A quartet of value opportunities

Aim-traded UK and eastern European property fund manager and investor First Property’s (FPO:35p) pulled off an incredibly well-timed disposal in April when the company offloaded its €44m (£40m) stake in the CH8 Tower in Warsaw, Poland. True, the absence of rental income from that property meant that interim pre-tax profits declined by 30 per cent to £2m, but Arden Partners still expect full-year pre-tax profits of £5.1m and earnings per share (EPS) of 3.9p to support a well-covered maintained dividend of 1.7p.

Importantly, First Property now holds £21.2m in cash (19.2p a share) which can be used as equity on new purchases to rebuild profits. The company also holds equity of £15.8m (14.3p) in eight directly owned high yielding properties in Poland and Romania, and has investments in 10 of the 12 funds it manages that are cumulatively worth a further £21.6m (19.6p). Effectively, with the shares trading 36 per cent below book value of 55p a share, fund investments and a profitable third-party fund management business (£557m of assets under management) are thrown into the price for free.

The current valuation is even more anomalous given that rent collection rates are robust, highlighting a bias towards retail warehousing, supermarkets and well located offices which have secure tenant covenants. Also, chief executive Ben Habib and his investment team have an enviable track record; 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. Expect the free cash to be used wisely.

Indeed, Mr Habib revealed during our results call that he is “looking at retail warehousing and specifically in Poland”, one of the least affected EU countries by the Covid-19 pandemic. First Property is also in an incredibly strong position to play hard ball with lender ING on an overrented office building in Gdynia. Five years ago, the company acquired a short finance lease on the building for €2m (£1.8m) and the building has generated around €2.5m of annual income to date. The finance lease expires in February 2021 when a £24.5m final payment is due, but the debt is non-recourse. Since First Property has no equity in the property, the company can simply walk away at no cost to shareholders.

But there is deal to be done as Mr Habib has already lined up Asseco Poland SA, one of the largest technology companies quoted on the Warsaw Stock Exchange, to take 6,000 sq metres at an annual rent of €0.8m. Once the building is fully let it could generate net rent of €1.8m (£1.6m) to support a valuation of £23m. I can see First Property trying to acquire the building outright for an attractive price by using some of its cash pile as equity and tapping low cost funding for the balance, thus delivering a hefty return on equity.

Trading on a modest PE ratio of 9 and offering a near 5 per cent dividend yield, expect the hefty discount to book value to narrow as the cash pile is deployed. Buy.

Jersey prepares for farm-out process

■ Acquisition of remaining interest in Verbier discovery.

■ Concept selection of the Greater Buchan Area project expected by year-end.

My 2019 Bargain Shares portfolio has recovered strongly in the past six months and is currently 39.6 per cent in profit. That’s 6.5 per cent higher than when I updated the portfolio in early February shortly before the stock market crashed (‘How the 2019 Bargain Share Portfolio beat the market, 6 February 2020).

It also compares favourably with the total returns on both the FTSE All-Share (1.1 per cent gain) and the FTSE Aim All-Share (17.7 per cent gain) since the portfolio’s launch. But as is the case with all portfolios, there are winners and losers. My portfolio is no exception as the laggard, Jersey Oil & Gas (JOG:109p), a UK North Sea-focused upstream oil and gas company, has reduced my overall return by almost five percentage points, sentiment being undermined by this year’s oil price collapse.

However, it could be about to improve. Not only is the oil price rebounding strongly again – Brent Crude benchmark has surged 25 per cent to US$47.20 a barrel since the start of November – but Jersey is making decent progress on its Greater Buchan Area (GBA) project. The company holds 100 per cent interests in the Buchan oil field, and the J2 and Glenn oil discoveries, and a majority interest in the nearby Verbier oil discovery in the Outer Moray Firth. It has now done a deal to buy-out the remaining 12 per cent interest in Verbier for a cash payment of £150,000 on completion, pay a further £1.5m on approval of the Verbier development plan, and make a £1m payment within 12 months of first oil. The deal is structured so that Jersey can use £15m of UK tax losses to offset against profits generated from its North Sea assets when they are brought onstream.

Importantly, Jersey now owns 138m barrels of 2C resources, of which more than half could be recovered from the Buchan field alone. Expect completion of the concept selection of the GBA project by the year-end, after which the £25m market capitalisation company will initiate a sales/farm-out process to secure a funding partner in the first quarter of 2021. Taking control of Verbier should make the farm-out process easier.

The point is that any positive news flow on the concept selection and/or the farm-out process could put a rocket under the share price given that analysts at WH Ireland value the Buchan field at 268p a share. House broker Arden has a risked value of US$238m (766p a share) on the company, based on a retained 70 per cent retained interest in Buchan, Verbier, J2 and Glenn post farm-out and using a long-term Brent Crude price of US$65 a barrel and NBP Gas Price of 48p a therm.

