■ Three-year contract win with Waitrose and John Lewis.
■ Demand driven by increased management of workforces through data-driven remote monitoring.
Technology group Checkit (CKT:47p) has won a three-year contract to provide all Waitrose and John Lewis stores with its Connected Workflow Management, Connected Automated Monitoring and Connected Building Management services. The platform digitises the scheduling and reporting of operational workflows with a view to automating manual processes, increasing efficiency and delivering greater management insight. It’s no coincidence that John Lewis Partnership (JLP) chairman Sharon White has announced plans to make £300m of annual cost cuts by 2022 to help fund £1bn of investment across stores and e-commerce.
By expanding the suite of services it provides, Checkit aims to support JLP in improving the quality and consistency of end-to-end processes by replacing paper and documents with digital process tools. In addition, its workflow management tools will deliver new insights and operational key performance indicators (KPIs) that can be used to analyse performance and identify training needs, as well as generating automatic digital records for in-house and third-party quality inspections. The contract win not only highlights how the retail sector is adopting new technology, but the business opportunity for Checkit to exploit as I have highlighted (‘Investments for the new normal’, 17 Sep 2020).
Moreover, expect demand for Checkit’s wireless monitoring technology to ramp up across multiple sectors in the new ‘normal’ given the need for companies to manage workforces through data-driven remote monitoring, the greater reliance on automated systems surveillance, and the need to save costs.
Offering 25 per cent upside to my 60p a share sum-of-the-parts valuation, the shares continue to rate a buy.
TMT on course for chunky valuation uplifts
■ Significant valuation uplift for PandaDoc.
■ Shareholding in Bolt conservatively valued.
TMT Investments (TMT:350¢), a venture capital company that invests in high-growth, internet-based companies across a variety of sectors – and with a significant number of Silicon Valley investments in its portfolio – has reported a small dip in net asset value (NAV) to US$101m (346¢ a share). I am not in the slightest bit concerned.
That’s because US$1.5m of first-half gains on portfolio investments were negated by a US$2.7m write-off on TMT’s stake in Le Tote, the department store and fashion rental business that filed for bankruptcy in August due to the impact of Covid-19 and associated lock downs. It was an isolated example as a notable number of TMT’s investments are prospering in the new ‘normal’, but importantly this is not being reflected in the carrying value of the investments due to conservative accounting policies.
In fact, some of TMT’s portfolio companies – ride-hailing platform Bolt, parent-school communication platform ClassTag, which connects 2m families across 25,000 schools in the USA, and online game coaching service Legionfarm – have raised additional capital through convertible instruments. These fundraises have significantly higher conversion caps compared with the levels at which TMT invested. So, while not triggering immediate revaluations for TMT, it creates material NAV upside in due course.
For example, TMT's largest investment, a 1.63 per cent stake in Bolt, has a carrying value of US$22.1m (75¢ a share), implying a US$1.35bn total equity valuation. However, Bolt raised €100m (US$117m) through a convertible loan note issue in late May with a conversion cap of €1.7bn (US$2bn), a valuation that would add US$10.6m (36¢ a share) to TMT’s stake. TMT originally invested US$320,000 in September 2014. Bolt is one of TMT’s five largest investments, which account for 75 per cent of the portfolio valuation. All offer upside potential.
For example, TMT holds a 1.55 per cent stake in PandaDoc, a provider of contract automation software that enables sales teams to remotely manage their selling processes "from propose to close". PandaDoc continues to report double-digit annualised revenue growth, and has more than 20,000 subscribers (up from 17,000 in December), a reflection that its software is becoming even more relevant. In August, the company completed a new equity funding round and one that resulted in a US$1.4m uplift in TMT’s holding to US$3.6m. Expect higher valuations in future funding rounds, too.
TMT’s newer investments also look well placed to benefit from the new ‘normal’. These include remote learning company MEL Science, Central American delivery company Hugo, and wine subscription service Vinebox. Since the half-year end, TMT has used some of its US$9.2m cash pile to make a further US$1m investment in Hugo, and invested US$1m in Moeco IoT, a data generation company that collects insights on real-world events and delivers them to customers through a secure software platform.
The point is that TMT’s conservative accounting policy means that as the company makes further realisations from mature investments – US$41.6m of cash exits since 2010 match total capital invested since formation – then it’s only reasonable for TMT’s five-year internal rate of return of 20.9 per cent to be maintained. Expect more special dividends, too.
