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Bargain shares for 2021

Simon Thompson reveals his Bargain Shares for 2021.
Bargain shares for 2021

The idea behind our annual Bargain Shares Portfolio is simple. It’s to invest in companies where the true worth of the assets is not reflected in the share price, usually for some temporary reason, but where we can reasonably expect that it will be in due course.

Our portfolios are based on the investment ideas of Benjamin Graham (see box ‘Rules of Engagement’) and they have certainly withstood the test of time, beating the FTSE All-Share index in 18 out of the 22 years in which we have run them. During that time, they’ve generated an average return of 21.8 per cent in the first 12-month holding period compared with an average increase of 3.9 per cent for the FTSE All-Share index.

My 2020 motley crew of Bargain Shares proved no exception, generating a 12-monthly total return of 30.2 per cent on offer-to-bid basis and including dividends. By comparison the FTSE All-Share Total Return index produced a negative return of 8.6 per cent, the index against which we benchmark our annual performance. That’s not to say this investment strategy is a one-way bet. Investing rarely is, and the laggard in the portfolio, finance company PCF, has lost a quarter of its value, thus highlighting the benefits of having a diversified portfolio.

Click her for a full run down of how the 2020 selection is faring. 

As usual, the hidden gems we uncover in the stock market are found amongst the under researched small and micro-cap segment. Targeting smaller cap companies has reaped handsome rewards over the years, so justifying our long-term bias, but it works both ways as companies that disappoint can be punished more heavily given the less liquid nature of these shares. The flipside is that when we get it right, expect substantial long-term outperformance as our track record shows.

And there is no doubt that this investment strategy has stood the test of time with every single one of the last five annual portfolios I selected having outperformed the FTSE All-Share index by more than 30 per cent to date. Some of the share price gains have been mightily impressive.


Simon Thompson's Bargain Shares Portfolios Performance (2016-2020)
PortfolioPortfolio total return to dateFTSE All-Share total return to dateFTSE Aim All-Share total return to date
Source: London Stock Exchange, FTSE International, Bargain Shares Portfolio total return calculated on offer-to-bid basis with dividends un-invested. Prices correct at 1.30pm on 02.02.21.


The 2017 portfolio returned 30 per cent in its first 12 months, and is currently up 101 per cent, driven by two technology companies: cyber security firm Kape Technologies (KAPE) and BATM Advanced Communications (BVC). It’s a similar story with the 2018 portfolio which turned a first year return of 12.5 per cent in a down market into a three-year return of 65.5 per cent, South African mining group Sylvania Platinum (SLP) being the star of the show with shares in that company surging by 618 per cent. The star of the 2019 portfolio, venture capital company TMT Investments (TMT) has more than trebled in value.

Interestingly, mergers and acquisitions (M&A) activity has been a regular feature of all my portfolios, as predators, attracted by the asset backing on offer, run their slide rule over the numbers. It’s understandable as in some cases valuations are so depressed that we are getting all the fixed assets in the price for free, thus offering the substantial “margin of safety” Benjamin Graham was aiming for.

So, once again, I have run the rule over around 1,500 listed companies on Aim and the main market of the London Stock Exchange to come up with a portfolio of companies where the asset backing should be strong enough to overcome any short-term trading difficulties and, in time, reward our loyal following of long-term value investors.


Bargain Shares Portfolio: 22-year track record
YearBargain Portfolio 1-year performance (%)FTSE All-Share index 1-year performance (%)
Average one-year return21.83.9
Source: Investors Chronicle


Rules of engagement

The bargain portfolio is based on the writings of Benjamin Graham, a US investor and writer, who favoured looking for companies that were “out of favour because of unsatisfactory developments of a temporary nature”.

How do we know whether the unsatisfactory developments are indeed temporary? Mr Graham’s approach was to focus on the balance sheet, and specifically the net current assets – stocks, debtors and cash less any creditors. He believed that a bargain share is one where net current assets less all prior obligations exceed the market value of the company by at least 50 per cent. Mr Graham’s theory was that a strong balance sheet will usually see a company through any short-term difficulties; he called it his margin for safety.

Finding companies that match these strict criteria has become more and more difficult over the years as the link between market capitalisation and asset value has become more tenuous. In practice, when we ran our search we found only a handful of the 1,500 listed UK companies had a bargain ratio of one or above and this included relatively illiquid micro-cap companies with market values below £10m that are very difficult to trade. So, to widen the net, the cut-off point has been lowered to 0.3, and we only considered companies with a market value above £15m to avoid liquidity issues.

Finally, market makers could easily raise their offer quotes for smaller companies by 10 per cent plus on publication day. However, prices and spreads have demonstrated a habit of drifting back over subsequent weeks, so please be disciplined in your share buying as these investments are for the long-term as the strong outperformance of the 2016, 2017, 2018, 2019 and 2020 portfolios clearly highlight. It is also important to buy a decent number of our recommendations to diversify risk.


Bargain Shares Portfolio 2021
Company nameTIDMMarketActivityMid-price Market value Bargain rating
Canadian General InvestmentsCGIMainClosed-end equity fund focused on Canadian corporations2,000p£417.2m1.44
Vietnam HoldingVNHMainClosed-end fund focused on high growth Vietnamese companies191p£81.9m1.23
Arix BioscienceARIXMainBiotechnology investment company166.5p£226.0m0.77
Wynnstay GroupWYNAimAgriculture products368p£73.4m0.67
Springfield PropertiesSPRAimScottish housebuilder133.5p£131.5m0.63
AnexoANXAimCredit hire and legal services132p£153m0.60
San Leon EnergySLEAimOil exploration and production25.2p£113m0.51
Ramsdens HoldingsRFXAim Diversified financial services group137p£42.2m0.50
Duke RoyaltyDUKEAimRoyalty finance 26.25p£67.7m0.42
Downing Strategic Micro-Cap Investment TrustDSMMainUK micro-cap focused investment trust64p£33.7m0.28
Source: London Stock Exchange RNS and company accounts.


Canadian General Investments (CGI)

Main: Share price: 2,000p (London); C$34.88 (Toronto)

Bid-offer spread: 1,960-2,040p (London); C$34.75-C$35 (Toronto)

Market value: £417m/C$727m


  • Trading 33 per cent discount to NAV
  • Impressive record of investment manager over both short and long-term
  • Exposure to US-quoted Information Technology and renewable energy

Nearly a century ago, former Prime Minister of Canada, Arthur Meighen, helped create what is today North America's second oldest closed-end fund, Canadian General Investments (CGI). Shares in the company have been dual-listed on both the Toronto and London Stock Exchanges since 1995.

Investment manager Morgan Meighen & Associates has run the $1.26bn fund since 1956 with a remit of generating better than average returns from a diversified portfolio of North American equities. That has clearly been achieved both over the long and short-term by adopting a bottom-up approach to stock selection. NAV per share increased by 35 per cent to C$50.02 (2,890p) in 2020, and is currently C$50.27. That means CGI’s shares trade on a 30 per cent discount to NAV even though the fund has increased NAV per share 260-fold since 1969, during which time it has delivered a compound annual growth rate (CAGR) of 11.5 per cent and outperformed its benchmark S&P/Toronto Stock Exchange Composite Index benchmark by 2 percentage points per year.

The majority of the portfolio is invested in Canadian companies, although up to 25 per cent may be held in US equities. Morgan Meighen has been doing just that by playing the boom in US Information Technology stocks, a contributory factor behind the doubling of NAV per share in the past five years. The IT sector currently accounts for 28 per cent weighting in CGI’s portfolio of 59 companies, down from 35 per cent at end September 2020, as the investment manager has taken significant profits on holdings in Apple (US:AAPL), Nvidia (US:NVDA) and Shopify (CA:SHOP). Considerable profits have also been taken on holdings in (US:AMZN) and Mastercard (US:MA). Importantly, the cash is being recycled into some exciting new holdings.


Canadian General Investments portfolio weighting by sector
Sector weightsPercentage
Information Technology28.1%
Consumer Discretionary11.4%
Real Estate3.4%
Communication Services2.1%
Health Care1.1%
Cash & Cash Equivalents0.6%
Source: Canadian General Investments portfolio summary 31 December 2020



Canadian General Investments top-10 shareholdings
Shopify Inc.7.4%Information technologyInternet services
Canadian Pacific Railway Limited4.2%IndustrialRailroads
Franco-Nevada Corporation3.8%MaterialsGold mining
Lightspeed POS Inc.3.5%Information technologySoftware
NVIDIA Corporation3.4%Information technologySemiconductors
First Quantum Minerals3.4%MaterialsMetals and mining, Inc.3.4%Consumer discretionaryOnline retail
Mastercard Inc.2.9%FinancialsFinancial services
Apple Inc.2.9%Information technologyTechnology
Square, Inc.2.7%Information technologyEcommerce payment platform
Source: Canadian General Investments portfolio summary 31 December 2020


Playing the green energy theme

One of CGI’s new positions is Ballard Power Systems (CA:BLDP), a C$12.5bn market capitalisation developer and maker of proton exchange membrane fuel cell products for the portable power, back-up power, material handling and engineering services markets. Ballard is also a leader in the development of hydrogen fuel cells to exploit the advantages it has over electric vehicles.

