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Bargain shares opportunities

Simon Thompson updates several companies from his market-beating annual Bargain Shares portfolios
June 29, 2020

BATM Advanced Communications (BVC:100p), a provider of medical laboratory systems, cyber security and network solutions, is clearly firing on all cylinders after the directors guided shareholders to expect 2020 revenues to be at least 25 per cent higher than last year, or more than double the 11 per cent growth embedded into Stifel’s forecast.

The growth is being driven by BATM’s biomedical division, which was quick off the mark to launch a new diagnostics antigen molecular test kit to detect Covid-19 and a lab serological test kit that diagnoses if a patient has had Covid-19 by detecting antibodies against it in their blood. BATM has already shipped several hundred thousand test kits, boasts a backlog of more than 1m orders still to be delivered and is seeing increased demand for its instrument readers, too.

Moreover, BATM is in the process of developing, in partnership with Novamed, a rapid Covid-19 diagnostics antigen test kit for home use, which is expected to be complete in the summer, with sales commencing in the fourth quarter. The biomedical division is also delivering 1,000 critical care ventilators (order value €29m) for a European government to support their response to Covid-19. Reassuringly, the pre-close trading update also revealed that BATM’s network and cyber division will now only suffer a minimal impact from the Covid-19 pandemic.

Following upgrades, analysts at brokerage Stifel expect 2020 pre-tax profits to surge from $4.8m to $7.7m (£6.3m) on revenue of $155m and are pencilling in year-end net cash of $39m. They also raised their target price from 100p to 115p based on an enterprise valuation to sales multiple of four times.

 

2017 Bargain Shares portfolio performance
Company nameTIDMOpening offer price on 03.02.17 (p)Bid price on 29.06.20 (p) or exit price (see notes)DividendsTotal return (%)
BATM Advanced Communications (see note seven)BVC19.25990452.1
Kape Technologies (formerly Crossrider)KAPE47.92103.55345.8
Cenkos Securities (see note two)CNKS88.4251069.530.6
Manchester & London Investment Trust (see note three)MNL291.653773.028.4
H&T HAT289.7533127.123.6
Avingtrans AVG20021010.810.4
Chariot Oil & Gas (see note one)CHAR8.291.8506.4
Management Consulting Group (see note five)MMC6.18360-3.0
Bowleven (see note four)BLVN28.95.515-6.1
Tiso Blackstar Group (see note six)TBG5515.90.54-70.1
Average    81.8
FTSE All-Share Total Return  64856457 -0.4
FTSE AIM All-Share Total Return 9771013 3.7
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 when he suggested using the profit banked to reinvest in the shares ('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). Please note that Simon has since included the shares in his 2020 Bargain Shares Portfolio and  rates the shares a buy ('exploiting cash rich value plays', 21 May 2020).
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 and Simon then advised selling the balance of the holding at 5.5p ('Taking stock and profits', 9 December 2019).
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. 
7. 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 buying back 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.

 

Not surprisingly investors have reacted positively to the raft of positive news since I last suggested buying the shares at 52p (‘Stockpicking value open to future gains’, 4 May 2020). In fact, the price has almost doubled to a 19-year high of 101p, and smashed through my 65p-a-share sum-of-the-parts valuation. Longer-term holders are showing a 452 per cent gain since I included the shares in my 2017 Bargain Shares portfolio, one reason why the portfolio is up 82 per cent, during which time its benchmark, the FTSE All-Share Total Return (TR) index, has posted nil growth and the FTSE Aim All-Share TR index is only 3.7 per cent in profit.

It appears to me that BATM is now in the early stages of an earnings upgrade cycle and one that could lead to a far higher monetary value being attributed to its intellectual property than I had previously estimated. Run profits.

 

First Property cashed up for acquisitions

UK and eastern European property fund manager and investor First Property (FPO:36.5p) has reported a modest decline in its year-end net asset value (NAV) from £65.5m to £62.1m (55p a share). I am not concerned, as this reflected a downward £3m movement in the value of its 23.4 per cent shareholding in the former Krakow Business Park.

However, the £7m carrying value of the stake is still 250 per cent more than First Property invested two years ago (‘Profit form the deal of the year’, 14 June 2018), and improvements to the park and the tenant mix since then are supportive of the latest valuation. Furthermore, the £27.1m (24p a share) equity interests First Property holds in 10 of the 12 funds it manages produced a healthy pre-tax profit contribution of £1.5m in the 12 months to 31 March 2020.

