Exploiting share price dislocations

Shares in TMT Investments (TMT:580¢), a venture capital company that invests in high-growth, internet-based companies, has rallied 76 per cent since I turned buyer again, at 318¢ (‘On the hunt for recovery buys’, 6 July 2020). This means that they are now rated on a premium to pro-forma net asset value (NAV) of $130m (446¢) after taking into account the $41m cash windfall from the sale of TMT’s stake in Pipedrive, a customer relationship management (CRM) software tool developer that is being purchased by US investment firm Vista Equity Partners for $1.5bn. The disposal realises a $29m profit, too.

However, that gain looks small fry compared with the upside potential upside on TMT’s 10.85 per cent holding in Backblaze, a cloud storage and data back-up company with more than 600,000 customers. That’s because news agency Reuters reports that Backblaze is targeting an IPO in 2021 that could value the company at around $1bn, a valuation reflecting forecasts that the global cloud storage service market is estimated to grow from $50.1bn this year to $137.3bn by 2025 (MarketsandMarkets estimates).

TMT invested $5m in Backblaze in July 2012 and 2013, made a partial $2m disposal last year and retains a 10.85 per cent stake, which was last valued at $21.2m. At a $1bn valuation, the holding could be worth five times book value and add an eye-watering 300¢ a share to TMT’s NAV. Buy.

Alpha alert for share price gains

■ Likely windfall gain on land sale

■ No defaults on secured loan book

First-half results from Alpha Real Trust (ARTL:153p), a company that invests in high-yielding property and asset-backed debt and equity investments, highlights a compelling and low-risk investing opportunity.

Alpha is run by a shrewd management team which has generated substantial returns for shareholders since I first suggested buying the shares, at 80p ('High-yield property play', 10 February 2016). Since then, the company has paid out total dividends of 14.6p a share and lifted NAV per share by 71 per cent to 211p, within pennies of a record high. The quarterly dividend of 1p a share proves a 2.6 per cent yield.

Moreover, Alpha’s cash of £62.8m (104p a share) accounts for half of NAV as the company has been realising substantial value from its portfolio by reducing exposure to development risk and recycling capital into asset-backed lending. Alpha holds £37.5m (62p a share) of secured and mezzanine property loans that generate an annual weighted average income return of 9.4 and 14.6 per cent, respectively. Loan-to-value ratios average 59 per cent, repayments have been steady and there have been no defaults.

Alpha’s other major investments are a 30 per cent stake worth £17.9m in the H2O shopping centre in Madrid, and a £7.2m investment in an 11.8-acre freehold industrial facility near Hamburg, Germany leased to international industrial waste management group Veolia. Despite the Covid-19 pandemic, H2O occupancy rates of 93 per cent remain very healthy and the centre’s roll call of international brands includes Nike, Zara, H&M and Mango. Alpha also holds a £1.7m equity investment in a joint venture that owns part of the Cambourne Business Park near Cambridge. The asset generates a 10 per cent return on equity.

Strip out cash on Alpha’s balance sheet, and Alpha’s other assets are in the price for half their book value. Moreover, the company is set to generate a cash windfall from an asset held in the accounts at nil cost. That’s because Alpha has now recovered all its investment in the Galaxia project, an 11.2-acre development in an established suburb of Delhi, India, having previously won an arbitration award against its development partner Logix. The site is under offer for £10.1m, of which £6.1m (10p a share) has been deposited by the purchaser with the Supreme Court. That sum will be released to Alpha when the sale completes. The shares are worth buying on a 28 per cent discount to NAV. Buy.

Gresham House Strategic on a bull run

■ Spot NAV per share close to all-time high

■ Portfolio outperforms small-cap index by 36 per cent in past three years

■ Investee companies offer substantial profit recovery potential

Aim-traded investment company Gresham House Strategic (GHS: 1,250p) has recovered strongly since the first quarter market rout. NAV per share increased 14 per cent to 1,211p in the six months to 30 September 2020 and has since kicked on to 1,389p, within a few percentage points of January’s high water mark. However, the company’s share price has lagged and now trades on an unwarranted 10 per cent discount to NAV, or double the discount in January.

It’s reasonable to expect both a narrowing of the discount and further NAV upside as investment manager Richard Staveley strives to build on the company’s impressive 36.8 per cent outperformance of the FTSE Small-Cap index (ex-investment trusts) over the past three years.

GHS’s managers adopt a value-orientated strategy focused on a small number of companies – the top 10 holdings account for 80 per cent of NAV – offering substantial profit recovery potential. A post-vaccine environment will clearly contribute, but the bulk of future profit growth is expected to be generated by self-help measures, already identified by new management teams, incentivised to deliver them and, if achieved, should lead to material increases in valuation multiples.

With this strategy in mind, GHS used this year’s market volatility to take advantage of several new buying opportunities, including a past favourite of mine, specialist distribution company Flowtech Fluidpower (FLO); environmental and planning consultant RPS (RPS); Van Elle (VANL), a ground engineering specialist for the construction industry that is set to benefit from a step change in government infrastructure spending in the coming years; and Fulcrum Utility Services (FCRM), a specialist in designing and constructing electricity connections such as electric vehicle charging points and smart meters. Fulcrum is a direct play on the push for net-zero emissions and a 'green' recovery. GHS is also benefiting from the strong housing market through its holding in ULS Technology (ULS), a digital conveyancing platform for housing transactions. I can see the investment merits in all these companies.