Another new holding is Xebec Adsorption (CA:XBC), a provider of gas purification and filtration solutions for the natural gas, biogas, nitrogen, oxygen, and hydrogen markets. Xebec designs, engineers and manufactures products that transform raw gases into marketable sources of clean energy. Product segments are biogas plants for the purification of biogas from agricultural digesters, landfill sites and waste water treatment plants; natural gas dryers for natural gas vehicles (NGV) refuelling stations, and helium and hydrogen purification systems for fuel cell and industrial applications. The C$1.6bn market capitalisation company offers high growth potential as highlighted by third quarter results which delivered 39 per cent year-on-year revenue growth.

CGI’s portfolio manager has also taken a new position in Brookfield Asset Management (CA:BAM.A), a C$75bn market capitalisation alternative asset manager which has US$575bn of assets under management across the real estate, infrastructure, renewable power, and private equity markets. Brookfield has a strong balance sheet, offers scope for a special dividend, and should scale up its asset allocation this year.

The addition of lumber group West Fraser Timber (CA:WFT) is interesting, too, as the group is ideally placed to benefit from the US economic recovery as well as reaping benefits from the C$4bn acquisition of Norbord (CA:OSB), the world's largest OSB producer.


Unwarranted share price discount

CGI’s shares have performed well in recent times, rising by 139 per cent in the past five years. However, they still trade on a 33 per cent discount to NAV, close to the top of the 24 per cent to 38 per cent range over the past 10 years.

Admittedly, the board is unable to repurchase shares to narrow the share price discount to NAV as it would contravene its Canadian investment corporation tax status. The insiders hold 52.5 per cent of the shares, too, the lower than average 47 per cent free float being another reason for a wider discount as there could be a perception that the shares are less liquid. However, they are readily tradeable on a 0.6 per cent bid-offer spread in Toronto where 50 per cent of the 20.86m shares in issue are held. In London, the bid-offer spread is 4 per cent, but it’s possible to trade well within that. Buying the Toronto-listed shares is my preference.

True, the fund’s gearing could put off some investors, but it shouldn’t as the average interest cost on its C$175m (£101m) debt is only 2.44 per cent and the C$1.26bn portfolio has delivered an excess annual return above the cost of debt of 6.08 per cent since the portfolio manager first adopted a leveraged strategy in 1998. In any case, net gearing of 16 per cent is hardly excessive. Morgan Meighen’s annual management fee is a relatively modest one per cent of the market value of investments net of cash.

Furthermore, although the fund has a focus on total return rather than income, it’s not as if shareholders aren’t being rewarded. The 84¢ annual dividend supports a decent 2.4 per cent dividend yield.

The bottom line is that with CGI’s shares trading 30 per cent below NAV, effectively C$322m of listed equity holdings are in the price for free. That’s not only wholly unwarranted given the track record of the portfolio manager, but provides investors with just the margin of safety that Ben Graham aspired to. Buy.


Vietnam Holdings (VNH)

Main: Share price: 191p

Bid-offer spread: 190-192p

Market value: £81.9m


  • Restructured portfolio now performing strongly
  • Portfolio valuations well below those offered by foreign buyers
  • Direct Foreign Investment flows buoying equity market
  • Country relatively unscathed by Covid-19 pandemic

Vietnam Holding (VNH) is a little known closed-end fund listed on the Main Market of the London Stock Exchange. It holds a concentrated portfolio of between 20 to 25 mid to small-cap companies to play three specific secular growth trends in Vietnam:

■ Industrialisation (best-in-class manufacturers, international logistics)

■ Urbanisation (purposeful real estate, transportation, clean energy and clean water)

■ Domestic Consumerism and its enablers (sustainable retail, domestic logistics, products and finance)

The portfolio manager, Dynam Capital, follows a GARP (growth at a resonable price) investment process using both top-down and bottom-up analysis in its stock selection. Around half the portfolio is held in sub-US$1bn market capitalisation companies. Over the past decade, Vietnamese equities have outperformed both the MSCI Asia Pacific ex-Japan and Emerging Markets indices, but valuations are still not stretched. Dynam estimates the market is trading on a 2021 price/earnings (PE) ratio of 14 (excluding outliers).

Moreover, Vietnam is one of only a handful of countries that managed to post economic growth last year – GDP rose 2.9 per cent – and one of the few to have been largely untouched by the Covid-19 pandemic, registering only 35 deaths and 1,544 cases across its 100m population. Last year’s trade surplus of US$19.1bn was a record, helped by the fact that the country is a net beneficiary of the trade tussle between China and USA.

Importantly, business and consumer confidence remains high. In December, the keenly watched manufacturing PMI rebounded to 51.7, so is expanding, and the latest Indochina Research survey of consumer confidence revealed that two-thirds of those polled are optimistic about prospects in 2021. Retail sales in December increased 9.4 per cent year-on-year.

This optimism is reflected in increased retail dealing activity in Vietnam’s equity markets with daily liquidity hitting record levels. In 2020, Foreign Direct Investment (FDI) into the country only declined 2 per cent year-on-year and Dynam expects “an even smoother flow of FDI this year”. This positive back drop explains why Vietnam Holding’s US$138.8m (£101m) investment portfolio recovered strongly in the second half of last year, posting a 24.7 per cent gain in sterling.

This means that the shares trade on a 19 per cent discount to the latest net asset value (NAV) of 235.5p even though Dynam is clearly performing, having posted a first quartile ranking in the past three months (16.1 per cent NAV return). By comparison, the much larger VinaCapital Vietnam Opportunity Fund (VOF) trades on a 4 per cent discount to NAV, a reflection of its superior returns over the longer term (NAV return of 211 per cent over five years versus 61 per cent for Vietnam Holding).

However, Vietnam Holding’s share price discount to NAV should start to narrow markedly as more investors realise that Dynam is an entirely different investment proposition to the former portfolio manager who was responsible for the previous underperformance. Having taken over the mandate in July 2018, Dynam first had to sell some illiquid holdings, and restructure the fund to enable some shareholders to exit, returning US$16.1m and US$40.7m in the 2019 and 2020 financial years. It could only then focus on creating a portfolio concentrated on its key investment themes. Although the restructuring created a headwind for its investment performance, the upside from Dynam’s new approach is now being seen.

Importantly, the investment manager agreed a more appropriate management fee structure (1.75 per cent annual fee on NAV below US$300m) to align its interests with those of shareholders. Vietnam Holding’s new board also has the authority to use surplus cash to repurchase 14.99 per cent of the shares outstanding. The fund is ungeared.


Vietnam Holding portfolio by sector
Sector weightsPercentage
Industrial Goods and Services26.0%
Real Estate11.0%
Food & Beverage5.0%
Financial Services3.0%
Source: Vietnam Holding portfolio summary 31 December 2020



High conviction rate

Around 63 per cent of NAV is concentrated in the top-10 shareholdings, highlighting a strong conviction rate as does the sector bias with 86 per cent of the portfolio in the following industries: banks (30 per cent); industrial goods and services (26 per cent); real estate (11 per cent); retail (10 per cent); and telecommunications (9 per cent).

All three investment themes are interlinked. For instance, as Vietnam's population is becoming increasingly data-connected and sophisticated, demand for clean water, access to safe food and quality education for their children continues to rise. In addition, Vietnam's 'middle income' population (13 per cent of the total) is projected to expand at a rate of 18 per cent annually, adding a further 35m people to this group of consumers by 2030. Vietnam's consumers are already keen on spending more on clothes, vacations, technology products, home improvement and interior decoration, as well as paying more for medical insurance.

The International Monetary Fund forecasts that Vietnam's real GDP per capita could reach US$3,664 by 2023, equivalent to a compound annual growth rate of 7.5 per cent, one of the strongest paces of growth in the Asia-Pacific region.


Vietnam Holding top 10 shareholdings
CompanyPercentageSectorManager comment2021 forecasts
FPT Corp9.1%Telecommunications2020 pre-tax profit growth of 10.1 per cent to 30 November.PE ratio of 12.6.
Hoa Phat Group8.7%Industrial Goods & Services2020 construction steel sales volume up 22 per cent to 3.4m tonnes with 33 per cent market share. PE ratio of 10.9.
Vietin Bank8.6%Banks2020 pre-tax forecast up 40 per cent driven by strong loan growth. Price to book value 1.3.
Gemadept7.4%Industrial Goods & ServicesGemalink deep sea port to finish commissioning in January 2021.PE ratio of 18.6.
VP Bank6.0%Banks2020 pre-tax profit growth of 25 per cent, helped by cost savings and non-interest income.Price to book value 1.2.
Phu Nhuan Jewelry5.3%Retail2020 year to date sales growth of 1.5 per cent despite Covid-19 lockdowns.PE ratio of 16.8
Military Commercial Bank4.8%Banks2020 pre-tax profit up 6.5 per cent, buoyed by loan growth and cost cutting.Price to book value 1.1.
Khang Dien House4.7%Real EstateIn final stages of launching two new low-rise projects to secure 2021 growth.PE ratio of 13.8
ABA Cooltrans4.4%Industrial Goods & Services2020 year to date cash profit up 4.2 per cent.Unlisted
Mobile World Investment 4.4%Retail2020 sales increased 6.7 per cent.PE ratio of 9.5.
Source: Vietnam Holding portfolio summary 31 December 2020


The country is urbanising at one of the fastest rates in the world, too. The proportion of the population living in urban areas doubled to 36 per cent between 1990 and 2018, and is forecast to hit 44 per cent by 2030. Ho Chi Minh City, Vietnam's largest urban ground, has become a metropolis, and is now home to more than 10m people. This growth has necessitated the construction of roads, bridges, ports, new townships and massive demand for modern apartments. Vietnam Holdings is playing this theme through its holding in Kang Dien House (KDH), a leading private property developer in Ho Chi Minh City. KDH has secured a 10-year land bank of which half is allocated for green residential projects.