TMT was the star of my 2019 Bargain Share Portfolio after I advised banking a 140 per cent gain, at 580¢ (‘Takeovers, tenders and taking profits’, 9 Sep 2019). I then turned buyer over the summer, at 318¢ (‘On the hunt for recovery buys’, 6 Jul 2020). Admittedly, the shares are tightly held – 81 per cent are owned by management and connected parties – but they are worth buying around NAV. Buy.
Frontier IP commercialising valuable technology
■ University of Plymouth spin-outs receive UK grant funding.
■ Fieldworks enters a collaboration with leading vegetable producer.
Frontier IP (FIPP:67p), a company that provides a range of commercialisation services to university spin-outs in return for ‘free equity’ stakes, has made several positive announcements since my last update (‘Small-caps under the radar’, 27 Jul 2020).
Fieldwork Robotics, a developer of robotic technology to harvest soft fruit and vegetables that addresses the need for heightened food safety and the shortage of UK seasonal workers, has been awarded a continuity grant by Innovate UK to accelerate development of agricultural robot technology during the Covid-19 pandemic. The company has already made strong progress with a raspberry-harvesting robot in collaboration with Hall Hunter Partnership, one of the UK's biggest soft fruit producers, and is working with Bosch to optimise the software and design of the robotic arms. It has now entered a collaboration to develop a cauliflower harvesting robot with Bonduelle, a leading vegetable producer in more than 100 countries that generates annual revenue of €2.8bn. Fieldworks raised £318,000 earlier this year to accelerate the development of its technology and is being supported by £547,250 of Innovate UK grant funding. Frontier IP holds a 26.9 per cent interest that was last valued at £1.35m.
Pulsiv Solar, another University of Plymouth spin-out, is making stellar progress with its patented technology to improve the energy efficiency of power converters. Pulsiv is also working with Bosch to optimise the design of its energy efficient solar micro-inverter. The company has now raised £500,000 from a convertible loan note: £250,000 from the UK Government Future Fund, £50,000 from Frontier IP, and £200,000 from the University of Plymouth’s commercial arm. Pulsiv is in discussions with investors to raise further money at a “significant premium” to the carrying value of Frontier IP’s 18.9 per cent stake.
I also note that Frontier IP’s largest portfolio company, Exscentia, a leading artificial intelligence-driven drug discovery company, completed a US$60m Series C financing round that was priced at a significant premium to the previous funding round. Frontier IP holds a 2.4 per cent stake in Exscentia, which is carried in its accounts at £5.1m.
I first suggested buying the shares at 56p (Alpha Research: ‘A differentiated IP play’, 15 Nov 2019), and they still only trade on a modest premium to last reported net asset value of £23.6m (46.6p per share) even though the forthcoming annual results should deliver valuation uplifts from several investee companies. A placing over the summer raised £2.3m at a 19 per cent premium to NAV, so other investors clearly see scope for valuation uplifts, too. A return to pre-Covid 19 highs around 86p, and beyond, is not unrealistic in the next 12 months. Buy.
Oakley’s disposal highlights valuation anomaly
■ Sale of Casa.it at 50 per cent premium to book value.
■ Acquisition of leading online fitness and nutrition platform, and over-the-counter consumer healthcare company.
Private equity investment company Oakley Capital Investments (OCI: 257p) has realised £34m selling its stake in Casa.it, one of the leading players in the online real estate classifieds market in Italy. Under Oakley's ownership, Casa significantly expanded its customer base, and now services over 14,000 real estate agents with over 1m property listings on its website. Casa offered many of the traits that Oakley targets in an investment, namely a digital platform and a strong position in a structural growth market.
The exit was at a 50 per cent premium to Oakley’s end June 2020 carrying value, so adds 7p a share to the last reported NAV of 356p. Moreover, further upside is expected from the retained minority stake in online classified business atHome.lu in Luxembourg. Taking the sale proceeds into account Oakley has pro-forma net funds of £295m (152p a share), some of which is committed to Oakley’s new Origin Fund that will invest in businesses in the lower mid-market segment of the private equity market.
Oakley also announced the acquisition of a majority stake in 7NXT GmbH, the leading online fitness and nutrition platform in the German speaking region. Gymondo, the leading female-focused online fitness subscription platform with over 2m registered accounts, generates majority of 7NXT’s revenue through subscription-based access to high-quality workout videos, customised fitness programs and personalised nutrition plans. It looks an interesting addition to the portfolio.
