire.
Reflecting a yield shift due to Covid-19, surveyors at Knight Frank valued the 100,000 square foot park at £16.4m (30.6p a share). However, the park is trading far better than most operators in the retail sector, given its high-quality tenant base, which includes budget retailers Lidl, B&M and Iceland. Construction of a new Burger King should restart as soon as the lockdown ends.
Chairman Robert Ware says that the only tenant, Peacocks, is at risk and it only has a small unit of 5,500 square feet and pays £80,000 a year in rent on a monthly basis. Before the UK lockdown, leases with new tenants were in legal hands to take the remaining 12,000 square feet of empty space, but assuming “the space stays empty, Peacocks doesn’t pay [in future] and Burger King completes, the rent roll should be £1.15m a year”, says Mr Ware. That still implies a yield of 7 per cent, justifying Knight Frank’s valuation. Fully let, the rent roll is nearer to £1.4m.
The point is that Conygar’s net cash of £36m (67.3p) and the £16.4m (30.6p) Cross Hands investment are worth £52.4m (98p), implying all its other unencumbered development assets, worth £41.9m (78p), are in the price for £9m (17p). That’s anomalous given that the conditional sale of an industrial property in Selly Oak, Birmingham, to a well-known student accommodation provider, could realise £9m alone. Conygar paid £3.57m for the property in April 2019. Subject to planning permission being granted, the disposal should complete by Conygar’s September year-end.
Furthermore, Mr Ware says that he has lined up a high-profile hotel chain at Conygar’s flagship mixed-use 2m square feet development project in Nottingham city centre, which also has planning consent for offices, student housing, private residential and build-to-rent flats. The 37-acre site is held in the accounts at £16.7m (31p), has a gross development value of £1bn and estimated construction cost of £600m. Conygar has already received offers of funding, and [unsolicited] interest from parties who want to buy the site. A joint venture with a partner is one option being explored to maximise value for shareholders.
Admittedly, the share price has fallen below the 140p level when I last rated the shares a buy (‘Conygar’s plans for shareholder value creation’, 2 Dec 2019). However, with the combined value of Cross Hands, Selly Oak and cash backing up all Conygar’s market capitalisation of £61.5m, you’re getting a free ride on £38m of assets: the Nottingham scheme (£16.7m carrying value); the residential development project at Haverfordwest, Pembrokeshire, where construction has already commenced (£7.7m); and five sites in Wales (£13.9m). Recovery buy.
Kromek’s valuable IP materially undervalued
A trading update from Kromek (KMK:17.5p), a radiation detection technology company focused on the medical, security screening and nuclear markets, prompted a 12 per cent share price markdown that simply isn’t warranted.
True, Covid-19 restrictions means that two key contracts will be postponed until the new financial year, the impact of which is that Kromek will break even on a cash profit basis in the 12 months to 30 April 2020. However, the contracts have only been delayed, not lost. There is clearly demand for its products as highlighted by the massive ventilator order I commented on in mid-April (‘Stockpicking for bear market gains’, 16 Apr 2020).
Moreover, analyst Paul Hill at Equity Development points out that Kromek is well advanced on its US Department of Defence contract to develop a groundbreaking vehicle biological threat detector that rapidly detects any airborne pathogen used in germ warfare. Mr Hill understands that the “same first-of-its-kind science can also accurately and consistently recognise Covid-19” and could have “substantial benefits for many non-military applications, such as shopping centres, sports arenas, theme parks, schools, hospitals, offices, airplanes, and cruise ships”. This is certainly not being priced in, nor is the real possibility of additional ventilator orders. The shares offer 100 per cent upside to my 35p target price. 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].
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Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.