It’s also worth noting that Vietnam Holdings owns holdings in four banks which are modestly rated on low price-to-book values and sub-market earnings multiples even though they have all registered decent profit growth in 2020 and are well positioned to profit from a rebound in Vietnam’s GDP in 2021.


Hidden value

The share price discount to NAV aside, there is hidden value in the portfolio valuations. That’s because half the US$138.8m investment portfolio is held in stocks that have reached their foreign ownership limit. As a result foreign buyers often offer a premium to the listed share price, ranging between 7 to 30 per cent. However, Vietnam Holdings uses the lower quoted price in its valuations. As shareholdings are divested then expect holdings to realise materially more than carrying value. This could be a very good year for shareholders. Buy.


Arix Bioscience (ARIX)

Main: Share price: 166.5p

Bid-offer spread: 165-168p

Market value: £226m


  • Disposal of portfolio company VelosBio at 776 per cent premium to carrying value
  • Merck strategic research collaboration with Artios could deliver massive returns
  • Nasdaq-quoted portfolio and cash exceed Arix’s market capitalisation
  • Director share buying

Arix Bioscience (ARIX), a global venture capital company, is a classic Ben Graham recovery play. Having fallen out of favour under previous management, shareholders' fortunes have turned a corner under a new board which is mandated to realise value from the portfolio. Arix holds some exciting investments, too, that have attracted the interest of heavyweight technology investors in recent funding rounds, adding substance to the likelihood of further profitable exits in the future. Investee companies are also attracting the interest of big pharma. This is simply not being priced in to the share price which is trading on an unwarranted 32 per cent discount to my estimate of the read through portfolio valuation.

Since listing its shares on the Main Market in February 2017, Arix has raised £187m of equity in two placings (at 207p and 225p a share) with the aim of creating a diversified portfolio of investments in early stage biotechnology businesses targeting cutting edge advances in life sciences. It’s been doing just that, generating an internal rate of return (IRR) of 20 per cent on the portfolio by the 2020 half year-end, during which time it had deployed £149m of the capital raised.

That IRR is set to rise sharply after pharmaceutical giant Merck (US:MRK) completed the US$2.75bn acquisition of portfolio company VelosBio at the end of 2020 which realised US$185m (£139m) for Arix’s 6.8 per cent stake. The disposal generated a £121m (89p a share) increase on the carrying value of Arix’s investment. VelosBio’s lead investigational candidate is an antibody-drug conjugate that is being evaluated in Phase 1 and Phase 2 clinical trials for the treatment of patients with hematologic malignancies and solid tumours.

The profit booked means that Arix is set to report a thumping pre-tax profit for the 2020 financial year. The crystallisation of the VelosBio stake brings into focus the huge ‘margin of safety’ on offer in the rest of Arix’s portfolio given that I estimate the company now holds net cash of about £155m (124p a share), a sum that backs up two-thirds of its market capitalisation of £232m (171p). I have stated the cash position after allowing for a £18.8m tax liability on the VelosBio disposal based on a 15 per cent tax charge.

This means that the combined value of cash and Arix’s holdings in four Nasdaq-listed biotech companies that have a combined portfolio value of £87m (64p a share) comfortably exceed Arix’s own market capitalisation of £226m. That leaves an unlisted portfolio in the price for free even though Arix has just hit the jackpot again with another one of these unlisted companies, Artios Pharma, a leading DNA Damage Response (DDR) company that is developing a pipeline of precision medicines for the treatment of cancer.


Arix Bioscience investment portfolio (28 January 2021 estimates)
Investee company ValuationValue per shareEquity Interest
Atox Bio£6.6m4.9p6.4%
Autolus (US:AUTL - US$8.50)£20.8m15.3p6.5%
Harpoon Therapeutics (US:HARP - US$19.80)£32.1m23.7p6.9%
Imara (US:IMRA - US$13.41)£15.3m11.3p9.0%
LogicBio Therapeutics (US:LOGC - US$8.54)£18.8m13.9p9.4%
Quench Bio£8.9m6.6p24.6%
STipe Therapeutics£2.1m1.5p14.8%
Legacy Assets£6.8m5.0pN/A
Other Investments£2.7m2.0pN/A
PORTFOLIO VALUE£147.4m108.6p-
Estimated unrealised gains on unlisted portfolio (second half of 2020)£38m28.0p 
PORTFOLIO VALUE (28 January 2021)£185.4m136.6p-
Cash at 30 June 2020£44m--
VelosBio cash proceeds (December 2020 at exchange rate of £1:US$1.33)£139m--
Estimated administration costs second half 2020-£3.2m--
Follow on investments (Arix and VelosBio in July 2020)-£5.8m--
Estimated tax bill on disposal of VelosBio stake (15 per cent tax rate on US$172m gain)-£18.8m  
Proforma net cash at 28 January 2021£155m114.4p-
Source: Arix Bioscience annual report, 2020 interim accounts, London Stock Exchange and Nasdaq filings. Investor Chronicle estimates using latest open market prices of listed holdings and historic book values (30 June 2020) of unquoted private investments. 


Hidden value in Artios investment

At the end of last year, Artios entered a three-year strategic research collaboration with drug giant Merck to discover and develop multiple precision oncology drugs. Artios received US$30m in upfront and near-term payments, and Merck has the right to opt into exclusive development of compounds on up to eight targets. If Merck chooses to exercise the option, subject to double-digit option fees, Artios will be eligible to receive up to US$860m per target, in addition to up to double-digit royalty payments on net sales of each product commercialised by Merck. Artios management are highly regarded, having played key roles in AstraZeneca’s discovery of Lynparza, a treatment for advanced ovarian cancer. Strategically, the collaboration strengthens Merck’s position in the field of cancer treatment as it develops a unique discovery platform of novel DNA repair nuclease inhibitors and targets.

Arix has backed every one of Artios’ funding rounds since it was formed in December 2015 and is the largest shareholder, holding a 12.7 per cent fully diluted equity stake (14.6 per cent undiluted), having invested a total of £13.8m of the £90m Artios has raised to date. The stake was last valued in Arix’s accounts at £19.1m, the figure used in my valuation table, having been raised in value by £3.9m in the end June 2020 accounts. This reflected progress on Artios' lead programmes, Polθ and ATR inhibitors, both of which are due to commence clinical developments in 2021.

The recently announced Merck/Artios collaboration will deliver another material valuation uplift to Arix’s stake in Artios. To put this into perspective, IP Group, an intellectual property commercialisation company, has guided the market to expect a 45 to 136 per cent increase in the value of its 11.7 per cent holding in Artios. The revaluation of Arix’s holding in Artios should contribute a chunk of the £38m of net unrealised gains Arix could make on its unlisted portfolio in the second half of 2020, excluding the already disclosed £121m windfall gain on the VelosBio stake.

Furthermore, even if only one of the eight targets in the Merck-Artios collaboration is successful then it’s highly likely that Merck will opt to buy Artios’ shareholders out completely rather than making US$860m of milestone payments. The fact that Arix made a 12.5-times return on the US$15m invested in VelosBio highlights the bumper payday that could be on offer.


Arix Bioscience's well-diversified portfolio
Disease areaPercentage
Genetic diseases28%
Source: Arix Bioscience presentation (September 2020)



Arix Bioscience's portfolio by stage of development
Stage of developmentPercentage
Phase 146%
Phase 225%
Phase 33%
Source: Arix Bioscience presentation (September 2020)


A portfolio with promise

Arix’s portfolio companies are engaged in 19 clinical trials and conducting over 20 pre-clinical trials. In particular, listed holdings in two companies offer decent prospects for value accretion:

■ Nasdaq-quoted Autolus Therapeutics (US:AUTL) is developing next generation programmed T cell therapies for the treatment of cancer. The company has reported encouraging Phase 1 data in its AUTO1 programme for the treatment of adults with acute lymphoblastic leukemia, showing a favourable safety profile, and high level of clinical activity. These positive results have enabled Autolus to progress AUTO1 to a pivotal Phase 1b/2 trial. The aim is to have full data by the end of 2021, and a Biologics License Application filing in 2022.

■ Nasdaq-quoted Harpoon Therapeutics (US:HARP) is a developing a novel class of T cell engagers that harness the power of the body's immune system to treat patients suffering from cancer and other diseases. The company has presented encouraging interim Phase 1 data for its lead programme, HPN424, in patients with metastatic castration-resistant prostate cancer.

In addition, Harpoon has an ongoing Phase 1/2 clinical trial focused on relapsed/refractory multiple myeloma, HPN217, that is targeting B-cell maturation antigen (BCMA). It is Harpoon's third product candidate to enter the clinic and is covered by a global development and option agreement with AbbVie (US:ABBV), the US$193bn market capitalisation research-based biopharmaceutical company. Harpoon boosted its strong cash pile through a well backed US$115m equity raise last month.


