Private equity investment company Oakley Capital Investments (OCI: 252p) has released first half results that not only highlight a robust operational performance from its investee companies, but the scale of the undervaluation with the shares priced 29 per cent below net asset value (NAV), or double its peer group average discount (ex-3i Group).
Oakley’s latest NAV of 356p per share is 4 per cent higher than at 31 December 2019, and 13 per cent up year on year, a reflection that only three portfolio companies (Time Out, North Sails and Iconic Brands, all being consumer facing) suffered a major impact from the Covid-19 pandemic. The other 12 investee companies are forecast to meet or beat budget or have returned to budgeted run rates in the second half.
The investee companies delivered 17.5 per cent cash profit growth year on year, but that’s not reflected in the latest valuation as four of Oakley’s top five performers are still held at cash cost in the books. Furthermore, the read through valuation of the portfolio is only 11.8 times cash profit to enterprise valuation, representing a hefty discount to its closest rivals Apax (15 times) and HG Capital (20 times on top 20 investments), demonstrating Oakley’s conservative approach to its valuations. It also helps explain why Oakley has posted an average 34 per cent uplift on realisations since inception. That’s worth bearing in mind given that Oakley’s average holding period is 2.8 years on the current portfolio (excluding Time-Out and North Sails) so is closing in on the 3.5 year historic average prior to exit.
The portfolio’s technology bias has served Oakley well as more than 70 per cent of investee companies operate a subscription-based or recurring revenue business model, so are less vulnerable to temporary declines in customer demand; and two-thirds deliver products or services digitally or can shift to online delivery in a short time frame. Companies here include those specialising in webhosting, business service software and education technology.
Interestingly, Oakley partners noted during our results call that the fall-out from the Covid-19 crisis is likely to lead to a once in a generation investment opportunity to target high quality companies [in its targeted sectors] that have funding gaps, and capitalise on investment opportunities, such as those arising from distressed corporates needing to offload businesses to improve their liquidity position. Research from Morgan Stanley highlights that some of the best private equity fund vintages follow economic crisis.
Oakley is certainly cashed up to do so, ending the first half with net funds of £261m (135p a share). Some of the cash has already been committed to Oakley’s new Origin Fund that will invest in businesses with an enterprise value of up to €100m in the lower mid-market segment of the private equity market. It makes sense to do so given that 14 of the 32 investments Oakley has made since 2008 have been in this segment and have achieved an eye-catching money multiple return of 3.6 times invested capital.
| Simon Thompson's Bargain Shares Portfolio 2016 performance | |||||
| Company name | TIDM | Opening offer price (p) 05.02.16 | Closing bid price (p) 11.09.20 or exit price (see notes) | Dividends (p) | Total return (%) |
| Bioquell (see note one) | BQE | 125 | 590 | 0 | 372.0% |
| Volvere (see note six) | VLE | 419 | 1150 | 0 | 188.2% |
| Gresham House | GHE | 312.5 | 685 | 7.5 | 121.6% |
| Oakley Capital | OCI | 146.5 | 250 | 15.75 | 81.4% |
| Bowleven (see note two) | BLVN | 18.935 | 5.5 | 15 | 43.2% |
| Gresham House Strategic | GHS | 796 | 970 | 56.15 | 28.9% |
| Juridica (see note three) | JIL | 36.1 | 14 | 32 | 27.4% |
| Mind + Machines (see note four) | MMX | 8 | 7.5 | 0 | 2.8% |
| Walker Crips (see note five) | WCW | 44.9 | 23.2 | 5.59 | -35.9% |
| French Connection (see note seven) | FCCN | 45.7 | 11 | 0 | -75.9% |
| Average return | 75.4% | ||||
| FTSE All-Share Total Return | 5180 | 6435 | 24.2% | ||
| FTSE AIM All-Share Total Return | 747 | 1092 | 46.2% | ||
| Notes: | |||||
| 1. Simon Thompson advised buying Bioquell's shares at 149p in February 2016. Bioquell bought back 50 per cent of shares in issue at 200p each in June 2016 through a tender offer and Simon recommended buying back the shares in the market at 145p to give an average buy in price of 125p (‘Bargain shares updates’, 22 June 2016). Company was taken over at 590p cash per share in January 2019. | |||||
| 2. 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). | |||||
| 3. Simon Thompson advised buying Juridica's shares at 41.2p in February 2016. Juridica subsequently paid out a special dividend of 8p a share in June 2016 and Simon recommended buying shares in the market at 61p using the cash proceeds to take the average buy in price to 36.1p (‘Brexit winners', 1 August 2016). Juridica then paid out a special dividend of 32p a share in September 2016 and total return reflects this distribution. Simon advised selling the holding at 14p ('Taking Q1 profits and running gains', 4 April 2017), hence the price quoted in the table. | |||||
| 4. Simon Thompson advised buying Mind + Machines shares at 8p in February 2016. Mind + Machines subsequently bought back 13.22 per cent of the shares in issue at 13p a share. The total return reflects this capital distribution. Simon advised selling the entire holding at 7.5p which is the exit price stated in the table ('Strategic acquisitions', 9 May 2018). | |||||
| 5. Simon Thompson advised selling Walker Crips shares on Monday, 4 March 2019 at 25p ('Bargain Shares Portfolio updates', 4 March 2019). This is the exit price quoted in the table. | |||||
| 6. Simon Thompson advised rendering 41.18 per cent of your holdings back to company at 1290p a share. Tender completed 19 June 2019 ('Tenders, takover and hitting target prices', 3 June 2019), and subsequently advisded selling balance of the holding at 1,150p ('Taking stock and profits', 9 December 2019). | |||||
| 7. Simon Thompson advised selling French Connection shares at 11p ('Targeting value plays', 16 March 2020). | |||||
| Source: London Stock Exchange share prices | |||||
There is no doubt in my mind that the shares remain priced for a profitable outcome. Adjust for cash and Oakley’s private equity portfolio (221p a share) is in the price for almost half of book value even though the company has delivered an annualised NAV total return of 16.5 per cent over the past three years (the highest of all listed private equity funds) and has more than doubled NAV (total return basis) over the past five years. Add to that a small dividend – Oakley has paid out 15.75p a share since I suggested buying the shares, at 146.5p, in my 2016 Bargain Shares portfolio – and they are attractively priced on a bid-offer spread of 250p to 252p. Buy.
My next column will be published at 12pm on Tuesday, 15 September.
■ 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.
