Six small-cap value picks

Anglo-Eastern Plantations (AEP:560p) has issued a bullish third-quarter trading update that points to a major profit recovery this year, the primary reason why I included the shares, at 570p, in my market beating 2020 Bargain Shares Portfolio.

Anglo’s primary activities are crop production and processing of crude palm oil (CPO) and some rubber from 16 plantations across Indonesia and Malaysia. The company has extensive landholdings amounting to 128,200 hectares, of which 72,696 hectares is planted. CPO, together with its related product, palm kernel oil, is derived from the fruit of the oil palm and is one of the four major vegetable oils. Non-food applications include use in bio-diesel and oleochemicals.

In recent years, a combination of oversupply and competitive pricing of other vegetable oils placed significant pressure on the CPO price (ex-Rotterdam). However, I anticipated a sharp rebound in 2020 based on specific drivers including: a reduction in supply coming onto the market due to a reduction of fertiliser applications by planters; lower prices keeping a lid on industry production growth; and Malaysia and Indonesia pushing through increases in their biofuel mandates.

The Covid-19 pandemic has certainly created unexpected price volatility, but the CPO price is certainly moving in the right direction, rebounding by 26 per cent to average US$665 per metric tonne (mt) in the first nine months of 2020 and surging by 20 per cent from US$710 to US$855 per mt since the start of October. The price only averaged US$565 per mt in 2019. Likely supply shortage resulting from the moderate La Nina weather phenomenon and the surge in the price of soyabean oil, a competing peer, are supportive of strong prices holding for the remaining part of the year.

So, with Anglo’s own production of fresh fruit bunches (FFB) up 6 per cent and total CPO production holding steady at 295,000 mt in the year to date, expect annual profits to obliterate last year’s result. Indeed, first half pre-tax profit of US$16.8m was only US$2.1m shy of the total profit reported for the whole of 2019, and Anglo is now benefiting from a very strong pricing tailwind in the fourth quarter.

There are no analyst forecasts in the market, but I would not be at all surprised to see full-year pre-tax profit double to US$38m to produce earnings per share (EPS) of around 60 cents (46p). Strip out Anglo’s net cash of US$90.2m (174p a share) and my financial models suggest the shares are currently being rated on a prospective cash adjusted price/earnings (PE) ratio of 8. They also trade on an unwarranted 41 per cent discount to book value of 950p. A return to February’s share price high of 680p, and the 2017 high of 886p, is not an unrealistic possibility. Buy.

TMT’s eye-catching disposal

■ Pipedrive disposal pitched at 245 per cent premium to book value.

■ Net asset value per share increases by 29 per cent.

TMT Investments (TMT:458¢), 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 made a major portfolio disposal at a thumping 245 per cent premium to book value.

Leading US investment firm Vista Equity Partners is acquiring Pipedrive, a developer of a customer relationship management (CRM) software tool that improves the productivity of their businesses, in a deal that values TMT’s 2.64 per cent stake in the technology company at US$41m. That represents a massive US$29.1m premium to the book value of the stake in TMT’s interim accounts. It also adds 29 per cent to TMT’s last reported net asset value (NAV) of US$101m (346¢), implying spot NAV of US$130m (446¢).

When I turned buyer again on TMT’s shares, at 318¢, having previously banked a 140 per cent gain in my 2019 Bargain Shares Portfolio, director Alexander Selegenev singled out Pipedrive as a likely mergers & acquisitions target (‘On the hunt for recovery buys’, 6 July 2020). Pipedrive is TMT’s second company to reach the US$1bn valuation point, representing a total cash return of over 51 times on TMT’s original investment. The quantum of the Pipedrive disposal proceeds also highlights TMT’s incredibly conservative accounting policy (‘Technology stocks for the new ‘normal’, 26 October 2020). I fully expect further disposals of mature portfolio investments at hefty premiums to book value in the future.

Furthermore, TMT’s investment team has been actively investing in new opportunities to drive future gains, including £0.5m in Hinterview, a UK-based specialist video platform for the recruitment industry; US$1m in StudyFree, Inc., an EdTech Software-as-a-Service platform that helps students secure financing through scholarships and grants; and an additional US$700,000 in Ad Intelligence Inc., trading as RetargetApp, an online solution aimed at monitoring ad campaigns and automatically managing daily budgets, audience and bids to improve the quality of retargeting.