Director share buying and stock overhang removed

Interestingly, Arix’s management team have set themselves a target of increasing NAV to £500m by 2023. Chairman Naseem Amin is clearly confident, having purchased 183,000 shares at 206p each in late December. Mr Amin was appointed to the role last April when Arix’s board was restructured to accelerate shareholder returns through exits. In addition, the board has slashed annual operating costs to a more palatable 1.5 per cent of NAV. I also note that US hedge fund Acacia Research Corporation (US:ACTG) has acquired a 19 per cent stake in Arix that was previously held from LF Equity Income Fund (the fund that is winding down the former Woodford portfolio), thus removing a stock overhang.

The sharp pullback in the share price since Arix announced managing director Jonathan Tobin will be leaving the company on 1 March is massively overdone. Buy.


Wynnstay Group (WYN)

Aim: Share price: 368p

Bid-offer spread: 365-370p

Market value: £73.4m


  • EU settlement and UK Agricultural Bill improved sentiment across farming sector
  • Reorganisation delivering tangible benefits
  • Stronger farmgate prices

The defensive qualities of specialist agricultural products supplier Wynnstay Group (WYN) were clear to see in last week’s annual results. Underlying pre-tax profit increased by 4 per cent to £8.37m on 12 per cent lower revenue of £431m, an outstanding achievement in the circumstances.

In the past 18 months, the company has had to deal with multiple challenges including:

■ Poor 2019 autumn planting season and a dry spring, both of which had a detrimental impact on yields and led to reduced activity across multiple product categories such as grain.

■ 2020 UK harvest at a 20-year low with wheat volumes down 38 per cent on 2019.

■ Subdued farmer confidence and investment, reflecting weaker farmgate prices and Brexit uncertainty.

The board have also overseen a reorganisation in the group’s management structure in the second half of last year to support Wynnstay’s future growth plans. These are primarily focused on developing existing products and services, strengthening channels to market, and improving efficiency and productivity.



Two sites have been closed and Wynnstay has strengthened its specialist advisory teams, particularly in youngstock, animal health, dairy and free range egg production, all of which are key growth areas for the group. Wynnstay has also introduced a sales trading desk to support its teams of on-farm specialists, and continues to develop channels to market, including digital. Following the expiry of the lease on Wynnstay’s Selby seed plant in Yorkshire, the site closed in December and options for a new modern and more efficient plant are being explored. In the meantime, the directors are investing in the group’s seed processing plant at Astley in Shrewsbury to increase capacity and efficiency, and are utilising facilities of its partners.



The resilience of the business partly reflects Wynnstay’s balanced business model, which spans both arable and livestock sectors, thus providing a strong natural hedge to the sector variations experienced last year. The company is also an essential service provider, so its 54 depots and plants have been able to trade throughout the Covid-19 pandemic. For example, while a weaker performance from arable activities materialised as expected, volumes and gross margins on feed sales were strong in the second half of 2020 as Wynnstay secured new business in the dairy and free range egg sectors. A three-year investment in the group’s Carmarthen feed mill will significantly increase manufacturing capacity and improve productivity and provide the platform to continue growing this side of the business.


Robust strong cash generation and appealing valuation

Wynnstay has the firepower to invest in its businesses as it generates chunks of cash and retains a robust balance sheet, holding net cash of £8.4m (42p a share) which is stated after IFRS 16 lease liabilities of £10m on its plant facilities. The group has bank debt of only £1.6m. Gross cash of £20m doubled year-on-year as net cash generated from operating activities shot up 50 per cent to £18.6m (93p a share) to produce free cash flow of £17.7m.

Wynnstay’s strong cash generation explains why the board have just lifted the annual dividend by 4 per cent to 14.6p-a-share, the pay-out being covered more than two times by adjusted earnings per share (EPS) of 34p. That yield is worth locking into especially as the pay-out is progressive, having risen by a third since 2015. A price/earnings (PE) ratio of 11 is also an attractive entry point for a company that still managed to maintain a pre-tax return on equity of 8.6 per cent despite encountering the challenges last year. An enterprise valuation to cash profit multiple of 4.5 times highlights the value opportunity on offer here, a 25 per cent discount to the average ratings of Wynnstay’s peers.


Wynnstay Group peer group comparisons
CompanyYear EndShare priceMarket Capitalisation12m forward PE ratio 12m forward EV/EBITDA12-month forward dividend yield
Wynnstay Group October£3.68£73m11.14.54.1
Carr's GroupAugust £1.34£124m11.37.83.6
Origin EnterprisesJuly€3.35£372m8.15.83.9
Sources: London Stock Exchange, Shore Capital.


For good measure, the shares trade on a 24 per cent discount to NAV of 492p, so you’re getting a chunk of Wynnstay’s assets thrown in for free. That seems anomalous given that prospects for the year ahead look well underpinned and skew the investment risk to the upside.


Positive outlook

The UK's trade deal with the EU has introduced clarity and stability for UK farming and removed an obstacle that has been inhibiting farmer confidence and investment spending. Indeed, the new UK Agricultural Bill maps out the support that the UK Government will provide to farmers post-Brexit, and 2021 marks the start of a seven-year transition period that will see direct payments reduce and farmers incentivised for efficiency and environmental projects. In turn, farmers are now likely to invest in their businesses to improve efficiency and productivity while also addressing environmental issues.

Reassuringly, Wynnstay’s directors note that the new financial year to 31 October 2021 has started well. Stronger farmgate prices towards the end of 2020, along with the EU settlement and UK Agricultural Bill, have buoyed sentiment across the farming sector. Wynnstay's performance to date is in line with management’s conservative looking budgets which are in line with 2020 underlying pre-tax profit of £8.3m. However, it could exceed guidance as Wynnstay outperformed in the 2019/20 financial year, a case of underpromising and overdelivering. That’s no bad thing. Buy.


Springfield Properties (SPR)

Aim: Share price: 133.5p

Bid-offer spread: 130-137p

Market value: £131m


  • Supply demand imbalance in Scottish housing market
  • Springfield offers differentiated business model to other housebuilders
  • Strong revenue visibility underpins earnings surge
  • Balance sheet deleveraging de-risks investment case

Investors are materially underestimating the scale of the earnings recovery at Springfield Properties (SPR), a housebuilder focused on developing a mix of private and affordable housing in Scotland that trades under its Springfield, Dawn Homes and Walker Group brands.

Founded by chairman Sandy Adam, the group listed its shares on London’s junior market in October 2017. Springfield offers a differentiated business model to other housebuilders by focusing on two key markets, both of which enjoy high demand and a lower risk profile: family housing and affordable housing. Springfield acquires land ‘off market’ at attractive prices, rather than in the mainstream market, preferring more complex long-term projects. The focus is mainly on mid-sized Village communities that are close enough to fast growing cities such as Dundee, Perth, Stirling, Livingston and Elgin.

Since listing on AIM, Springfield has made a couple of smart acquisitions to increase its geographic footprint, buying Dawn Homes in 2018 to give it exposure to West of Scotland, and Walker Group a year later. The Walker Group acquisition not only strengthened its presence in the commuter belts around Edinburgh, but has boosted the group’s gross margin due to the higher priced homes in the region.

Springfield also entered a smart strategic partnership agreement with Sigma PRS Management, a wholly owned subsidiary of Sigma Capital Group (SGM), to acquire and develop residential sites in Scotland for the private rented sector (PRS). Several Springfield Village sites have potential for PRS development. Sigma acquires the land and awards Springfield a fixed-cost design and build contract to deliver housing, which is then let and managed by Sigma under its ‘Simple Life’ brand.

Importantly, there are strong dynamics at work that underpin demand across all part of the business.


Demand outstripping supply in buoyant Scottish market

Independent research suggests that there is a need for a further 53,000 affordable homes in Scotland by 2026. Springfield is well placed to capitalise on the opportunity as it already has strong partnerships with local authorities and housing associations. In the 2019/20 financial year, the group delivered over 300 affordable homes at an average selling price of £141,000, including the first affordable housing at a Village development at Bertha Park, Perth.

Prospects are rosy in private housing, too. Record low interest rates, extensions of both the First Home Fund (which is not restricted by property price) and Help to Buy (Scotland) to March 2022, and zero rate Stamp Duty on purchases below £250,000 are all helping to support buyer interest in Springfield’s homes. Demand has been particularly strong for larger homes, with gardens, located within commuting distance of cities. Springfield’s Village developments fit the bill nicely.

In the 2019/20 financial year, the private housing division completed 419 homes at an average selling price of £236,000, a contribution that accounted for more than two-thirds of the group’s annual revenue of £144m, albeit there was an abnormally low level of completions in April and May 2020, the final two months of the previous financial year, due to the first national lockdown when construction sites were shut down across Scotland.


Strong earnings rebound not priced in

One consequence of the delayed completions last spring is that Springfield is set for a strong recovery in the financial year to 31 May 2021. This is exactly what’s happening.

A trading update in mid-December highlighted a strong rebound in sales and build activity in the first half to 30 November 2020, and a material reduction in net debt, too. In fact, net borrowings have been slashed by more than half to £33.6m since the 31 May 2020 financial year-end, the effect of which is to reduce Springfield’s gearing to 34 per cent. That lowers the financial risk.

