On the hunt for recovery buys

Following an informative call with TMT director Alexander Selegenev, who is responsible for leading the business and the executive management team, I am in no doubt that the investment risk is skewed to the upside for a company that has increased net asset value per share (including dividends) by almost 300 per cent since December 2011.

With only a few exceptions, TMT’s portfolio of more than 35 companies (worth US$91m) have performed well through the Covid-19 pandemic. Indeed, Mr Selegenev expects to report positive news on multiple investee companies, almost all of which are focused around big data/cloud, e-commerce, marketplaces and SaaS (software-as-a-service) solutions.

For instance, TMT’s investment (US$2m in February 2019) in MEL Science, a UK EdTech company that uses virtual reality software to focus on early science education, has been incredibly well-timed in light of Covid-19 disruption to schools. In fact, MEL Science is one of five in TMT’s portfolio that are in the process of completing follow on convertible loan note (CLN) fundraises at significant premiums to TMT’s entry point, highlighting ongoing strong appetite for venture capitalist and private equity investment in the technology space.

Another example is ClassTaG, a parent-teacher communication platform that connects over 2m families across 25,000 schools. TMT had the insight or good fortune to invest US$400,000 in February this year, weeks before the pandemic unfolded. TMT has already reaped an immediate payback on its US$200,000 investment in Hugo, a Central American delivery service. An equity financing round in January almost quadrupled the value of TMT’s stake in only 12 months.

However, that gain is small fry compared to TMT's largest investment, a 1.63 per cent stake in Bolt (formerly known as Taxify), a leading international ride-hailing and transportation company. Bolt’s revenue is bouncing back rapidly from its Covid-19 pandemic lows and the company is cashed up to take advantage of the improving demand trend, having successfully raised €100m (US$110m) through a CLN issue in late May. The CLN has a conversion cap of €1.7bn (US$1.87bn), significantly higher than Bolt’s equity valuation of US$1.35bn following its last funding round in June 2019. TMT originally invested US$320,000 in September 2014 and the holding is carried at US$22.1m (76¢ a share) in its 2019 accounts.

Interestingly, Mr Selegenev singles out Pipedrive, the developer of a customer relationship management (CRM) software tool that is used by 90,000 customers around the world to improve the productivity of their businesses, as a likely mergers & acquisitions target with the most potential investment upside. He has a point as the fast-growing company is profitable, cash flow positive, holds a strong cash position and modestly valued. TMT’s 2.41 per cent stake is held at $10.26m (35.2¢ a share), or 13 times its investment eight years ago, implying an equity value of US$426m. Enterprise valuation to sales multiples in the sector suggest a take-out at least double this valuation. This also highlights the conservative approach of TMT’s investment committee in its own valuation policies.

The point is that with the shares being offered in the market at a 10 per cent discount to last reported NAV of 352¢ a share, the potential for TMT to maintain its eye-catching NAV-based annual IRR (internal rate of return) of 23.8 per cent over the past five financial years is simply not being priced in. If the company does maintain its stellar growth, then NAV per share could be well above 500¢ by the end of 2021. Clearly, Artemii Iniutin, TMT's Head of Investments, sees the upside as he has just purchased 433,157 shares at 311¢. Canaccord Genuity has emerged with a 5 per cent stake in recent weeks, too.

Please note that over 80 per cent of the 29.17m shares in issue are held by the largest shareholders, so the shares are tightly held. Taking the restricted liquidity into account, I still feel that a share purchase around the current offer price of 318¢ is likely to deliver significant upside over the next 18 months. Buy.

Expert witness to drive a re-rating

“Our plan is to refocus on higher margin work, minimise revenue break-even [to de-risk the business], keep costs under control, and benefit from the post Covid-19 bounce” says former chief operating officer and newly appointed chief executive Mark Wheeler of consultancy group Driver (DRV:57.5p). Specifically, Driver provides clients in the construction and engineering sectors with specialist commercial management, planning, project management, and dispute resolution services. It also generates more than a fifth of revenue from expert witness work undertaken by its Diales subsidiary.

Diales is incredibly well placed to benefit from a likely surge in demand for its team of 48 experienced adjudicators, arbitrators and mediators as a direct consequence of the Covid-19 pandemic. Mr Wheeler notes that around 55 per cent of all construction projects normally incur cost over runs or are completed late, a figure that is closer to 100 per cent now. That’s a lot of disputes to earn lucrative fees from (gross margins of 30 to 40 per cent) for a company that has offices in North America and Europe, Asia and Middle East.