Admittedly, TMT’s shares are tightly held – 81 per cent are owned by management and connected parties – but they are still worth buying.

Exploit Inland’s hidden value

■ Significant Build to Rent sales.

■ Record land bank.

Inland Homes (INL:58p), a south-east England-focused housebuilder and brownfield land developer, is trading far better than investors are giving it credit with the shares priced on a thumping 44 per cent discount to proforma European Public Real Estate Association (EPRA) NAV of £234m (103p a share).

Importantly, a raft of recent deals should enable net debt of £138m to be paid down, thus unwinding the elevated equity risk premium embedded in the share price. Inland has announced two major sales to Build to Rent (BtR) funds in the past month alone including the £31.5m disposal of 123 units at its Centre Square development in High Wycombe that is scheduled to complete in March 2021. Half the consideration will be paid on completion and the balance in monthly staged payments before then, thus providing significant cash flow. Inland has also exchanged contracts on the £21.3m sale of 85 units at Buckingham House, High Wycombe to another BtR fund with completion slated in early 2022.

Inland now has 415 private homes under construction and 1,302 partnership homes across 13 sites. A third of the £156m forward order book are private homes and commercial units. To put this into perspective, Inland sold 226 homes at an average of £287,000 in the 12 months to 30 September 2020, generating revenue of £65m, accounting for just under half the directors’ total revenue guidance of £135m.

It's worth noting that net reservation rate per sales outlet increased sharply during the last quarter, driven by a combination of underlying demand in the marketplace and the Stamp Duty Tax holiday. The point is that Inland’s affordable private homes should continue to sell well, while at the same time the company de-risks revenue visibility even further through institutional BtR bulk sales and housing association partnerships. It’s the right strategy to pursue.

Furthermore, Inland’s land bank of 11,045 plots is at a record high, of which almost 2,500 plots have planning consent, 2,800 plots are strategic land held under option at a discount to open market value, and the balance are in the planning or pre-application planning stage. This offers scope to continue to realise value from land sales, or through housebuilding activity.

True, we need to wait for January’s results to ascertain the level of profitability as there are no earnings forecasts in the market. However, what’s clear to me is that as more sales are booked, and the balance sheet de-gears, then the unwarranted 44 per cent share price discount to NAV should narrow. Prior to the March stock market crash, the shares were priced on a 10 per cent discount to EPRA NAV.

Interestingly, Inland’s share price appears to have completed a base formation, having traded in the 47p to 57p range since early April. A likely chart break-out opens the door to a rally towards the 80p previous resistance level. Trading at the 57.75p entry point in my 2019 Bargain Shares Portfolio, and with my standing dish first quarter seasonal housing building sector trade almost upon us (‘Alpha alert for housebuilders’, 3 January 2018), Inland shares are worth buying from both a technical and fundamental perspective. Buy.

Duke Royalty on upward trend

■ Reinstatement of quarterly cash dividend.

■ All bar one royalty partners making monthly cash payments.

Duke Royalty (DUKE:26.6p), an Aim-traded company that makes its money by providing capital to companies in exchange for rights to a small percentage of their future revenues over a typical term of 25-40 years, has issued a bullish trading update.

Having weathered the Covid-19 storm in the first quarter of the 2020/21 financial year, only one of the company’s 12 royalty partners is still in forbearance. Duke has taken 30 per cent equity stakes in three partners in lieu of foregone cash revenue: independent glass merchant United Glass Group; coatings and paint company Trimite; and private education company Step. All have now resumed making cash royalty payments. Also, the equity stakes are held at nil value in the accounts, thus offering valuation upside to Duke’s last reported NAV of £74m (29.3p a share).

Of the other two royalty partners who sought forbearance, healthcare facility manager and developer Interhealth Canada is finalising a refinancing that will see all forgone royalty payments made good. European cruise ship operator Temarca was worst affected, but Duke held first ranking mortgages on three wholly owned vessels and has taken direct ownership with a view to leasing them back into the market as the ship owner.