The directors also noted that Springfield is delivering against “a substantial backlog and is experiencing high levels of demand”, thus offering visibility over the remainder of the financial year to de-risk expectations of a near 50 per cent surge in pre-tax profit to £15m on 23 per cent higher revenue of £177m. On this basis, the shares are rated on a price/earnings (PE) ratio of 11. Furthermore, the recovery in earnings is unlikely to stall given a supply-demand imbalance in the Scottish property market, the relatively low entry point of Springfield’s homes and a raft of schemes the group is building out.


Springfield Properties profitability set to rebound
Year to 31 May201920202021E2022E2023E
Adjusted operating profit£17.6m£12.1m£16.6m£21.1m£25.5m
Operating profit margin9.2%8.4%9.3%9.2%10.3%
…to deleverage its balance sheet
Year to 31 May201920202021E2022E2023E
Net debt£29.6m£68.8m£45.7m£38.8m£29.9m
…boost net asset per share
Year to 31 May201920202021E2022E2023E
Net asset per share92p98p106p118p133p
…and improve post-tax return on equity
Year to 31 May201920202021E2022E2023E
Post tax return on equity15.3%8.3%11.7%14.4%15.8%
Source: Springfield Properties annual report, Progressive Equity Research forecasts 2021 to 2023



In fact, analysts expect pre-tax profit and EPS to both rise by a further 30 per cent to £19.5m and 15.7p, respectively, in the 2021/22 financial year on 26 per cent higher revenue of £196m. On this basis, the shares are rated on a bargain basement forward PE ratio of 8. There is a decent 4p-a-share prospective dividend on offer, too, implying a forward dividend yield of 3 per cent. It could be higher still as some analysts are predicting a 4.5p a share payout.


Surge in earnings not in the price

The point is that Springfield is likely to stand out amongst housebuilder peers over the next few years as its earnings explode upwards, the retained profit from which is likely to drive up NAV per share to 118p by May 2022, from 97p in May 2020. A forward price-to-book value ratio of 1.1 times is a bargain for a company that could deliver a 14 per cent post-tax return on equity in the 2021/22 financial year.

Moreover, there is significant hidden value in the group’s 15,882-plot land bank, half of which has planning consent. Land and work in progress is carried in the books at £174m, or below £10,000 per plot. It’s also the equivalent of 20 years output, so Springfield would be a prodigious cash generator if it ever decides to build out its land bank and hold off from making significant land purchases for a while. Buy.


Anexo (ANX)

Aim: Share price: 132p

Bid-offer spread: 129-135p

Market value: £153m


  • Strong earnings rebound in 2021 and 2022
  • Cash collections and free cash flow set to markedly improve
  • Hidden value and potential for huge cash windfall in Volkswagen Class Action
  • DBAY stake acquisition offers takeover possibilities

Liverpool-based Anexo (ANX) is a provider of a complete litigation claims process focused on the recovery of credit hire and repair costs for the impecunious non-fault motorist involved in a road traffic accident (RTA). By offering both credit hire and legal services, Anexo has a competitive advantage over pure credit hire companies (who lack the in-house capacity to litigate a customer’s claim), and solicitors (who lack a vehicle fleet to offer to motorists).

Anexo can by law charge considerably higher credit hire rates rather than spot hire rates by offering its services to customers deemed impecunious. These are individuals without the means to pay in advance for car hire following a non-fault RTA and mainly those who only have third-party insurance and without access to a replacement vehicle. It then recovers these charges from the at-fault insurer at no upfront to the individual. Anexo’s fleet of 1,902 vehicles comprises motorcycles (owned by the company) or leased cars, so the credit hire division benefits from significant economies of scale.


Understanding the credit hire market

The total credit hire market comprises 300,000 cases each year, or more than double the number of RTAs, of which Anexo funded 6,959 cases in 2019. This gives it a 2 per cent market share. In addition, as more law firms exit the credit hire market following 2018 ‘whiplash reforms’ which have reduced scope for personal injury claims, Anexo should be able to buy up books of cases from those rivals. Anexo has a decent 98 per cent success rate in recouping its full costs.

The company also has counter-cyclical characteristics in the current economic environment as the number of impecunious people will have dramatically increased. In turn, this segment is likely to try to save money by extending the life of their vehicle, thus making them more susceptible to RTAs. Many of these additional RTAs will not be the fault of the impecunious driver, thus creating extra demand for Anexo's services.

Historically, motorists also save money by switching from cars to motorcycles to save money in times of hardship. That’s good news for Anexo as motorcycles account for two-thirds of its fleet with an emphasis on the courier market, an area that has been proved resilient during the Covid-19 pandemic.


2020 dip in profits to reverse in 2021

Analysts at Panmure Gordon estimate that the credit hire division will account for £50m of Anexo’s 2020 forecast revenue of £87m, the major issue last year being that normal working practises for lawyers and law courts have been impacted by the Covid-19 pandemic.

Road usage also declined in the first lockdown last year as more people were forced to work from home. Inevitably, this had effect on the ability of Anexo’s staff to agree settlements with counterparties which subdued cash collection rates. Anexo has to pay costs for garages and vehicle leases and insurance upfront and then only recoups its outlay on average 520 days later. The Covid-19 pandemic coincided with Anexo increasing the number of senior fee earners by 30 per cent year-on-year to tap into the growth opportunity, one reason why salary costs within its legal services division increased by a third to £8m in the first six months of 2020.

So, even though legal services revenue is expected to rise by a fifth to £37m in 2020, increased overheads and lower than expected cash collections explains why analysts at Panmure Gordon expect Anexo’s pre-tax profit to decline from £23m to £16m in 2020. However, that’s likely to be the low point as last week’s pre-close trading update pointed to a strong second half recovery and one that should continue, thus enabling Anexo to capitalise on its investment in additional fee earners who take up to 12 months to hit peak earnings power.


Anexo's operating profit by division
Credit Hire£6.9m£8.9m£8.0m£11.5m£19.4m£18.6m£19.8m£20.5m
Legal Services£5.5m£4.6m£7.1m£5.5m£6.7m£3.5m£5.1m£7.0m
VW Class Action    -£0.9m-£3.9m-£2.3m-£1.1m
Central profit/cost   £0.2m£0.1m£0.1m£0.1m£0.1m
Total operating profit£12.4m£13.5m£15.1m£17.2m£25.3m£18.3m£22.7m£26.5m
Source: Anexo annual report, Panmure forecasts (2020 to 2022)



2021 profit rebound

Analysts at Panmure are pencilling in a rebound in legal services’ operating profit from £3.5m to £5.1m in 2021 which will contribute to an estimated £5m increase in group pre-tax profit to £21m, albeit that’s still shy of the £23m high water mark in 2019. Nevertheless, it still means that Anexo should deliver earnings per share of 14.3p, up from 11.2p forecast in 2020. On this basis, the shares are priced on a price/earnings (PE) ratio of 9.5.

Importantly, the group has a strong balance sheet. Estimated 2020 year-end net debt of £26m equates to a modest 16 per cent of shareholders’ funds of £155m (134p a share), and the company has significant cash headroom having raised £7m in a placing in May 2020, and drawn down a £5m low interest loan under the UK Government’s CBILS scheme. As collection rates rebound, expect free cash flow to improve dramatically.


Anexo's free cash pre-dividends improving
Free cash-£0.1m-£11.2m-£3.8m£3.0m£7.6m£10.4m
Source: Anexo annual report, Panmure forecasts (2020 to 2022)



There is hidden value in Anexo’s balance sheet, too. That’s because there is potential for a windfall gain as early as this year relating to a Class Action Anexo is pursuing on behalf of Volkswagen car owners impacted by the emission scandal.


Tapping into the VW scandal

In April 2020, the High Court of Justice ruled that the German car maker subverted key air pollution tests by using special software to reduce emissions of nitrous oxides under test conditions. The ruling applies to VW cars and those manufactured by Audi, SEAT and Skoda. Subsequently, the Court of Appeal refused VW permission to appeal, thus increasing the likelihood of a settlement. Anexo’s management believe that there could be 1m VW cases in the UK, of which 91,000 claimants are involved in the High Court Group Litigation Order, to which Anexo is not a party.

However, Anexo has been actively investing in marketing to attract claimants to pursue a claim against VW, noting that VW has being settling legal actions involving emissions in multiple jurisdictions. In Germany, settlements to car owners have ranged from £1,190 to £5,540 depending on the age, model and cost of the vehicle. Last year Anexo incurred £2.9m in marketing and staff costs to drive VW claimant counts and analysts pencilled in a further £2.7m investment this year.

It’s well worth doing. That’s because based on an average claim size of £3,000 with Anexo taking a 50 per cent commission, then the 14,356 claimants Anexo has so far recruited could generate the company an operating profit of £16m after accounting for all costs. The respective potential operating profits are £23m for 20,000 claims, and £34m for 30,000 claims. These are sizeable one-off profits for a £155m market capitalisation company and are not embedded in Panmure’s forecasts.


