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Deep value buys

Five small-cap companies have traded resiliently through lockdown, and are well placed to continue to do so
Deep value buys

In early June, I suggested buying shares in RBG (RBGP:65p), a professional services group that owns law firm Rosenblatt, a nascent litigation funding arm and specialist finance boutique Convex Capital (Alpha Report: ‘Back a winning legal team’, 2 June 2020).

A pre-close trading update released ahead of first-half results on Wednesday 16 September 2020 makes me even more convinced that there is potential to double your money over the next 12 months. Rosenblatt has enjoyed a good lockdown, winning a broad range of new instructions, including corporate transactions, employment advisory work and financial restructuring mandates. In fact, Rosenblatt’s first-half revenue has soared 38 per cent to £11.2m.

It’s high margin work, too, generating a 40 per cent cash profit margin. That’s because Rosenblatt’s team of 46 fee-earning legal eagles specialise in litigious/contentious work that enables the firm to bill clients by the hour and control the level of fees it charges. Dispute resolution-related work accounts for two-thirds of the business, whereas listed rivals have greater exposure to more commoditised general legal services work, which has lower pricing and where fixed fee structures are common. The top 200 UK law firm has a strong pipeline of opportunities, hardly surprising given that the pandemic-induced economic downturn is likely to lead to a boom in dispute resolution work and employment-related lawsuits.

I also note that RBG’s litigation finance arm expects to “execute four potentially significant commercial litigation financing transactions imminently” and has a growing pipeline of opportunities. Furthermore, the directors plan to sell a proportion of these investments as was the case in 2019. Selling down participation rights in contingent cases contributes to one-off revenues, and enables cash to be recycled into additional cases to diversify the portfolio. Rosenblatt has an enviable track record of success in this area. Since taking on contingent work in 2011, the law firm has won 19 of the 22 cases that have concluded to date.

Convex Capital, the specialist sell-side corporate finance boutique acquired by RBG in September 2019, has a strong pipeline of deals (around 30, with each one potentially worth £1m in fees), albeit the Covid-19 pandemic has resulted in transaction deferrals and it’s uncertain how many deals will conclude in the second half. However, as I noted five weeks ago, there is a silver lining. That’s because £6.6m of the deferred consideration on the acquisition price represents a contingent earn-out to be settled in shares (minimum issue price of 140p), but only if Convex exceeds a cash profit of £6m for the 12 months to mid-September 2020. In other words, RBG’s existing shareholders will avoid dilution if Convex fails to hit its target, but still retain 100 per cent ownership of the business. That’s not a bad outcome at all.

Trading on a price-to-book value of 1.3 times, historic price/earnings ratio of 8.5 and offering a trailing dividend yield of 4.6 per cent, the potential for Rosenblatt’s high-earning legal eagles to continue to create value for shareholders is woefully undervalued. Buy.


Packaged for economic recovery

Mpac (MPAC:263.5p), a small-cap niche packaging engineering business has issued a reassuring pre-close trading update ahead of interim results on Thursday 3 September 2020. Entering the second half, the order book is up almost 14 per cent year on year to £45.4m, and there have been no Covid-19 cancellations. All sites have been able to remain open throughout the pandemic, so providing essential support for customers in the pharmaceutical, healthcare, nutrition and beverage industries.

Mpac continues to win new orders with original equipment manufacturers (OEMs) and service orders, too, highlighting resilience in the healthcare sector (accounting for three-quarters of annual sales), and in the Americas region (almost two-thirds of sales). Moreover, debtor days remain at pre-Covid-19 levels, and net cash has surged from £18m to £22.1m since the start of 2020, driven by tight working capital management, deferral of discretionary spend and access to government support.

Admittedly, there will be an impact on Mpac’s operations this year. Analyst Sanjay Jha at Panmure Gordon estimates a 24 per cent decline in revenue to £67.6m ahead of a strong recovery in 2021 when he forecasts sales of £81.5m. On this basis, expect operating profit of £2m, rising sharply to £5.3m in 2021, although in the absence of management guidance I feel that Panmure is being far too bearish on this year’s profit estimates and overly cautious on 2021 numbers. In any case, Mpac's shares are only rated on 10.5 times low-ball 2021 EPS estimates, representing a 36 per cent discount to the UK engineering sector average even though the company has net cash of 110p a share.