Of more interest is the post year-end disposal of First Property’s stake in the CH8 Tower in Warsaw, Poland, which has boosted the company’s free cash to £23.6m (21.5p a share) and provides the firepower to exploit investment opportunities through co-partnerships with clients. For instance, chief executive Ben Habib is eyeing up a 15,500 sq metre over-rented office building in Gdynia, Poland, which is currently let to a single tenant (lease expiry in October). First Property acquired a short finance lease on the property (expiry in February 2021) and is in talks with the lender, the existing tenant and other prospective tenants, too. A lucrative deal could be on the cards.

Adjusting for the CH8 disposal, the company also holds £14.3m (13p a share) of equity in eight directly held properties in Poland and Romania that are worth £56.3m. Net of interest costs on £42m of non-recourse debt secured on the properties, they made an annual pre-tax profit contribution of £3.9m before allocation of central overheads. Effectively, the equity is in the price for free, as is a third-party fund management business that produces annual fee income of £3.1m from managing £567m of third-party assets.

These mandates include a £143m office fund in which First Property receives a share of total profits in lieu of fund management fees. Bearing this in mind, the capital value of that fund would have to decline by 6 to 7 per cent a year for the £800,000 annual income stream on the offices fund to be wiped out. That’s not going to happen. In the UK, 93 per cent of rents for the March quarter were collected on time, highlighting the quality of tenants who account for two-thirds of third-party funds. In Poland, the respective figure was 84 per cent for April and May.

The company has generated annualised growth in net assets (including dividends) of 22.7 per cent a year over the past decade, the primary reason why the shares have produced a 155 per cent total return since I included them in my 2011 Bargain Shares Portfolio. On a modest price/earnings (PE) ratio of 9.5, offering a 4.5 per cent dividend yield, and on a 33 per cent discount to NAV, the shares remain on my buy list.

 

Jersey’s Great Buchan Area project potential

My 2019 Bargain Shares portfolio is 13.3 per cent in profit, a performance that still compares favourably with the FTSE All-Share TR index (5.8 per cent decline) and the FTSE Aim All-Share TR index (1 per cent decline). That said, it has been far from plain sailing, as is the case with any portfolio. For instance, shares in the laggard, Jersey Oil & Gas (JOG:103p), a UK North Sea-focused upstream oil and gas company, have been a casualty of this year’s oil price collapse.

However, Jersey is playing the long game, so can afford to ride out short-term oil price volatility. More important is the imminent completion of the concept selection of its Greater Buchan Area (GBA) project, after which the £21m market capitalisation company will initiate a sales/farm-out process to secure a funding partner. The GBA development has an estimated project value of $1.2bn (£975m) and potential to deliver free cash flow of more than $3bn. Vendor and offtake financing, reserve-based lending, infrastructure funding and investment from industry partners or even private equity are all potential options being explored ahead of the submission of a formal development plan.

The GBA project includes 100 per cent interests in the Buchan oil field, and the J2 and Glenn oil discoveries, too, as well as an 88 per cent interest in the nearby Verbier oil discovery in the Outer Moray Firth. Jersey has a net interest in 142m barrels of 2C resources, of which more than half could be recovered from the Buchan field alone. Bearing this in mind, drilling horizontal wells alongside secondary recovery (water/gas injection) and enhanced recovery (chemicals) techniques could be used to prolong Buchan’s life and provide a relatively low-cost and low-risk way of increasing recovery rates.

Importantly, with net cash of £12.3m (56p a share), Jersey is fully funded until the end of 2021. We will know well before then whether the company succeeds in unlocking the value from the GBA project. If it does, the shares will absolutely fly. To put the current undervaluation into some perspective, oil analyst Brendan Long of brokerage WH Ireland has a 268p-a-share fair value estimate based on $60-a-barrel oil, but this only includes 10 per cent of the value of the Buchan field and “ignores the potential of another 60m barrels of discovered recoverable resources held by Jersey in immediately neighbouring satellite fields”.