Expansion of arbitration activities in USA and South America is one of Mr Wheeler’s main priorities, as is increasing the volume of business from Chinese clients. Another is rightsizing its Middle East operation to have a greater focus on areas like resolution work in the oil & gas industry. Having reacted promptly and taken costs out of that business following last year’s slowdown in the UAE, and seen the division trade at break-even in the six months to 31 March 2020, prospects are quite positive for the underperformer. Indeed, there are 19 live proposals in the pipeline in the Middle East and “if only three or four come off we would need to pull in people [from other regions to work on them].”

Moreover, although earnings guidance was withdrawn when the UK lockdown started, Driver has been trading well throughout the crisis. First half operating profits increased by 60 per cent to £1.3m on revenue down slightly to £28m (highlighting the focus on margin) and the group has been profitable through April to June, making around £200,000 profit during each month. Net cash of £3.3m at the half year-end has since increased to £5.5m (10p a share) and finance director David Kilgour revealed during my results call with the board that cash collection rates are still running at pre-Covid-19 levels of around £5m per month. That’s reassuring.

Admittedly, Driver’s share price has drifted from the 67.5p level since I updated my 2019 Bargain Shares Portfolio in early February, and is below my 74p original entry point. However, this is more the case that investors have yet to cotton on that Driver’s business activities could benefit hugely from the disruption caused by the pandemic and earn chunky fees (as high as US$2m on some cases taken on) from its expert witness work. Also, a likely post Covid-19 boom on infrastructure work by major sovereign states is another positive tailwind.

Investors looking beyond a likely modest dip in underlying operating profits in the 12 months to 30 September 2020 are likely to be well rewarded buying shares in the £30m market capitalisation company. Indeed, chairman Steve Norris also noted that the recent promotion of Mark Wheeler (who replaced previous chief executive Gordon Wilkinson) will lead to annual costs savings of £600,000, the full benefit of which will be seen in the 2020/21 financial year. Buy.

Inland’s value proposition

Shares in Inland Homes (INL:50.5p), a south-east England-focused housebuilder and brownfield land developer, were up 51 per cent on my recommended buy-in price when I updated my 2019 Bargain Shares Portfolio in early February. The stock market crash wiped out all the gains, and more. The holding is now 12 per cent under water, albeit more than 25 per cent ahead of the 40p level at which I last advised buying when investor risk aversion was at heightened levels (‘Built for recovery’, 23 March 2020).

Until the middle of March, Inland was well on course to deliver results in line with Panmure Gordon’s full-year pre-tax profit and EPS forecasts of £22.7m of 8.9p, respectively. However, the economic uncertainty caused by the Covid-19 pandemic has made major housebuilders cautious. Three of five major land sales that were due to complete by 31 March 2020 (Inland’s half year-end) were aborted. With a total sales value of £46.2m, the proceeds would have markedly deleveraged Inland’s net debt position of £150m. The absence of these land deals explains why the company reported a pre-tax loss of £7.2m on revenue of £59.6m in the six-month trading period, rather than a hefty profit.

It’s worth stressing that Inland is still doing deals. For instance, it has just announced the unconditional sale of 94 plots at its flagship development site at Wilton Park in Beaconsfield to Bewley Homes, a specialist in high quality developments, at a premium to EPRA valuation. The sale is expected to complete in September and has been structured so that two-thirds of the [undisclosed] cash consideration is payable on completion and the deferred element payable within 12 months. In addition, Inland is “at an advanced stage on a number of land sales which are anticipated to exchange or complete in July.”

Despite the hiatus caused by the lockdown, the company is still selling new homes, too. In the 12 weeks since 1 April 2020, it has booked 46 net new reservations worth a total of £21.2m and has forward sold a hotel under construction which will generate proceeds of £13.3m in early 2021. Inland is also being approached by housing associations and build-to-rent funds for bulk purchases of apartments under construction. Inland’s current partnership housing order book stands at £84.9m and this excludes a construction contract for £34m which is “at an advanced stage and is expected to be signed in July”.

The point is that the value embedded in the company – proforma European Public Real Estate Association (EPRA) net asset value of £234.5m (103p a share) post the half year-end placing – is more than double Inland’s market capitalisation of £115m even though the directors have taken steps to bolster cash reserves and protect cash flows. For instance, Inland raised £9.4m in placing in early April to give it a cash buffer and has since renegotiated the terms for some loan repayments as well as deferring certain land payments. The company has reduced headcount by 11 per cent, too.

So, although the Covid-19 induced economic downturn has created uncertainty, I feel that the perceived financial and operational risk embedded in Inland’s valuation is factoring in an Armageddon scenario that is highly unlikely to materialise. As positive news flow on land and housing sales emerges in coming months, expect the share price discount to EPRA NAV to narrow markedly. 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.