Corporate broker Cenkos Securities (CNKS:50p) is delivering the profit recovery I envisaged when I suggested buying the shares, at 54p, in my 2020 Bargain Shares Portfolio even if the market is failing to acknowledge the fact.
Excluding previously announced staff restructuring costs of £0.7m which have cut annualised staff costs by £0.8m, and a £0.5m one-off charge to amend the company’s staff incentive plan, Cenkos reversed a small loss in the first half last year to deliver underlying operating profit of £2m. This highlights the benefit of having a relatively low fixed cost base, and a remuneration structure highly geared to performance, which means profit increases sharply in a positive operating cash cycle.
In the first half, revenue increased by more than a fifth to £12.9m, buoyed by 48 per cent higher corporate finance fees of £9.2m, despite slightly lower income from nominated advisor, broking and research work. Eleven clients left the firm mainly due to takeovers and de-listings, but Cenkos won eight new clients to end the first half with 97 clients who generate around £6.5m a year in fees.
Importantly, Cenkos' strategic focus on growth companies has seen clients overwhelmingly raise funds for acquisitions and expansion to take advantage of new opportunities, rather than to shore up their balance sheets through the economic downturn. In the six month period, Cenkos raised £340m of equity finance from 11 transactions including the largest IPO on Aim in 2020, debt advisory and financial restructuring group FRP Advisory (FRP). Cenkos has maintained the run rate into the second half, raising a further £157m across six listed transactions, including a US$98m (£76m) placing for salt lake brine project company Salt Lake Potash (SO4).
Cenkos’ balance sheet remains in robust shape. Net cash is up by more than half to £22.4m (40p a share), accounting for over 90 per cent of the company’s net asset value of £24.6m (43p), and the broker has a £15.8m capital resources surplus above the Pillar 1 regulatory requirement.
The bottom line is that if you adjust for cash on the balance sheet, Cenkos’ operational business is in the price for a bargain basement valuation of £6m even though they are profitable. There is even a dividend as the board has declared an interim pay-out of 1p a share. As investors cotton onto the progress being made, a return to last autumn’s share price highs around 67p is not unrealistic. Buy.
Urban Exposure materially upgrades plan for cash returns
A fortnight ago, I highlighted how specialist residential development finance provider and asset manager Urban Exposure (UEX:69p) is making stellar progress at winding down its loan portfolio and returning cash to shareholders (‘Capital investments worth backing’, 22 September 2020). There has been even more positive news since then.
The directors now report that the company’s cash balance has risen from £51m to £65.5m (41p a share), a sum that accounts for more than half of Urban Exposure’s net tangible assets of £122m (77p a share). The plan is to distribute £43m (27p a share) of cash back to shareholders through a tender offer within the next two months, rather than the £26m previously announced. The board still expects to return between 72p and 78p a share to shareholders in total, of which 90 per cent will be returned within 12 months.
Bearing this in mind, it’s possible to deal within the official 67p to 70p bid-offer spread with the latest buys going through the market at 69p, an entry point that should deliver a decent risk-adjusted capital return over the next 12 months and more than make good the 2 per cent loss on the holding if you backed my original buy call (‘Urban Exposure: High-yielding property asset manager in deep value territory, 22 March 2019). Buy.
Exploit First Property’s valuation anomaly
A trading update from UK and eastern European property fund manager and investor First Property (FPO:35p) highlights the scale of the investment opportunity on offer for a company that has been the best performing fund manager versus MSCI's Central and Eastern European (CEE) Benchmark for the past 14 years.
First Property owns eight directly held properties worth £56.3m in Poland and Romania, two of which are office buildings in Warsaw (11,000 sq metres) and Gdynia (15,500 sq metres) which have been valued at £43.7m. The balance of £12.6m is invested in three mini-supermarkets in Poland, a development site in Warsaw, an office in Bucharest and a logistics warehouse in Romania.
Importantly, tenants are continuing to pay their rent on time. In the five months to 31 August 2020, collection rates were 96 per cent on the properties in Poland, and 93 per cent in Romania. In aggregate, the eight high yielding properties generated a pre-tax profit contribution of £5.7m in the 2019/20 financial year. First Property has £42m of non-recourse debt secured against the eight properties, so retains equity of £14.3m (13p a share).
Bearing this in mind, one reason for the share price weakness is that the single tenant’s lease on the Gdynia property expires this month. First Property acquired a short finance lease on the property (expiry in February 2021) and has been in talks with the lender, the existing tenant and other prospective tenants. The company is in a strong negotiating position. That’s because the final finance lease repayment of €25.2m (£23m) on the Gdynia property falls due in February 2021, but it is non-recourse. This means that First Property can walk away if it fails to sign up another tenant. The lender on the property clearly wouldn’t want that, so there is an incentive for a deal to be done on attractive terms if First Property can secure a tenant. It could play into First Property’s hands given the company’s strong financial position, having £21.6m (19.4p a share) of cash on the balance sheet. Also, First Property’s equity in the Gdynia property is held in its accounts at €550,000 (£500,000), representing a tiny fraction (0.45p a share) of the £14.3m (13p a share) equity held in its eight properties. Expect an update when First Property releases interim results on Thursday, 26 November. The results will also reveal the scale of the company’s undervaluation.
A free ride on profitable businesses
Following the disposal post the 2019/20 financial year-end of its €44m (£40m) stake in the CH8 Tower in Warsaw, Poland, the equity held in the directly held properties (excluding Gdynia) and the aforementioned cash pile backs up 90 per cent of First Property’s share price and accounts for 60 per cent of its last reported net asset value of 55p a share. This means that the company is not only well funded to make further opportunistic property acquisitions, but you are getting a free ride on all of First Property’s other assets.
These include a successful third-party fund management business which has £564m assets under management, and a further £80m of fund commitments. Tenants are paying their rent on time. Collection rates for the five months to 31 August are as follows: UK (94 per cent); Poland (96 per cent); and Romania (95 per cent). The third-party fund management business generated fee income of £3.1m last financial year, so clearly has value. First Property also holds £27.1m (24p a share) of equity interests in 10 of the 12 funds it manages and these investments contributed £1.5m to pre-tax profit last financial year.
Trading on a 36 per cent discount to net asset value (NAV), and offering a prospective dividend yield of 5 per cent, First Property’s long-term record of value creation for shareholders – the company has posted annualised growth in net assets (including dividends) of 22.7 per cent over the past decade and paid out cumulative dividends of 13.32p a share since I included the shares, at 18.5p, in my 2011 Bargain Shares Portfolio – is completely at odds with the miserly valuation. 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.