In my opinion, Mpac’s current rating fails to adequately factor in a pick-up in second-half orders (thus reducing the 2020 profit shortfall) as lockdown restrictions are eased and potential for a stronger than forecast earnings rebound in 2021. Mpac’s management is ahead of the game, having put in place a ‘Fast Recovery’ plan to position the company for growth as activity levels return to normalised levels. Initiatives include the launch of a new website, a virtual exhibition for customers to demonstrate the range of newly developed products, and offering customers digital solutions for artificial intelligence-enabled equipment and robotics in their production facilities and warehouses. The Covid-19 crisis will undoubtedly accelerate these trends as more blue-chip clients reappraise their manufacturing efficiency.

Mpac’s share price is up 22 per cent since I last rated the shares a buy (‘Coronavirus winners’, 9 March 2020) and the holding has delivered a 66 per cent gain since I included the shares, at 156p, in my 2018 Bargain Shares portfolio. A recovery back to my 330p target price, which was surpassed in February when the shares hit a 16-year high of 377p, is not unrealistic. Buy.


Avingtrans’ nuclear option

Avingtrans (AVG:250p), a designer, manufacturer and supplier of original equipment, systems and after-market services to the energy and medical sectors, is also showing resilience during the Covid-19 pandemic, in this case a reflection of its exposure to government-funded work.

A pre-close trading update confirmed that Avingtrans will deliver at least £11.5m of cash profit in the 12 months to 31 May 2020, up from £9.5m the year before, and at a higher margin, too. That’s close to previous guidance. On this basis, expect adjusted earnings per share (EPS) of 15.5p. Net debt has been reduced by 10 per cent to £7.5m since the interim results, implying a modest debt-to-equity ratio of 10 per cent.

A robust balance sheet and the ability of Avingtrans’ management team, led by chief executive Steve McQuillan and finance director Steven King, to acquire and turn around underperforming businesses were key bull points when I suggested buying the shares in my 2017 Bargain Shares portfolio. A decent flow of dividends (9.6p a share banked) is another attraction.

Importantly, the company continues to win new contracts, having just announced two in the nuclear sector. The Vermont-based business that Avingtrans acquired as part of the Hayward Tyler acquisition in 2017 has won a $4.85m (£3.9m) contract to provide critical nuclear safety related spare parts to reactors in South Korea. Hayward Tyler has more than 600 pumps in active service in nuclear applications globally, so offers defensive qualities given the longevity of plants and their ongoing maintenance requirements. In the UK, Avingtrans’ East-Kilbride-based fluid-handling business has secured a contract, worth an initial £2.5m, to develop a prototype valve for a nuclear plant operator to replace legacy components. There is potential to produce up to 150 further units in due course.

It’s well worth noting that Avingtrans has been granted planning permission to build 1,000 new homes on Hayward Tyler’s site in Luton. The company only has a market capitalisation of £78m, so the potential windfall from any land sale could be material and is not factored into my 335p-a-share sum-of-the-parts valuation. The holding has produced a total return of 25 per cent since I initiated coverage, albeit the share price is slightly down since my last article (Staying calm and carrying on’, 2 March 2020) even though the directors have confirmed that the pipeline and order book remain strong overall. Buy.


2017 Bargain Shares portfolio performance
Company nameTIDMOpening offer price on 03.02.17 (p)Bid price on 13.07.20 (p) or exit price (see notes)DividendsTotal return (%)
BATM Advanced Communications (see note seven)BVC19.25129.50622.3
Kape Technologies (formerly Crossrider)KAPE47.92003.55324.9
Cenkos Securities (see note two)CNKS88.4251069.530.6
Manchester & London Investment Trust (see note three)MNL291.653773.028.4
Avingtrans AVG2002409.624.8
H&T HAT289.7533127.123.6
Chariot Oil & Gas (see note one)CHAR8.29209.6
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)TBG5516.90.54-68.2
Average    98.7
FTSE All-Share Total Return  64856489 0.1
FTSE AIM All-Share Total Return 9771008 3.2
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 Johanesburg 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.


Creightons on course for another profitable year

Creightons (CRL:50.5p), a Peterborough-based manufacturer of beauty and healthcare products, and a constituent of my 2020 Bargain Shares portfolio, has issued a brief trading update ahead of annual results on Wednesday, 26 August 2020. The upshot is that the company will deliver another decent result for the 12 months to 31 March 2020 while at the same time contributing to the country's response to Covid-19.

