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Six small-cap buys

Simon Thompson highlights six companies offering scope for material share price upside

Investors are being far too cautious with their valuation of Alpha Real Trust (ARTL:154.5p), a company that invests in high-yielding property and asset-backed debt and equity investments.

Alpha has just reported a 4.6 per cent rise in net asset value (NAV) per share to 213.7p and increased the annual pay out by half. The directors have also declared a quarterly dividend of 1p a share for the first quarter of the 2020/21 financial year. The company has a cash-rich balance sheet, too: cash accounted for £44.8m of NAV of £127.6m at 31 March 2020, and that excludes the £4.5m banked from this month’s sale of Alpha's Armouries development site in Birmingham.

The cash pile is set to climb further. That’s because Alpha’s investment in the Galaxia project, an 11.2-acre development in an established suburb of Delhi, India, is carried at £2.5m in the accounts, a fraction of the £9.2m Supreme Court order Alpha won against its development partner Logix. A third of this award has been lodged by Logix with the court and the balance will be released when the sale of the site completes. Alpha has a charge over the site and a purchaser willing to buy it for £6.1m. If the full award is recovered as now seems likely, it adds 11p a share to NAV per share and boosts Alpha’s cash pile to £58.5m (99p a share).

Strip out proforma cash from Alpha’s £92.5m market capitalisation and £75.6m of other assets are in the price for £34.1m. These include a 30 per cent stake worth €22m (£20m) in the H2O shopping centre in Madrid, £7.3m equity in an industrial facility close to Hamburg, Germany (leased to industrial waste management group, Veolia), a £1.7m high yielding investment in the Cambourne Business Park, Cambridge, and a £4.3m high yielding industrial property in Wolverhampton that’s held for sale.

Effectively, that leaves Alpha’s £39.9m high-yielding secured senior debt and mezzanine finance loan portfolio in the price for free even though it’s default-free and has an average loan-to-value ratio of 55 per cent. In fact, Alpha has received £4.4m of loan repayments since 31 March 2020 to boost its cash pile even further.

Alpha’s shares have produced a total return of 102 per cent since I first advised buying ('High-yield property play', 10 February 2016), and the unwarranted pullback from highs of 212p prior to the stock market crash is a repeat buying opportunity.

 

Bango lands Amazon deal with Softbank

Aim-traded Bango (BGO:176p), a provider of a state-of-the-art mobile payment platform enabling smartphone users to charge purchases made in app stores straight to their mobile phone account, has signed a direct carrier billing (DCB) agreement with global technology giant SoftBank (TSE: SOBKY ). It will enable Japanese customers of Amazon (NASDAQ: AMZN) to pay for goods, membership fees and subscription services, and charge the cost to their mobile phone bill.

This means that Bango has DCB for Amazon.co.jp across the three largest operators in what is one of the most highly penetrated mobile markets in the world. The company previously signed deals with NTT Docomo and KDDI in June 2017. Interestingly, Softbank notes that “it looks forward to benefiting from Bango data insights to accelerate the growth of our new business".

That’s important because telecom operators are increasingly looking to capitalise on the data insight into their customers spending habits to deliver a wide range of third-party products and services to them. The tie up with Softbank follows on from a multi-year agreement announced last month with another major global telecoms’ group, highlighting the value of Bango’s technology that enables telecom providers to more efficiently target their customers.

Bango’s share price has almost doubled since I initiated coverage ('Bang on the money', 26 Sep 2016) and has rallied 40 per cent since I last advised buying (‘Capitalise on a big data technology play’, 18 May 2020). Non-executive director Frank Bury is clearly upbeat on trading prospects as he has just snapped up 25,000 shares to lift his stake to 333,500 shares, or 0.45 per cent of the share capital. I see the upside potential, too. That’s because Bango’s market capitalisation of £133m fails to reflect the possibility that the highly operationally geared business could be making cash profits of £10m within a few years assuming current progress is maintained. I edge up my fair value target from 200p to 225p. Buy.

 

Metal Tiger roars

Shares in Metal Tiger (MTR:2.25p), an Aim-traded investment company primarily focused on undervalued natural resource opportunities, have almost doubled in value since I included them in my 2020 Bargain Shares Portfolio. The rerating is fully justified.

