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Clean up with two deep value plays

Two cash-rich deep value plays offer potential to deliver decent investment upside.
Clean up with two deep value plays
  • Sales of flagship brand Super Facialist increase 50 per cent.
  • Planned relaunches of five brands.
  • Investment in online platform to showcase brands

Aim-traded beauty brands business Brand Architekts (BAR:160p) should be a major winner as national lockdown restrictions are lifted. The fact that the company traded profitably in the second half of 2020 – underlying pre-tax profit only dipped £200,000 to £710,000 on 10 per cent lower revenue of £9m – was quite some achievement given that lower sales of Christmas gifts accounted for £600,000 of the revenue shortfall, and non-gift sales to high street retailers (closed due to the lockdown) declined by £800,000.

Revenue from Boots (13 per cent of total sales) dropped by a third, but as high street stores re-open in the coming weeks expect a strong bounce back. Not even Scrooge would cancel Christmas two years running, so expect gift sales to recover in the autumn. It’s also worth pointing out that the main reason international revenue reversed from £1.5m to £0.9m was due to Covid-19 government enforced lockdowns at TK Max stores in North America. The vaccine roll-outs in U.S.A. and Canada are well ahead of Europe, as are both country’s economic recoveries, factors which augur well for the future.

The fact that Brand Architekts offset £500,000 of the sales decline through higher direct-to-consumer and e-commerce sales is worth noting. Demand for flagship brand Super Facialist is on a tear, registering 50 per cent sales growth in the six-month period, and 14 per cent year-on-year growth during 2021’s lockdown. A media campaign (video, social media and digital) is planned to start in May to target ABC1 women aged 25 to 54, a key market segment for the facial brand.

Simon Thompson's 2020 Bargain Shares Portfolio Performance
Company nameTIDMMarketOpening offer price 07.02.20 Bid price 10.03.21 DividendsPercentage change (%)
XaarXARMain 42p141.5p0.0p236.9%
Metal Tiger (see note two)MTRAim11.8p21p0.0p78.0%
CreightonsCRLMain44p71p0.0p61.4%
NorthamberNARAim54.9p73p0.3p33.5%
Cenkos SecuritiesCNKSAim56p71p0.0p26.8%
Anglo Eastern PlantationsAEPMain570p600p0.4p5.3%
Chenavari Capital Solutions (see note one)CCSLMain61.4p35p0.0p-1.0%
Brand ArchitektsBARAim 160p155p0.0p-3.1%
CIP Merchant CapitalCIPAim57p50p0.0p-12.3%
PCFPCFAim33.3p24p0.4p-26.7%
Average      39.9%
FTSE All-Share Total Return index7,7967,414 -4.9%
FTSE Small-Cap Total Return index9,27410,605 14.4%
FTSE AIM All-Share Total Return index1,0991,358 23.6%
Note 1. Chenavari Capital Solutions made a compulsory capital redemption of 34.73 per cent of the share capital at 85.72p a share in March 2020, and subsequent compulsory capital redemption of 21.9 per cent of the share capital at 72.93p a share in July 2020. The total return takes into account the capital redemptions. The company delisted its shares from AIM on 30 September at a closing bid-price of 35p. Approximately 17.9 percent of each holding was then redeemed on 9 November 2020 at 65.26p per share. The board plans to make further compulsory capital redemptions in due course.
Note 2. Metal Tiger shares consolidated on the basis of one share for every 10 shares previously held on 1 July 2020.
Source: London Stock Exchange.

Investment in a direct-to-consumer online platform should help ramp up sales of the company’s brands, and create cross-selling opportunities, while relaunches of five key brands – Kind Natured; Happy Naturals; SenSpa; Argan; Root Perfect – are slated for this year. Tight working capital management and ongoing cost efficiencies helped boost the debt free company’s cash pile from £18m to £19m (110p a share), some of which is earmarked for acquisitions.

Although the share price is trading at the 160p entry point in my 2020 Bargain Share Portfolio, Brand Architekts is at an inflexion point whereby an increasing amount of gross margin (39 per cent) earned should convert into profit as revenues recover strongly given the company’s relatively fixed operating costs of £5.7m. A bounce back in domestic and international sales, new sales channels and self-help initiatives, and scope for earnings accretive acquisitions should propel both revenues and profits in the next 12 months, an outcome that is not being factored into a lowly enterprise valuation of £8m, the equivalent of 0.5 times sales (peer group average 2 times). Buy.