GHS’s value-orientated approach, focused on company fundamentals, cash generation, downside scenario testing and balance sheet strength, rings a chord with my own, a major consideration when I included the shares in my 2016 Bargain Shares Portfolio. It still does. Although the holding has produced a 63 per cent total return (TR) including dividends of 75p a share, and so has outpaced the FTSE All-Share TR of 37 per cent, it lags my portfolio’s 83 per cent gain. GHS’s shares are primed to play catch-up. Buy.

Metal Tiger’s African adventure running hot

■ Investee company Sandfire gives go ahead to T3 Copper-Silver copper exploration and development project in Botswana

■ Significant upside for Metal Tiger’s net smelter royalties

Shares in Metal Tiger (MTR:25.5p), an Aim-traded investment company primarily focused on undervalued natural resources opportunities, have reacted positively to news from Sandfire Resources (Aus:SFR), the A$1bn market capitalisation Australian Stock Exchange-listed mining and exploration group that is developing the T3 Copper-Silver project in the Kalahari Copper Belt, Botswana.

Metal Tiger has a capped US$2m Net Smelter Royalty (NSR) on the Australian group’s T3 Motheo Project and an uncapped 2 per cent NSR over 8,000km2 of Sandfire’s adjacent licence holdings, which includes the A4 resource area. Sandfire’s decision to progress the US$259m development of T3 put a rocket under its share price.

It’s not surprising given that T3 could generate US$1bn of cash profit over its initial 12.5-year mine life using a long-term copper price of US$3.16 a lb (10 per cent below the spot price) and at production rate of 3.2m tonnes a year. It also dramatically shortens the odds of A4 being developed (maiden inferred mineral resource of 6.5m tonnes) especially as Sandfire envisages that A4 could underpin its expansion. That’s not only good news for Metal Tiger’s royalty interest, but the Aim company also holds 6.29m shares worth A$36.3m (£20m) in Sandfire worth 13p a share.

Moreover, Metal Tiger also owns a 49 per cent interest in the Kalahari Metals Project (carrying value A$3.85m) in the Kalahari Copper Belt, Botswana, the balance of that project being owned by Australian Stock Exchange-listed Cobre Pty (Aus:CBEXX), a company in which Metal Tiger holds a stake worth A$4.5m (£2.5m). The nearby Sandfire T3 and A4 deposits are located 3km and 8km, respectively, to the north of Kalahari Metals Kitlanya East Project. This could get very interesting indeed.

I also note that Metal Tiger’s investment in Trident Resources (TRR:32p), an Aim-traded company that is establishing a diversified mining royalty stream, has increased by 60 per cent in value since the company invested £570,000 in the IPO six months ago.

Metal Tiger’s shares are showing a 112 per cent gain since I included them in my 2020 Bargain Shares Portfolio and with the copper price rallying strongly to a seven-year high, the tailwind driving the commercialisation of its African projects can only get stronger. Buy.

Augmentum’s solid valuation drivers

■ Strong growth in listed pre-IPO/venture sector forecast

■ Placing and retail offer bolsters cash pile for new investments

It never ceases to amaze me how often share prices dislocate themselves from the intrinsic value embedded in a company’s equity even though the fundamental case for investing has not changed. Augmentum Fintech (UGM:139p), the first publicly listed fintech fund in the UK, is a prime example.

Having included the shares, at 102p, in my 2019 Bargain Shares Portfolio, they were sold down to half spot NAV of 112.2p during the March stock market rout even though Augmentum is debt-free and has an exciting portfolio of investments. The ‘margin of safety’ was huge, and pointed to a favourable outcome materialising (‘Exploiting market mis-pricing’, 26 March 2020).

The subsequent 140 per cent share price rally has wiped out that discount and means the shares are now trading at a 16 per cent premium to end-September 2020 NAV per share of 119.3p, a more sensible take on the portfolio’s upside potential. Other investors clearly share this view as Augmentum had no problem raising £28.5m in a placing and retail offer, at 120p, post the half-year end. Cash now accounts for £36m of pro-forma NAV of £167m to provide firepower for new investments. There is scope for material gains in existing holdings, too.

For instance, BullionVault, a company that offers private investors low-cost access to investment-grade bullion, has $2bn-worth of gold bullion assets under administration (AuA) and a customer base across 175 countries trading more than $100m of gold and silver each month. Augmentum’s 11.1 per cent holding is in its books at £11.5m (cost of £8.4m), implying an equity value of £104m for a business that produced pre-tax profit of £5.2m on revenue of £9.3m in the 2018-19 financial year. Soaring precious metal prices will undoubtedly drive up profits again this year.

Augmentum’s largest holding, a 3.7 per cent stake in Interactive Investor (ii), a leading UK investment platform, is valued at £22.2m, or seven times its £3.2m cost. This implies a valuation of £600m for a company that delivered a 56 per cent increase in pre-tax profit to £13.9m on 23 per cent higher revenue of £90.2m in 2019, and has since completed the £40m acquisition of Share plc. ii now has £30bn of AuA, 300,000 retail customers and a 14 per cent share of the UK retail trading equity market. The carrying value of the stake still represents a ratings discount to listed peer AJ Bell (AJB).

Other interesting holdings include Tide, an emerging force in the small- and medium-sized enterprises (SMEs) challenger banking sector, Farewill, a digital legal services platform that writes one in 25 of all wills in the UK, and Onfido, a leading global provider of online identity verification. These three stakes are worth almost £36m.

So, although Augmentum is the highest rated company in its peer group, I feel the share price premium to NAV is warranted, especially as analysts at Liberum say “the next 12 months could see a period of strong growth in the listed pre-IPO/venture sector, given the strong recovery in public markets since the end of September, which should support increased valuations”. Hold.

■ 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.