That’s because the 24 per cent uplift in 2019 year-end NAV per share (from 1.4p to 1.73p) fails to factor in the significant hidden value in Metal Tiger’s conservatively valued assets. Positive newsflow from projects in both Australia and Botswana and the commodity price supportive balance sheet expansion of the US Federal Reserve (‘Bull market rules’, 8 June 2020) are creating a tailwind, too.

In particular, expect further upbeat drilling results at the T3 Copper-Silver copper exploration and development project in the Kalahari Copper Belt, Botswana operated by Sandfire Resources (Aus:SFR). Metal Tiger holds 6.29m shares worth A$29.5m (£16.4m) in the Australian Stock Exchange-listed mining and exploration group. Metal Tiger also owns a 62 per cent interest in the nearby Kalahari Metals Project which could be worth three times’ its £3.2m carrying value based on similar transaction values in the area. These are not the only investments with promise.

In the past month, Metal Tiger has subscribed for 2.85m new shares in newly listed Aim-traded Trident Resources (TRR:19.5p), a company that aims to establish a diversified mining royalty stream by constructing a portfolio with a bias towards production or near-production assets. In addition, Metal Tiger has conditionally agreed to invest A$310,000 in Australian Stock Exchange-listed Cobre Pty (Aus:CBEXX) at the IPO price of A$0.20 per share, to lift its holding to 20.9m shares, a stake worth A$4m (£2.2m). Cobre has just commenced its third drilling programme at the Perrinvale copper project in Western Australia with the aim of extending current Volcanic-Hosted Massive Sulphide mineralisation and drill testing new targets.

In addition, Metal Tiger has invested A$250,000 in Aim-traded Thor Mining (THOR:0.35p) to lift its stake to 147m shares, or 11.46 per cent of the minnow’s share capital. Thor has successfully raised money from Australian investors and secured an option to acquire highly prospective US uranium and vanadium exploration projects. Metal Tiger’s chief executive, Michael McNeilly, believes the outlook for uranium demand in the US is likely to be particularly robust, hence the exposure to the commodity.

I also note positive drilling news from Aim-traded Greatland Gold (GGP: 12.15p) in relation to the Havieron gold-copper discovery in the Paterson region of Western Australia. The project is being developed under a farm-in agreement with a wholly owned subsidiary of Newcrest Mining (ASX: NCM). Shares in Greatland have surged 572 per cent this year, placing a value of £1.1m on Metal Tiger’s shareholding.

Another positive is a proposed 10-for-one share consolidation that will become effective on 1 July. The aim is to improve marketability of Metal Tiger’s shares, reduce their volatility and narrow the bid-offer spread. My new target price of 3p values the equity at £45.6m. Buy.

 

Cashed-up Checkit well placed post Covid-19

I first suggested buying shares in Checkit (CKT:35.5p) in my November 2018 Alpha Report when the price was 44p and the technology group was known as Elektron. Last autumn, management completed the disposal of Bulgin, a world-class designer and maker of hermetically-sealed (air and watertight), fail-safe circular connectors, and returned £81m to shareholders through a two-for three tender share offer at 65p. This means that you have a free ride on the rump of your holdings.

Interestingly, chairman Keith Daley splashed out almost £2m on a share buying spree earlier this year, so obviously sees value (‘Follow the insiders’, 24 February 2020). I do too. That’s because Checkit had net cash of £13.1m (21p a share) at 31 May 2020; its non-core Elektron Eye Technology (EET) business, a developer of portable analysers for detection of age-related macular degeneration, is up for sale; and owns a profitable Fleet-based leader in high-end service-based temperature monitoring for healthcare and life sciences within the UK, and data-related building energy management system services, which it acquired for £8.8m (14p a share) in May 2019. Checkit has also invested around £15m (24p a share) in its proprietary work management ‘software as a service’ (Saas) business, which replaces paper-based systems with a centralised, interactive cloud-based way of managing the multitude of tasks that staff carry out daily.

Strategically, management is focused on targeting revenue generation from high quality national and multi-national customers – NHS, BP petrol stations and Waitrose are all clients; boosting profitability of the UK operation through improved pricing on all new contracts; eliminating unprofitable business; and increasing the focus on the healthcare sector.