After I last highlighted a buying opportunity, at 103p, the shares surged to 170p within a month, before giving back most of the gains. However, with the oil price rebounding – it’s 20 per cent higher than six months ago, the global economic recovery brought forward by the roll-out of the Covid-19 vaccines, equity market sentiment bullish, and important news flow from Jersey imminent, I feel the risk:reward is favourable to drive another re-rating. Buy.

Investors overreact to LoopUp warning

■ Higher churn and lower revenue in non-professional segments.

■ Pipeline of live cloud telephony opportunities has potential contract value of £84m.

LoopUp (LOOP:84p), a London-based premium remote conference meetings company, downgraded revenue expectations on Friday while I was on leave. The market reaction was savage with the shares halving in value and slicing through my 138p entry point (‘Tap into the remote working boom with LoopUp’, 2 July 2020). Having seen the share price rally 80 per cent to 250p by late summer, passing through my initial 225p target price in the process, the holding is now 40 per cent underwater. Although any downgrade is disappointing, in this case I feel investors have massively overreacted.

Firstly, business remains strong in LoopUp’s key professional service verticals where data privacy and security is paramount (law, accountancy, investment banking, corporate finance, private equity, asset management, insurance, PR and marketing). Minute volumes are 43 per cent higher on average (during September and October) than pre-pandemic levels. This growth driver is still in place.

Secondly, the issue is in non-professional (and non-core) segments which account for 14 per cent of platform revenue. Minute volumes have fallen 10 per cent (compared to pre-pandemic levels), and churn has spiked to 30 per cent, a reflection that non-professional segments face greater competition from rivals Zoom and Microsoft Teams, and clients suffer greater financial distress and have higher levels of employee furloughing. Although this pressure is unlikely to ease anytime soon, these are non-core segments and account for a diminishing amount of LoopUp’s overall revenue.

Thirdly, there has been a shift in the call mix towards lower-rated domestic and dial-out minutes away from higher rated international and dial-in minutes, a reflection of the depressed number of international deals being done. This in turn has impacted the average revenue per minute. However, as cross-border activity bounces back from depressed levels during the global economic recovery, then international usage should bounce back, too.

Fourthly, although analysts at Panmure Gordon have downgraded their 2020 revenue estimates from £55.6m to £50m, cash profit will still be more than double from £6.4m in 2019 to £15m to deliver annual pre-tax profit of £8.3m and earnings per share (EPS) of around 14.5p. Moreover, analysts’ new 2021 revenue estimate of £35.5m is based on LoopUp’s current revenue run-rate of £34m and factors in no contribution from the recently launched cloud telephony [integrated with Microsoft Teams] business. This product offering enables clients to make and receive external calls via a third-party network direct routing to companies using Microsoft Teams, alongside its own premium remote meetings capability. 

Bearing this in mind, the directors note that the pipeline of live opportunities here has a potential contract value of £84m, up from £68m just in late September. They also revealed that the company has been selected by a private banking group to provide their global cloud telephony, subject to a successful three-month proof of concept trial which starts in December. In other words, the pipeline is being converted.

Fifthly, the company has paid down substantial amounts of debt this year. In fact, analysts at Progressive Equity Research expect net borrowings of £1.9m at the end of December 2020, a sum that is £9.6m lower than 12 months earlier. This means that although their 2021 cash profit estimate of £6.1m is less than half previous estimates of £13.3m (due to the lower revenue run-rate), LoopUp’s enterprise value of £48m now equates to only 8 times downgraded cash profit forecasts, a massive 41 per cent discount to the UK Small-Cap Technology sector average multiple of 13.5 times 2021 enterprise value to cash profit.

The point is that as LoopUp converts its pipeline of potential contracts in the cloud telephony [integrated with Microsoft Teams] business, and cross-border activity bounces back to more normal levels (thus driving up higher margin international call volumes), there is scope for the current revenue run-rate of £34m to ratchet up and drive profits higher. Recovery buy.

Urban Exposure’s tender offer worth accepting

■ Tender offer to redeem 55 per cent of share capital.

■ Proforma cash balance to account for 28 per cent of net tangible assets.

Specialist residential development finance provider and asset manager Urban Exposure (UEX:74p) is making stellar progress at winding down its loan portfolio and returning cash to shareholders.

This morning the company announced a tender offer to return £65m of its £81m cash balance through a tender offer at 75p for 54.57 per cent of your existing shareholdings. It’s worth accepting. You have until 1pm on 16 December to send in your tender applications and expect the tender proceeds to be dispatched on 4 January 2021.

Guidance remains unchanged. The directors expect to return 72p to 78p per share to shareholders, with 90 per cent of proceeds expected to be returned by the third quarter of 2021. Post the current tender offer, proforma cash of £16m will account for 28 per cent of Urban Exposure’s net tangible assets of £57m (77p a share). As further asset sales are made, expect further tender offers, a point I highlighted in my last article (‘Ben Graham recovery plays’ 5 October 2020). Take up the tender offer.

Finally, I have published articles on 16 small-cap companies in the past week, all of which are available on my home page.

■ 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.