Takeover potential

Anexo was founded by chairman Alan Sellers in 1996 and listed its shares, at 100p, on AIM in June 2018. Interestingly, private equity firm DBAY Advisors agreed to buy a 29 per cent stake from three directors at 150p last November, subject to Financial Conduct Authority approval. Following the share purchase, Mr Sellers will retain a 17 per cent stake; Samantha Moss, managing director of legal services arm Bond Turner retains 18 per cent; and Valentina Slater, sales director of the Direct Accident Management business retains 3 per cent.

DBAY’s interest makes the possibility of a takeover more likely as profits and cash collection rates rebound especially as Anexo looks set to earn a hefty cash windfall from its VW Class Action. Buy.


San Leon Energy (SLE)

Aim: Share price: 25.1p

Bid-offer spread: 24.9-25.4p

Market value: £113m


  • Oil price surge since autumn de-risks investment
  • Cash could equate to 60 per cent of market capitalisation by year-end
  • Shares trading 70 per cent below sum-of-the-parts valuation
  • Hidden value in net profit interest in undeveloped Barryroe oil and gas field

The oil price has rallied by 55 per cent since early November, but this has yet to be reflected in the share price of San Leon Energy (SLE), a Nigeria focused exploration and production company that indirectly owns a 10.58 per cent interest in the vast 1,035 sq km Niger Delta licence, OML 18, located 500 km from Lagos.

Operated by Eroton, the acreage is the size of Bahrain and current deliveries of 25,000 to 30,000 barrels of per day (bopd) could easily double to 50,000 bopd with the benefit of a new export pipeline that comes on stream later this year (see below). Even then output could be maintained for 32 years based on the 2016 Competent Persons Report that estimated 1P and 2P (proven) reserves of 1.1bn barrels of oil equivalent (boe).


OML 18 Reserves estimates
OML 18Gross Reserves
Oil Condensate389576777
Source: San Leon Energy annual accounts.


Eroton led the US$1.1bn equity buyout of OML18 from a Shell operated consortium in 2015 and holds a valuable 27 per cent equity interest. OML 18’s other shareholders are Nigeria state oil company NNPC (55 per cent) and two indigenous companies (18 per cent). San Leon holds its indirect 10.58 per cent interest in Eroton through a 40 per cent stake in Mauritius-acquisition vehicle Midwestern Leon Petroleum Limited (MLPL) which effectively owns a 98 per cent stake in Eroton.

San Leon also purchased US$174.5m of loan notes (17 per cent annual coupon) issued by MLPL to enable Eroton to fund its share of the OML18 acquisition. These were financed by a US$221m placing in September 2018. The guarantor of the loan notes is Midwestern Oil and Gas, a company that holds the other 60 per cent of MLPL and which has close links to Eroton and other members of the OML 18 consortium. Midwestern and Eroton have a common chairman and Midwestern is the third largest shareholder in San Leon.

It’s proved a successful investment to date. Between 2017 and April 2020, San Leon received principal and interest of US$190.6m and still held loan notes worth US$82.1m at its 30 June 2020 half year-end. Under the loan agreement repayment schedule, San Leon was due a US$10m principal payment in the final quarter of 2020 followed by three US$24m principal payments in July, October and December 2021. The company will also earn a further US$8m in interest to bring the total return to US$281m on its US$174.5m initial investment. Of course, the ability of MLPL to continue to make its loan note repayments to San Leon is partly dependent on the ability of OML 18 to generate sufficient cashflow for its stakeholders.  

Bearing this in mind, the surge in the oil price will have done wonders for OML18’s cash flow. Based on a US$50 a barrel Brent price (spot price US$55.50), and after factoring in cash operating costs of US$23 a barrel and a 20 per cent federal government royalty, analysts at joint house broker Allenby Capital estimate that OML 18 is generating US$17 a barrel of cash. At US$60 a barrel, the cash contribution rises to US$25 a barrel. Eroton has an offtake agreement with Shell whereby oil is sold at spot prices. Bonny Light and Brent Crude are the key benchmark grades for pricing purposes.

Moreover, there is a plan in place to ramp up deliveries. That’s because OML 18’s 50 fields produce an average 50,000 bopd, but deliveries are running significantly below this level mainly due to downtime and losses to theft and vandalism on the existing Nembe Creek Tunnel line (NCTL) to the Bonny Terminal. That will all change when a new subsea 100,000 bopd capacity Alternative Crude Oil Evacuation System (ACOES) export pipeline becomes operational later this year. It will cut pipeline downtime and allocated losses from 35 per cent to 10 per cent of output, according to Eroton, thus driving up deliveries at a time when the oil price is recovering strong.

The ACOES tariff will be US$5 a barrel, in line with the existing NCTL tariff. For good measure, San Leon has acquired a 10 per cent equity stake in Energy Link Infrastructure, the operator of ACOES, and made a US$15m shareholder loan which carries a coupon of 14 per cent and has a four-year maturity.


Significantly undervalued

As the OML 18 consortium pays down the remaining US$210m of the US$663m reserve backed loan facility which it took on to fund the US$1.1bn purchase price – the loan matures at the end of 2025 – then it will bring into sharp focus the chronic undervaluation of San Leon’s 10.58 per cent indirect equity stake in OML 18 which is held at US$37.7m (6.2p a share) in the company’s accounts.

Based on San Leon’s share of OML 18’s 2P reserves of 117.7m the stake is worth nine times that amount using a modest US$3 a barrel valuation. That’s one reason why San Leon’s NAV of US$156.6m (25.75p a share) materially undervalues the true value of its assets.

Another is that San Leon has a hidden gem on its balance sheet, a 4.5 per cent net profit interest in the undeveloped Barryroe oil and gas field in the Celtic Sea Basin which has 2C recoverable resources of 346m boe. San Leon’s stake was held in the interim accounts at US$4.4m. However, the operator Providence Resources (PVR) announced a farm-out with Norway-based SpotOn Energy at the tail end of last year to develop and fund the project in conjunction with a world class oilfield services company. Production could start in the second half of 2023 following an appraisal and development drilling in late 2022. Analysts have placed a value of US$35m (6p a share) on San Leon’s net profit interest, or eight times the carrying value in its accounts.

It’s worth noting that analysts are predicting that cash inflows from the loan note repayment will drive up San Leon’s cash from US$35.6m (30 June 2020) to US$93.3m (15.3p a share) by the end of 2021, a sum that covers 60 per cent of San Leon’s current market capitalisation of £113m.


San Leon Energy's cash flow set to rebound
Cash flow pre-financing$40.1m$27.7m$16.6m$72.9m
Net cash (debt)$70.7m$36.7m$20.3m$93.3m
Source: San Leon Energy annual report, Allenby Capital forecasts 2020 and 2021



Material discount to sum-of-the-parts valuation

By my reckoning, San Leon has a sum-of-the-parts (SOTP) valuation of US$511m (£378m), or more than three times its current market capitalisation of £113m. As the company’s cash pile builds this year the shares should start to narrow the unwarranted 70 per cent share price discount as investors cotton on to the value in the company’s other assets.


San Leon Energy investment portfolio
Investment ValuationValue per share
Cash balance (mid-September 2020)$15.8m2.6p
OML 18 loan note balance$82.0m13.5p
Energy Link Infrastructure loan note receivable$10.0m1.6p
Total cash and cash equivalents$107.8m17.7p
OML 18 working interest (10.58 per cent)$353.1m58.1p
Energy Link Infrastructure working interest (10 per cent)$15.0m2.5p
Barryroe net profit interest (4.5 per cent)$35.1m5.8p
Source: San Leon Energy accounts, London Stock Exchange RNS, Allenby Capital. Exchange rate £1:US$1.35.


The fact that San Leon’s largest shareholder, Tosca Fund Management, owns 73.4 per cent of the 450m shares in issue means that any good news is likely to lead to accentuated share price moves given the lower than average free float. There is even the possibility of a hefty cash return if the board follow up on last year’s maiden special dividend of £27m (6p a share). Buy.


Ramsdens Holdings (RFX)

Aim: Share price: 137p

Bid-offer spread: 135-139p

Market value: £42.2m


  • All 157 high street stores now classed as essential so remain open through lockdown
  • Cash rich balance sheet to fund rebuilding of pawnbroking book
  • Strong gold price supports precious metals buying and selling
  • Set to capture market share in foreign currency exchange from weaker rivals

Middlesbrough-based Ramsdens (RFX: 137p), a diversified financial services group whose main activities encompass foreign-currency exchange, retail jewellery, pawnbroking and a precious metals buying and selling service, was a star of my 2018 Bargain Shares Portfolio. The share price rallied from my 157p entry point to a high of 260p by early January last year, before giving back all those gains, and more, in the 2020 stock market crash.

The fundamental long-term drivers of the business have not changed even if the profitability of certain business division have been impacted by national lockdowns in the short-term. This is exactly the type of recovery play Ben Graham would be looking for to create a decent ‘margin of safety’ as well as offering prospects of a sharp rebound in profits when life returns to ‘normal’. That’s because Ramsdens’s market capitalisation of £42.2m is only 19 per cent higher than NAV of £35.6m even though the group has a debt free balance sheet and holds cash of £15.6m. Current assets of £38m are almost four times current liabilities of £9.8m, highlighting a strong liquid ratio and an ability to pay its bills. In fact, current assets are more than double total liabilities of £16.8m.