It’s worth noting that the GBA project has an estimated operating break-even of $32 a barrel, well below the Brent Crude spot price of $41 and significantly below the $49 futures price for delivery in 2025 when first oil is being targeted. Using a $65-a-barrel oil price, analyst Daniel Slater at house broker Arden Partners has a risked value of 512p a share (1,025p a share unrisked) on Buchan alone based on Jersey retaining a 70 per cent interest.

I last advised buying the shares, at 123p, when I updated my 2019 Bargain Shares portfolio in early February. They have been volatile since then and are certainly not for the faint hearted. Indeed, the current share price is half my original entry point. However, the fact remains that any positive newsflow on the farm-out process is likely to see the share price surge given that the potential value embedded in the company’s oil assets represents upwards of five to six times Jersey’s current market capitalisation. Buy.

 

Simon Thompson's 2019 Bargain Shares portfolio performance
Company nameTIDMOpening offer price 01.02.19Bid price 29.06.20 or exit price (see notes)DividendsPercentage change
TMT Investments (note one)TMT250¢580¢20¢140.0%
Futura Medical (note two)FUM14.85p34p0p129.0%
Augmentum FintechAUGM102.4p106p0p3.5%
Mercia Asset Management (note three)MERC29.57p27.5p0p-7.0%
Ramsdens HoldingsRFX165p145p7.5p-7.6%
Bloomsbury PublishingBMY229p201p8.03p-8.7%
InlandINL57.75p48p3.1p-11.5%
Driver GroupDRV74p55p1.25p-24.0%
Litigation Capital ManagementLIT77.5p53.8p0.71p-29.7%
Jersey Oil & GasJOG205p100p0p-51.2%
Average     13.3%
FTSE All-Share Total Return index6,8526,457 -5.8%
FTSE AIM All-Share Total Return index1,0231,013 -1.0%
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). The selling price is the one used in the performance table.
Note 2: Simon advised taking profits on Futura Medical at 34p a share on Monday, 14 October 2019 ('Bargain Shares: golden opportunities', 14 October 2019). The selling price is the one used in the performance table.
Note 3: Simon advised selling Mercia Asset Management at 27.5p a share on Monday, 9 December 2019 ('Taking stock and profits', 9 December 2019). The selling price is the one used in the performance table.
Source: London Stock Exchange opening offer prices at 8am on Friday, 1 February 2019 and latest bid prices or on date when Simon advised exiting the holding.

 

Urban Exposure plans wind up

Specialist residential development finance provider and asset manager Urban Exposure (UEX:55p) has announced plans to wind the company up and return cash to shareholders.

It has also had a major boardroom clear-out that has seen the departure of chief executive Randeesh Sandhu, chief operating officer Daljit Sandhu, director Ravi Takhar and chairman William McKee, who will retire from his position at the forthcoming annual meeting. Graham Warner, previously finance director of JO Hambro Capital Management Group, is being appointed as non-executive chairman, and chief financial officer Sam Dobbyn will take over executive management of the operations. 

The directors believe that an orderly wind-down of the company has the potential to produce net returns for shareholders in a range of 70p to 83p a share on a fully diluted basis, and estimate that 80 per cent of proceeds should be returned to shareholders within seven to 15 months. Moreover, they anticipate making distributions on a quarterly basis as the loans mature, subject to existing cash requirements, most likely in the form of tender offers. In addition, the new board intends to use its shareholder authority to make on-market own-share purchases at prices that are accretive to tangible net asset value (NAV) per share.

Annual results released last Friday revealed tangible NAV of £133.1m (84p a share), which included £22.8m of cash, a £103m loan book and £6.6m of investments, the latter representing the partnership agreement (to make loans to real estate developers) with KKR in which Urban Exposure has a 9 per cent interest.

Earlier this year, Urban Exposure had been in the process of selling its loan book to Honeycomb Holdings, a subsidiary of Pollen Street Capital, a specialist finance lender, but Honeycomb pulled out of the deal following the stock market crash. The company is now claiming damages against Honeycomb and other connected parties to the sale agreement for repudiatory breach of contract. Honeycomb’s decision to abort the purchase sent the share price below my 70p entry point in my March 2019 Alpha Report.

However, as the loan book is wound down and cash returned to shareholders, expect investor interest to be sparked, especially as the maximum cash return could be 50 per cent above the current share price. NAV-accretive share buy-backs are a likely catalyst to drive up the share price, too. Value 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].

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.