 

Cash rich Arix Bioscience delivers huge NAV rise

  • New investment in GenSight Biologics.
  • Sell down of two Nasdaq-quoted investee companies.
  • Conservative revaluation of Artios Pharma stake.

Arix Bioscience (ARIX:186p), a global venture capital company, is a classic Ben Graham recovery play, the reason why I suggested buying the shares, at 168p, in my market beating 2021 Bargain Shares Portfolio. As I noted in my detailed analysis, 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 hefty gain on that disposal helped drive the company’s net asset value (NAV) 62 per cent higher to £324m (242p a share), a sum that includes net cash of £174m (128p a share).

Furthermore, since Arix’s financial year-end, the company has realised £15.7m selling down stakes in two of its four Nasdaq-quoted investments and increased its shareholding from 2.8 to 4.4 per cent in Paris Stock Exchange-listed GenSight Biologics (SIGHT:PAR), a developer of gene therapy-based treatments of retinal degenerative diseases. The stake in GenSights is worth £12.2m (9p a share) and accounts for a sixth of Arix’s listed portfolio valuation of £70m (52p a share) after adjusting for post period end movements. On the same basis, the unlisted portfolio is worth £62.5m and the proforma cash pile has risen to £185m (136p a share).

Importantly, the portfolio has exciting investment prospects. For instance, Artios Pharma, a leading DNA Damage Response (DDR) company that is developing a pipeline of precision medicines for the treatment of cancer, entered a three-year strategic research collaboration with drug giant Merck to discover and develop compounds on up to eight targets. Arix invested £13.8m for a 12.4 per cent fully diluted stake which has a carrying value of £19m. However, investment bank Jefferies values the Artios stake at £49m at current prices in its spot NAV estimate of £339m (250p a share). It's worth noting that Artios is eligible to receive up to US$860m per target plus future royalties if Merck exercises its option. More likely is that Merck will try to acquire Artios, as was the case with VelosBio.

Simon Thompson's 2021 Bargain Shares Portfolio Performance
Company nameTIDMMarketOpening offer price 05.02.21Bid price 10.03.21 DividendsPercentage change (%)
San Leon EnergySLEAim27.5p36p0.0p30.9%
Wynnstay GroupWYNAim424p510p0.0p20.3%
Duke RoyaltyDUKEAim29p34p0.0p17.2%
Ramsdens HoldingsRFXAim 142.8p165p0.0p15.5%
Springfield PropertiesSPRAim135.6p145p0.0p6.9%
Arix BioscienceARIXMain177p184p0.0p4.0%
Downing Strategic Micro-Cap Investment TrustDSMMain69p70p0.0p1.4%
Canadian General InvestmentsCGIMain3,611c3,650c0.0p1.1%
Vietnam HoldingVNHMain201.4p202p0.0p0.3%
AnexoANXAim136.9p135p0.0p-1.4%
Average      9.6%
FTSE All-Share Total Return index7,1357,414 3.9%
FTSE Small-Cap Total Return index10,15310,605 4.5%
FTSE AIM All-Share Total Return index1,3841,358 -1.9%
Source: London Stock Exchange. 

Please note that activist shareholder Acacia Research Corporation (NASDAQ:ACTG) acquired a 19 per cent stake in Arix that was previously held by Woodford funds. Acacia is now pressing for the appointment of a new chief executive and an experienced team of life sciences investment professionals, and for no reinvestment of the VelosBio proceeds pending these changes. Arix’s board has agreed to engage with Acacia directly and notes that in addition to the recent appointment of two experienced independent non-executive directors and a senior independent director, the company has already made public its commitment to build the investment team in the UK and the US.

I expect the two parties to come to some arrangement in due course, and continue to see scope for a significant narrowing of Arix’s 23 per cent share price discount to NAV. Moreover, if the board use their authority to buy back up to 10 per cent of the shares outstanding, then the share price discount is likely to narrow rapidly. Buy.

 

■ 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].

Promotion: Subject to stock availability, both books can be purchased for the promotional price of £25 with free postage and packaging.

They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.