Under normal trading conditions Ramsdens’ highly cash generative operation was making pre-tax profit of £8.5m on revenue of £59.5m in the 12 months to 31 March 2020, a period before the impact of the Covid-19 pandemic was really felt in the UK. Admittedly, it’s going to take time to get back to that high-water mark given that a third of gross profit previously earned came from foreign currency exchange and trading volumes in that business have been devastated due to travel restrictions.


Drivers of recovery

Whereas Ramsdens converted currency for 570,000 customers in the six months to 30 September 2019, the figure was only 69,000 in the same period last year. However, as soon as travel restrictions are lifted, and consumers return to the high street, there should be strong pent up demand for holidaymakers to take to the skies again. Ramsdens is well placed to benefit as it is well funded to take market share and even increase its gross margin of 2.6 per cent. Chief executive Peter Kenyon notes that there will be less competition in the market place as battered independents don’t have deep pockets and the former Thomas Cook stores acquired by Hays Travel at the end of 2019 don’t offer currency exchange.

The group’s pawnbroking arm, representing a quarter of group gross profit, is also well placed to rebuild profits. Unable to spend cash during last year’s lockdowns, Ramsdens’ customers repaid loans which reduced the group’s pledge book by a sixth to £6.5m. It’s realistic to expect the pawnbroking book – average pledge of £248 on a loan-to-value of 60 per cent – to start to tick up as lockdown restrictions are eased and customers’ requirement for cash starts to rise again. Furthermore, the gold price is 17 per cent higher than this time last year, and is up 40 per cent in the past two years, so there is scope to make larger pledges as the loan book rebounds given that a high proportion of pledged items have a precious metal content. A strong gold price also enables an improved recovery of interest charges where unredeemed pledged goods are scrapped as opposed to being sold through retail channels.


Ramsdens gross profit segmentation
Business activityPercentage
Foreign currency exchange32%
Jewellery retail16%
Purchase of precious metals21%
Other services (cheque cashing, Western Union money transfer, credit broking)5%
Source: Ramsdens annual report (18 months to 30 September 2020)



The combination of a high gold price and pawnbroking customers returning to their old spending habits (and so have a greater need for cash) is supportive of Ramsdens’ purchases of precious metals and unwanted jewellery. Typically, a customer brings unwanted jewellery into a Ramsdens store and a price is agreed depending upon the retail potential, weight or carat. The jewellery is then retailed through the 157-store network or online. Any residual items are smelted and sold to a bullion dealer for their intrinsic value. Precious metal purchases account for a fifth of Ramsdens’ gross profits.

Finally, Ramsdens’ jewellery sales should remain strong for several reasons:

Greater online presence. The internet now accounts for 9 per cent of all jewellery sales with two-fifths of online buyers living outside the natural catchment area of its branch network.

New jewellery sales. The segment now accounts for 31 per cent of retail revenue, and has been rising as Ramsdens’ improves its marketing offering.

Untapped demand. UK consumers have been hoarding away over £100bn in savings during the Covid-19 pandemic and millions of us have been denied the opportunity to spend. Some of this will be spent on higher value items as footfall returns to the high street.


Strong profit recovery

House broker Liberum Capital forecasts a Covid-19 impacted pre-tax profit of £3.9m on revenue of £51m in the 12 months to 30 September 2021 to produce earnings per share of 9.9p. On this basis, the shares are trading on a modest cash-adjusted price/earnings (PE) ratio of 8.5 after stripping out net cash of 51p a share.

Assuming operations return to normal by the end of the financial year, Liberum is looking for pre-tax profit of £6.9m on revenue of £57.4m in the 2021/22 financial year, a realistic assumption given that foreign currency-exchange revenue should rebound sharply and a high percentage of the incremental gross margin earned falls through to operating profit. On this basis, expect EPS of 16.9p, an outcome in line with Ramsdens’ earnings in both the 2018 and 2019 financial years. It also means the shares are trading on a forward cash-adjusted PE ratio of 5. Prospective pay-outs of 4.8p this year and 6.8p in 2021/22 offer dividend yields of 3.5 per cent and 5 per cent, respectively, adding further weight to the investment case. Buy.


Duke Royalty (DUKE)

Aim: Share price: 26.25p

Bid-offer spread: 26-26.5p

Market value: £67.7m


  • Balance sheet modestly geared
  • Disposals highlight conservative balance sheet valuations
  • Majority of portfolio partners trading back to normal
  • Covid-19 related impairment charges set to reverse

Shares in Duke Royalty (DUKE), 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, are trading 14 per cent below pro-forma NAV of 30.6p a share even though the group is set to enjoy a strong profit rebound.

Prior to the Covid-19 pandemic, the high yielding shares traded on a 10 to 40 per cent premium to NAV. Moreover, as a sign of the directors’ confidence, the board reinstated the 0.5p a share cash quarterly cash dividend in the final quarter of 2020, the annual pay-out equating to an attractive dividend yield of 7.6 per cent. The interim results released at the tail end of last year explain why the shares are firmly in bargain territory for multiple reasons.


Strong drivers for a re-rating

Firstly, seven of Duke’s royalty partners have maintained their monthly cash payments throughout the Covid-19 pandemic while four of the five partners that entered forbearance agreements have come out of forbearance. The agreements enabled these partners to defer payments to help them navigate through the Covid-19 crisis last year, but Duke protected the interest of its own shareholders by equitising the lost income. It now holds 30 per cent equity stakes in three royalty companies which offers shareholders additional investment upside as the economy recovers.

Secondly, having seen cash receipts decline from over £2.8m in the final quarter of the financial year to 31 March 2020 to £2m in the first quarter of the 2020/21 financial year, Duke’s royalty partners have experienced a significant upturn in trading. Indeed, cash receipts were £2.4m in the final quarter of 2020, a sum that covered all of Duke’s annual operating costs of £1.8m.

Thirdly, having previously booked non-cash write-downs of £12.6m on its royalty portfolio and a £2.9m impairment on its loan book to reflect the forbearance of some royalty partners in the 12 months to 31 March 2020, investors can expect these impairments to start to reverse as trading of Duke’s royalty partners improves during the economic recovery. Moreover, even after impairments, the £82.7m fair valuation of the portfolio is only £7m shy of cost and it is currently generating annual royalty payments of £10.38m, a cash-on-cash yield of 12.5 per cent.

Fourthly, Duke exited its largest investment in Dublin-based telecoms and IT and network specialist Welltel at the end of last year. The disposal was pitched at a 17 per cent premium to Duke’s carrying value of £13.2m, highlighting a conservative approach to valuations. Proceeds from the sale left the company in a net cash position. Duke also has a £30m credit facility which it can use to make further high yielding investments. The directors are evaluating 14 active investment opportunities.

This was also the second exit since the autumn. In September 2020, Duke made its first portfolio exit by realising £2m from its investment in Dublin-based B2B technology platform Xtremepush to deliver a healthy internal rate of return of 22 per cent. Duke still retains warrants over 3 per cent of Xtremepush's shares, so offering potential for future capital upside.

Fifthly, Duke’s portfolio now comprises 10 investments which have a carrying value of £82.7m (32p a share). Importantly, the majority of its portfolio companies have decent trading prospects.


The Duke Royalty financing model
 Year 1Year 2Year 3Year 4Year 5
Hypothetical Royalty Financing by Duke  £10m    
Hypothetical revenue of Royalty Partner  £50m£58.5m£64.4m£63.1m£65.6m
Hypothetical change in Royalty Partner revenue from previous year  5%17%10%-2%4%
Change in distribution (Collar +/–6%) for following year 5%6%6%-2%4%
Hypothetical yearly royalties based on initial 13 per cent cash-on-cash yield£1.3m£1.37m£1.45m£1.53m£1.50m
Annual cash–on–cash yield to Duke Royalty per year  13.0%13.7%14.5%15.3%15%
Cumulative return for Duke Royalty13.0%26.7%41.2%56.5%71.5%
Source: Duke Royalty 


Advantages of Royalty Financing
 Royalty financingDebt financingPrivate equity financing
TermTypically very long-term (in excess of 25 years or even perpetual)Short to medium termPermanent dilution of equity shareholders interests
Refinancing riskNoneSignificantPressure to exit
ControlPassivePassiveLoss of control
Cost of financing/debt12-15 per centSenior debt: 4-8 per cent; Mezzanine debt: 15-20 per cent plus.20 per cent plus.
SecuritySenior debt so ranks higher than equity.Typically senior debt so ranks higher than equity.None
Source: Duke Royalty Aim Admission Document


Business has been motoring at some portfolio companies

Duke has just made a follow-on £3.1m investment in portfolio company Miriad, a supplier of motorhome and caravan parts to Original Equipment Manufacturers and the aftermarket. Business has been booming as UK consumers are opting in increasing numbers to staycation in the UK. Miriad’s royalty payments have been unimpacted by the pandemic which is reassuring as Duke’s total royalty investment of £13.1m accounts for 15.5 per cent of the royalty portfolio. The investment in Miriad earns the company a monthly cash payment of £147,000, representing a healthy cash yield of 13.5 per cent.