Seven of the 12 partners have continued to make their royalty payments throughout this year which is why Duke’s quarterly cash distributions never declined below £2m. The current quarterly run-rate is £2.5m, well ahead of the company’s annual operating expenses of £2.3m and interest servicing costs on its net debt of £14m. The strong cash flow and improving visibility from royalty partners has enabled the directors to reinstate the 0.5p a share cash dividend, implying the shares offer a dividend yield of 7.5 per cent. It’s sustainable, too, as analysts at house broker Cenkos expect cash receipts of £9.4m in the 12 months to 31 March 2021 to recover to £10.9m in the 2021/22 financial year. On this basis, expect net cash of £7.6m from operating activities, well above the annual £5.2m cash cost of the pay-out.

Duke’s shares have started to recover since I last suggested buying them at 23p (‘Companies on the rebound’, 21 September 2020), and the re-rating should have some way to run. That’s because prior to the Covid-19 pandemic they traded at a premium of 10 to 40 per cent to NAV, implying a target range of 32.25p to 41p. Buy.

Venture Life moothwash set to clean up

■ Moothwashes eradicate Covid-19 virus

■ Results of human clinical trials expected early 2021.

Aim-traded Venture Life (VLG:103p), a developer, manufacturer and distributor of products for the self-care market, has announced that its key oral care mouthwash brands (UltraDex and Dentyl) containing the powerful Cetylpyridinium Chloride (CPC) technology eradicated the SARS-CoV-2 (COVID-19) virus completely (>5log reduction, equivalent to 99.999 per cent) within a 30 second exposure. The virus was supplied by Public Health England, unlike other similar studies reported in the media, which have not used the relevant COVID-19 virus, but a related strain of it.

The in-vitro study was carried out by scientists at Cardiff University who found that the 'exact formulation is also important'. Whilst the CPC technology in Venture Life's mouthwash proved highly effective in the in-vitro study, the scientists also tested a third mouthwash, which contained both CPC and another ingredient, yet this proved ineffective. Their conclusion was that active ingredients in mouthwashes were not, on their own, enough to rely on, but rather it was the construct of the mouthwash formulations that was the critical determinant of a successful outcome. Venture’s directors consider the composition of the company’s CPC-based mouthwashes to be unique. Expect results from the human (in-vivo) clinical study to be published in early 2021. The outcome of that study has potential to have a significant positive impact on sales of Venture’s mouthwashes, a factor not reflected in current earnings forecasts.

For the 2021 financial year, analyst Chris Donnellan at Cenkos expects Venture to deliver pre-tax profit of £4.6m on sales of £33.3m to produce adjusted EPS of 5.65p based on 14 per cent earnings growth.  The shares have more than doubled since I initiated coverage at 45p, in my May 2019 Alpha Report, and I maintain my 130p target price. Buy.

Jarvis’ record dividend a strong business indicator

■ Record cash dividend for 2020.

■ Four-for-one stock split improves liquidity.

Shares in Aim-traded Jarvis Securities (JIM:200p), a financial services outsourcer and retail client stockbroker, hit an all-time high of 230p last week. That’s double my entry point of 115p (‘Jarvis offers medium-term value’, 15 August 2018) and above my raised 200p target price (‘Targeting tech stocks’, 10 August 2020). For good measure the board has also paid out 21.625p a share in dividends and that excludes the fourth quarter dividend of 3.125p a share (ex-dividend: 19 November) which takes the 2020 pay-out to 11.1p a share, or 69 per cent higher than last year.

However, I would run your profits as the board’s confidence in hiking the dividend is a clear indicator that the momentum in the business remains strong. In fact, analyst Nick Spoliar at house broker WH Ireland expects full-year pre-tax profit to soar by 42 per cent to £6.8m on 13 per cent higher revenue of £13.2m. On this basis, expect EPS to rise to 12.4p, up from 8.7p in 2019. The boom in retail share trading volumes aside, Jarvis is seeing decent demand from pension funds and wealth managers looking to make cost savings by outsourcing financial administration services to the company’s corporate division. That business is benefiting from operational gearing, too, and new regulatory requirements which support further growth.

A prospective post tax return on equity of 80 per cent, a 5.5 per cent rolling dividend yield, and a 2020 forward PE ratio of 16 point to further share price upside. Last month’s four-for-one stock split has also improved liquidity in shares of the £87m market capitalisation company. Run profits.

■ 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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They 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. Details of the content can be viewed on www.ypdbooks.com.

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