In addition, Oakley is investing £43m in WindStar Medical, a leading over-the-counter consumer healthcare company that offers premium high-growth branded products in Germany, including SOS (wound care/disinfectants), Zirkulin (gastro-intestinal care), GreenDoc (mental wellbeing) and EyeMedica (eye health). WindStar is a provider of private label products to the leading German drug stores and supermarkets, too.
Oakley’s shares have produced a total return of 85 per cent since I suggested buying them in my 2016 Bargain Shares Portfolio and continue to offer upside trading on a 29 per cent share price discount to NAV. Buy.
Mpac on the upgrade
■ Material earnings upgrades.
■ Increased geographic exposure to The Americas.
Panmure Gordon has pushed through material earnings upgrades for client Mpac (MPAC:365p), a small-cap niche packaging engineering business that offers customers digital solutions for artificial intelligence-enabled equipment and robotics in their production facilities and warehouses. The Covid-19 pandemic is driving an acceleration of the move to automation as more blue-chip clients reappraise their manufacturing efficiency.
Panmure upgraded its 2020 and 2021 earnings per share (EPS) estimates by 7 and 37 per cent, respectively, to 25.3p and 37.4p, following Mpac’s acquisition of Ohio-based Switchback, a provider of packaging machinery and automation solutions to the food, beverage and healthcare markets. Net of the US$13m (£10m) initial consideration, Panmure expects Mpac to close the 2020 financial year with net cash of £6.5m, rising to £10.4m in 2021.
Switchback’s strength is in the high growth craft brewing industry which is benefiting from a shift towards increased use of recyclables, aluminium cans, and cardboard packaging. The range of products offered by Switchback adds breadth and depth to Mpac's carton and end-of-line solutions, and access to a wider potential customer base to build the business in the USA. The Americas accounted for half of Mpac’s first-half revenue, so is an important market.
Mpac’s share price is up by a fifth since I covered the half-year results (‘Manufacturing gains’, 7 Sep 2020) and has now passed through my 350p target. Longer-term holders who bought the shares when I included them in my 2018 Bargain Shares Portfolio are showing a 124 per cent gain. There should be more upside to come. After applying the average UK engineering sector rating of 15.6 times 2021 earnings estimates, and adjusting for net cash and Mpac’s £35.2m actuarial pension deficit, Panmure arrives at a new target price of 461p. I concur. Buy.
Augmentum capital raise opportunity
■ Placing and PrimaryBid.com retail offer to raise £28m.
■ Strong portfolio operational performance in first half.
The UK’s only listed fintech fund Augmentum Fintech (AUGM:123p) has announced a placing and retail offer for subscription to raise £28m at 120p a share, a small discount to the previous closing price. The proceeds will enable the company to take advantage of a qualified pipeline of investment opportunities worth £120m.
A trading update for the six months to 30 September 2020 highlights just why the offer is worth taking up. Augmentum’s diversified portfolio of 18 private fintech companies offer innovative technologies, asset-light business models and have adapted well to the new ‘normal’. Many are performing incredibly well.
Investment platform Interactive Investor (16.1 per cent of NAV) delivered 62 per cent year-on-year growth in first-half revenue, buoyed by a record number of new customers that exceeded the total number acquired during the whole of 2019, and a material increase in younger investors, too.
Tide (10.5 per cent of NAV), an emerging leader in digital business banking, has experienced strong growth in both revenue and customer numbers in the past three months, benefiting from the accelerated digitisation trend during the pandemic. Tide's market share of business accounts passed 4 per cent in September, and it now serves almost 250,000 SMEs.
Bullion Vault (8.2 per cent of NAV) has been consolidating its dominance of the ‘digital gold’ space for private investors. Amid the financial uncertainty and lower interest rates spurred by the Covid-19 pandemic, growth in new users has been buoyed by a surge in demand for gold, silver and platinum, with price volatility further contributing to dealing commissions on the company’s platform. Pre-tax profit is up more than 100 per cent year on year, demonstrating the platform’s scalability.
On a modest premium to last reported NAV of 116p, and offering one of the few opportunities for public markets investors to access the fintech sector, Augmentum has scarcity value as well as solid prospects of delivering decent NAV growth. The shares are well up on the 102.4p entry point in my 2019 Bargain Shares Portfolio, and the retail offer (closes at 5pm on 29 October) is worth taking up. Buy.
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