Prior to the Covid-19 pandemic analysts at Equity Development expected Checkit to report an improved cash loss of £2.2m (£3.6m in 2019-20) on revenue of £16.9m in the 2020/21 financial year, reducing to a cash loss of £0.7m on revenue of £20.5m in 2021-22 as the business scales up. However, management has withdrawn guidance given the difficulty in forecasting. That’s understandable as its field engineers have been unable to enter clients’ sites during lockdown, one reason why revenue in April and May was 36 per cent short of budget. Sensibly, the directors acted promptly to align the cost base, making annual salary savings of £4m including use of the government’s furlough scheme, and reining in non-essential capital expenditure. The cash outflow for the four months to end May 2020 was only £1.2m, highlighting tight working capital management.

Checkit is not only well funded to trade through the pandemic, but its cloud-based workflow management and automated monitoring systems are well placed to benefit from greater adoption of remote monitoring in working practices due to Covid-19. The company’s product suite includes a market leading wireless temperature sensor for the hot shelves used to keep ready-to-go food warm and safe.

Trading on a hefty discount to sum-of-the-parts valuations around 60p, the shares rate a value buy.

 

‘Business as normal’ at Pelatro

Aim-traded Pelatro (PTRO:50.5p), a company that makes its money by providing telecoms operators with precision marketing software, has issued a bullish trading update at its annual meeting.

Annualised recurring revenue of US$4.7m is US$600,000 higher than when annual results were released in early April and two thirds higher than the 2019 run rate. This highlights the strength of demand for Pelatro’s software which handles and processes the data for more than 800m subscribers of its 19 telecom operator clients around the world.

Specifically, Pelatro uses 'big data' analytics to reveal patterns, trends, associations and behavioural traits of subscribers to enable telecom operators to monetise data to boost average revenue per user and increase their share of subscriber spend. Adopting a more customer centric approach to marketing also reduces churn rates.

Admittedly, Pelatro’s share price is below my 79p entry point ('Pelatro: Big data, big profits', Alpha Report, 4 February 2019), having declined from the 70p level prior to the stock market crash. However, this is not a reflection of the operational performance as revenue visibility for 2020 backs up two thirds of Cenkos Securities' 2020 estimate of US$7.4m, up from US$6.7m in 2019, and the broker’s 2021 revenue estimate of US$9m doesn’t seem unreasonable given that Pelatro has a US$18m new business pipeline and is likely to see higher demand from existing contracted work, too.

The potential for Pelatro to double net profits next year as the operational leverage of the business model kicks in is significantly undervalued as the shares only trade on a 2021 price/earnings (PE) ratio of 10. My target price is 100p. Strong buy.

 

Record outlines strong credentials

Currency manager Record (REC:38p) has rarity value in the current environment. Not only has the board held the normal annual dividend at 2.3p a share, but the directors feel comfortable enough with the outlook to declare a special dividend of 0.41p, too. The total pay-out is 1.2 times covered by flat earnings per share (EPS) of 3.26p, highlighting the ability of the cash-generative asset-light business to pay a sustainable income to shareholders who enjoyed a 23 per cent post-tax return on their equity in the 12 months to 31 March 2020.

It’s worth noting that prior to the outbreak of the Covid-19 pandemic in Europe in the final month of Record’s financial year, assets under management equivalent (AUMe) had increased by 13 per cent to US$64.7bn by the end of February 2020. Some of those mandates are used to hedge the underlying equity exposure of clients, mainly public and corporate pension funds, foundations and trusts. As a result of sharp stock market falls in March, AUMe only edged up 2 per cent to $58.6bn at the financial year end. However, drill through the numbers and the company still generated net inflows of $4.6bn. Moreover, equity markets have been on a tear since the start of the new financial year which is positive for both AUMe and management fees.

Another positive is Record’s dynamic macro currency strategies, which performed well during the market rout and returned 4.2 per cent for clients in the 12-month trading period, underlining the benefit of diversifying the offering beyond systematic currency return-seeking strategies. It’s not the only successful new initiative either. A newly developed ESG/impact bond product is in due diligence with a large bank in Switzerland which would then offer the product to wealth managers. This highlights a far more proactive approach to generating new business and one that will be helped by investment in new hires (London, New York and Zurich).

The high yielding shares have produced a modest total return since I included them in my 2018 Bargain Shares portfolio, and on a forward cash-adjusted PE ratio of 12, they remain on my buy list.

 

■ 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.