Another portfolio company that has been performing resiliently is BHP Insurance, an Irish brokerage specialising in the niche not-for-profit insurance space, with small operations in other specialty insurance areas. While Covid-19 adversely impacted some of its business lines, including charities and events, other areas such as social housing, where BHP enjoys dominant market share across Ireland, have continued to grow year-on-year. BHP’s full-year profitability is in-line with pre-Covid-19 budgets and Duke's royalty payments have been unaffected. The outlook remains positive, so much so that Duke has just made a £1m follow-on investment to increase its total capital invested to £5.2m. Duke also holds a 10.5 per cent equity stake in BHP following its acquisition of smaller rival, Capital Steps, in August 2019.


Duke Royalty's royalty financing portfolio
Portfolio companyDate of initial investmentFair value of investmentCost of investment Annualised royalty paymentCash yield on costArea of business
MiriadFeb-19£12.1m£12.8m£1.76m13.8%Largest privately-owned recreational vehicle parts wholesale company in the UK. It currently supplies over 15,000 individual products and accessories in the motorhome, caravan, and converter market to approximately 1,700 end business customers and operates out of a 35,000 sq ft facility.
Lynx EquityOct-17£11.6m£13.0m£1.59m12.2%Toronto-based private company with a portfolio of operating companies that acquires mature, old-economy mid-market businesses ($750,000 – $2.5m cash profit) with the goal of building value.
TemarcaApr-17£10.6m£13.5mnilnilFamily owned business established in 1997 that operated multi-day riverboat cruises along the Rhine and Danube rivers. Duke took ownership of mortgaged vessels in 2020 and is looking to lease them to a new operator when the market improves.
InterHealth Canada Holding CorpAug-18£9.9m£10.0m£1.35m13.5%Leading healthcare organization specialising in the development, commissioning and management of healthcare facilities and services using a public-private partnership model.
TrimiteMar-18£9.5m£11.0m£1.39m. Duke has also taken 30 per cent equity stake.12.7%Key supplier of industrial coatings to global brands in defence and aerospace, agricultural and construction equipment, and automotive sectors. Trimite has a history of profitable operations in highly technical applications, has low debt and enjoys robust gross margins relative to the overall paint industry.
BrightwaterSep-18£8.5m£9.4m£1.27m13.5%Market-leading recruitment consultancy founded in 1998 with offices in Dublin, Cork and Belfast that provides permanent, contract and executive search services to SMEs, large blue-chip corporates and public sector entities.
United Glass GroupApr-18£6.8m£7.5m£1.06m prior to Duke taking 30 per cent equity stake. UGG has resumed cash payments.14.1%One of the UK’s leading independent glass merchants and processors.The Group has supplied glass to prominent projects such as the Shard skyscraper, London’s Olympic Park, the British Museum, the Bowes Museum, Sage Gateshead, as well as Fenwicks and Selfridges department stores.
BHP InsuranceAug-18£6.0m£5.2m£0.84m16.2%Irish brokerage specialising in the niche not-for-profit (NFP) insurance space.
Step InvestmentsJun-18£6.4m£6.4m£0.77m and Duke has  taken 30 per cent equity interest in lieu of monthly payments from April 2020 to September 2020.12.0%Portfolio includes Pearl & Dean and Wide Eye Media , established players in the cinema advertising space, and an 85 per cent stake in City Education Group, the owner of four private education facilities in Dublin. Step has recommenced payments including all amounts previously due.
BerkeleyJun-17£1.3m£1.1m£0.175m15.4%The company provides recruitment and consulting services to a long-standing list of blue-chip clients across Ireland, with a specific focus on the business and technology, life sciences and engineering sectors. 
Total £82.7m£89.8m   
Source: London Stock Exchange RNS, Duke Royalty annual report, Duke Royalty (27.1.21).


Cash receipts set to drive profits higher

Analysts are pencilling in a strong recovery in royalty investment income and ongoing improvements in operating cash flow to support the £5.1m annual cash cost of the 0.5p a share quarterly dividend.


Duke Royalty operating cash flow improving
Year to 31 MarReceipt of royalty debt payments, interest on loans and sale of equity investmentsNet cash from operating activitiesCash cost of dividends paid in reporting period
Source: Duke Royalty annual report and Cenkos Securities estimates.



Furthermore, as cash is recycled into new high yielding investments – the directors have announced £6.3m of follow-on investments since December – Duke’s post-tax profit looks set to rise from £5.2m in the 2020/21 financial year to £6.2m in 2021/22 to deliver EPS of 2.4p. On this basis, Duke’s shares are rated on a forward PE ratio of 11, offer a dividend yield of 7.6 per cent and are priced on a 14 per cent discount to a conservative net asset value. The income aside, any uptick in trading from royalty partners should offer a catalyst for capital growth as royalty payments are reset upwards to drive portfolio valuations higher. Buy.


Downing Strategic Micro-Cap Investment Trust (DSM)

Main: Share price: 64p

Bid-offer spread: 63-65p

Market value: £33.7m


  • Profit taken from top performer to fund new investments
  • NAV discount double long-term average
  • Decent dividend
  • Share buyback programme narrowing discount to NAV

Shareholders in Downing Strategic Micro-Cap Investment Trust (DSM) have endured a testing time since the company listed its shares, at 100p, on the Main Market in 2017. Net asset value (NAV) per share has since declined 20 per cent to 80.38p, and the share price trades 20 per cent below that level, so accentuating the paper loss.

Sentiment has not been helped by some poor investment decisions. For instance, Redhall, a specialist engineering company went into administration. The company had undergone a turnaround process but lacked board strength and managerial grip to cope with subsequent contract delays on public sector contracts. To add salt into the wound, various divisions were subsequently acquired by rivals at advantageous prices from the administrators.

Downing fund manager Judith MacKenzie is also honest enough to admit that the trust’s investment in aviation series group Gama Aviation (GMAA) was a mistake with regards to “our judgement of management and our belief that they had alignment with equity shareholders. We believe it is a good business managed badly, and despite our efforts we could not facilitate the change of management that we thought was necessary.” Downing exited that investment last year. I made the same error of judgement and pressed the ejector seat on Gama a couple of years ago.

However, Downing’s investment team have also made some decent calls. The share price of electronics equipment group Volex (VLX) has rocketed from 75p to 317p since the investment manager invested £2.4m. Last November, Downing top-sliced a third of the 3.2m shares held at the 280p mark and retains 2.2m shares worth £7m which account for 17 per cent of the portfolio’s £42.2m value. The investment in Volex highlights the merits of Downing adopting a private equity style approach to investing in listed micro-cap securities, and proactively engaging with and working alongside aligned management teams to drive returns. Downing also looks to unlock shareholder value by using strategic mechanisms such as restructuring, refinancing and mergers & acquisition (M&A) activity, targeting a holding period of between three to seven years on its investments.


Downing Strategic Micro-Cap Investment Trust investee companies market caps
Market capitalisationPercentage
£0m to £50m58.9%
£50m to £100m19.5%
£100m to £150m5.5%
£150m to £200m0.0%
Source: Downing Strategic Micro-Cap Investment Trust portfolio summary 31 December 2020


A portfolio with re-rating potential

Importantly, Downing’s portfolio of small-caps includes a fair number of value plays I am rather keen on. These include a £2.8m holding in Hargreaves Services (HSP:270p), a diversified industrial services group and brownfield land developer that is now reaping the upside from a strategic transformation over the past four years.

I have covered the company in detail since I initiated coverage at 206p (A high yielder offering significant hidden value’, 19 March 2020). The re-rating has some way to run as I recently highlighted (‘Four small caps with upgrade potential’, 5 January 2021). Hargreaves' free cash flow is set to soar in the coming year, one area Downing pays close attention to in its stock selection. A robust balance sheet ticks another box for both of us as the shares are priced on a 33 per cent discount to NAV of 403p (land is in the books at cost) even though Hargreaves has paid off all its bank debt.

I also have a cross over in this year’s portfolio with Downing’s £2.2m holding in diversified financial services group Ramsdens (RFX) and a £1.3m holding in Duke Royalty (DUKE), albeit they only account for 8 per cent of Downing’s portfolio.


Downing Strategic Micro-Cap Investment Trust portfolio by sector
Electrical equipment22.7%
Loan notes17.0%
Support services11.4%
Financial services9.8%
Consumer discretionary3.7%
Food producers0.5%
Source: Downing Strategic Micro-Cap Investment Trust portfolio summary 31 December 2020



Share buybacks narrowing discount

The portfolio composition aside, I like the fact that Downing continues to deploy some of its last reported £6.6m cash (16 per cent of NAV) to make NAV per share accretive buybacks. Since last autumn, the company has purchased 1.82m shares, or over 3 per cent of the issued share capital. This removes a stock overhang from stale bulls and is another positive for the share price.

The bottom line is that you are getting 16p a share of cash and receivables thrown into the price for free with the shares trading on a 20 per cent share price discount to NAV – the historic average discount is only 8.8 per cent, according to Trustnet – even though there are solid re-rating prospects for several investee companies. Also, income from loan notes and dividends supported a 1.6p a share pay-out to Downing’s shareholders in the 2019/20 financial year to provide shareholders with a 2.5 per cent dividend yield.

Please note that although Downing has a Bargain rating of 0.3, this is a quirk of IFRS accounting as all its listed holdings are held in the accounts as non-current assets which artificially depresses the Bargain rating. Toronto-based Canadian General Investments includes all its investments as current assets, hence its Bargain rating of 1.44. On the same basis, Downing would have the same Bargain rating of 1.25. Buy.


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