The outbreak of the pandemic in Europe occurred at the tail end of the reporting period, and has created challenging demands on the supply chain in what is a competitive environment, much as one would expect. However, it has created new sales opportunities, too. For instance, Creightons’ management team was quick off the mark to introduce its new Pure Touch brand of hand sanitisers and hand washes through all distribution channels that need anti-viral hygiene products. The company has also developed and is about to launch anti-viral and alcohol-free hand cream.

Having delivered a £400,000 profit uplift at the interim stage, it seems reasonable to expect Creightons to lift annual pre-tax profits by at least 14 per cent to £3.3m in the 12 months to 31 March 2020, and perhaps far more. On this basis, the shares are priced on 10 times earnings, a modest rating for a company that has traded resiliently through the Covid-19 crisis and generates a post-tax return on equity of more than 20 per cent.

Creightons’ shares hit an all-time high of 71.4p in mid May after I last suggested buying at 36.5p (‘Coronavirus winners’, 9 March 2020) before succumbing to profit taking. This is a repeat buying opportunity.


SRT to make waves

I initiated coverage on Aim-traded SRT Marine Systems (SRT:39p), a global leader in AIS, an advanced identification communications technology used to track and monitor maritime vessels, in my August 2019 Alpha Report (‘Set sail for a profitable voyage’, 16 August 2019).

The shares duly hit my 55p target in early January to deliver a 51 per cent return, offering ample time to take profits before the stock market crash. I subsequently advised buying in again at, 25.5p (‘Stockpicking for bear market gains’, 16 April 2020), noting that SRT’s profit generation from existing contracts and a £550m validated sales pipeline was materially undervalued. The share price has risen by 50 per cent since then, primarily driven by news that work has recommenced on SRT’s flagship Philippines fisheries management system project. A significant cash payment has been received on the contract, too, thus allaying any cash flow concerns. The revised project plan is to accelerate implementation to make up for as much of the time lost due to the Covid-19 lockdown as possible.

There has been good news from the Middle East, too. Two new national vessel-tracking systems awards and a smaller system upgrade had been delayed due to Covid-19 lockdowns, but final contract negotiations are expected to conclude imminently with the projects commencing in the coming months. The Philippines and Middle Eastern contracts are worth over £100m in revenue to SRT, or more than five times its annual revenue in the last financial year. I estimate that these contracts should contribute upwards of annual revenues of £50m and operating profit of more than £10m. Also, SRT’s transceivers business, which made £8.1m in revenue last year, is performing better than expected, with sales higher than in the first quarter last year.

When SRT reports annual results on Monday, 7 September 2020 I would expect further positive news on contracts and analysts to reinstate estimates. Based on my financial models, the £64m market capitalisation company should be in a net cash position by then, too. The strong profit recovery in the 2020/21 financial year is still being materially undervalued. Buy.


Chenavari’s latest capital return

Chenavari Capital Solutions (CCSL:49p), a Guernsey-registered closed-end investment company that is in the process of winding itself up, is returning £3.5m through a compulsory partial redemption of 21.9 per cent of the issued share capital at 72.94p a share. Shareholders on the register on Monday, 13 July 2020 are entitled to receive the payment. It’s the second capital return since I included the shares, at 61.4p, in my 2020 Bargain Shares Portfolio. In late March, the company completed a £10m compulsory repurchase of 34.73 per cent of the shares in issue at 85.72p a share.

This means that for every 10,000 shares originally purchased at a cost of £6,140 you will have recouped £2,977 and £1,042, respectively, for the two compulsory capital redemptions and still retain ownership of 5,098 shares which have a break-even of 41.6p. That’s 43 per cent below Chenavari’s end May 2020 net asset value of 72.94p a share, down from 85.4p in March 2020, the difference representing the £2.6m write-down on Spanish property loans that I outlined in my last update when the shares were trading at 40p (‘Five bargain share success stories’, 11 May 2020).

I continue to expect a positive outcome here. That’s because you only need a further 57 per cent of your remaining shareholdings to be compulsory repurchased at the current NAV to get back 100 per cent of your original investment. At that point you will have a free ride on the balance of your shareholdings. Hold.


■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at, 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

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