Upgrading target prices

In many cases, I have side stepped investments simply because the upside potential doesn’t merit an interest at the current price even though the fundamental case for investing is strong. However, I still add the companies to an active watchlist and await a share price pull-back to tip the scales back in my favour. Sometimes the share price never pulls back enough, but that’s life as setting price objectives and entry points is subjective. If enough market participants are willing to pay a higher price then so be it, but you still need to be comfortable with your own entry point.

This subject is highly relevant as the share prices of several constituents of my market beating annual Bargain Shares Portfolios have been closing in on my target prices, so I need to reassess their investment merits to ascertain whether a change in my fair value estimates is in order.

Record gaining record traction

• Assets under management equivalent (AUMe) increase 37 per cent to record high.
• Client numbers rise from 76 to 89.
• Launch of new currency Impact/ESG fund by end of June.

Annual results from currency manager Record (REC: 90p) highlight exactly why the share price has doubled since the start of 2021. They also highlight why there should be more upside to come.

Client numbers have increased by 50 per cent in the past three years, a trend that is clearly gathering momentum under the leadership of chief executive Leslie Hill, who took the reins last year. Buoyed by total new business wins of US$14.3bn (£10.3bn) in the past two years, and positive net flows in seven of the past eight quarters, AUMe hit a record high of US$80.1bn in the 12 months to 31 March 2021.

Moreover, with Record’s AUMe and revenue run-rate materially higher than at the same stage last year, house broker Panmure Gordon forecasts pre-tax profit will surge from £6.2m to £11.2m on 30 per cent higher revenue of £33m in the new financial year, implying earnings per share (EPS) of 4.7p. I expect Record to beat Panmure’s forecasts.

That’s because Record has developed a market-first Dublin-based Currency Impact/ESG fund [in collaboration with a European wealth manager] which will launch by the end of June. Panmure has factored in US$200m of net flows and a revenue contribution of less than £0.3m from the new fund in its 2021/22 forecasts, but Record could easily exceed that fund size at launch. In addition, if the new fund scales up to US$1bn in its first year then it would add 0.8p of incremental EPS in the 2022/23 financial year, or 17 per cent of current year estimates.

The potential for rapid earnings growth aside, the board’s policy is to declare almost all post-tax earnings as dividends, a reflection of Record’s highly cash-generative business model, and strong balance sheet – closing cash of £19.7m (9.8p a share) accounts for 73 per cent of net asset value (NAV). Based on a 100 per cent pay-out ratio, Panmure’s current year dividend estimate of 4.66p a share implies an attractive prospective dividend yield of 5.1 per cent. A forecast post tax return on equity of 34 per cent is eye-catching, too.

The holding has produced a 123 per cent total return since I included Record’s shares in my 2018 Bargain Shares portfolio, and came within pennies of achieving my 100p target price post the annual results. Ahead of likely earnings upgrades as the financial year progresses, I raise my target price to 115p to 120p. Buy.

Litigation Capital’s case win highlights hidden balance sheet value

• High Court award equates to 10 per cent of market capitalisation.
• Company funding a claim against Carillion’s former auditors.
• Funding a claim against Darty in relation to Comet.
• Third party fund expected to be fully invested imminently.

Litigation Capital Management (LIT:112.5p), a provider of litigation financing which enables third parties to pursue and recover funds from legal claims, has announced a major court award for one of its balance sheet funded investments. A conservative accounting policy and potential to earn high returns from 40 directly held balance sheet investments were key reasons why I included the shares, at 77.5p, in my 2019 Bargain Shares Portfolio.

The High Court of New Zealand has issued a judgment in favour of the plaintiff (financed by LCM) in relation to a case involving a long-running partnership dispute and ordered the disbursement of a significant amount from the funds [contributed by the defendant] held by the Court. The judgment crystallises the entitlement of LCM to NZ$26.8m (£13.8m) of which 25 per cent represents the return of its investment.

I also note that LCM has entered an agreement to provide a litigation finance facility to fund a claim against the former auditors, KPMG, of Carillion, the largest corporate collapse in the building and construction industry in UK history. The claim arises from KPMG’s conduct of its audits of Carillion’s financial statements. The losses which form the subject matter of the claim are expected to exceed £250m.

In addition, LCM is providing liquidation finance to a partner of FRP Advisory, additional liquidator of the former Comet Group to cover proceedings issued in the High Court against Darty, a multi-national electrical retailer based in France. At the time of its insolvency, Comet was the UK's second largest electrical retailer with 239 stores and 6,900 employees.

The additional liquidator alleges a transaction giving preference in Darty's favour occurred prior to Comet entering administration, thus reducing the amounts available for Comet's creditors.  The proceedings are seeking recovery of a sum exceeding £83m for distribution to Comet’s creditors.

Expect news flow from LCM’s fast-growing fund management business. It manages A$322m of investments including a US$150m (£109m) third-party fund which should be fully invested in the coming weeks. A follow-on US$300m to US$400m fund, or an expansion of the existing fund is planned. LCM receives 25 per cent of profit on each fund investment over a soft hurdle rate of 8 per cent, and an outperformance return fee of 35 per cent over an internal rate of return (IRR) of 20 per cent.

LCM’s shares are up 46 per cent since my last update (‘Exploiting a valuation anomaly’ 26 March 2021), and came within a penny of achieving my 120p target last week. However, they are still only rated on a forward price/earnings (PE) ratio of 10 for the 2021/22 financial year, a modest rating considering the potential for further bumper windfall profits as two-thirds of LCM’s directly held investment portfolio matures within the next 15 months. I raise my fair value target to 140p. Buy.

Note 1: Simon advised taking profits on TMT Investments at 580c a share to bank 140 per cent gain including dividend of 20c ('Takeovers, tender offers and taking profits', 9 September 2019), and subsequently advised buying back the shares  at 318c ('On the hunt for recovery buys', 6 July 2020). 

Note 2: Simon advised taking profits on Futura Medical at 34p a share on Monday, 14 October 2019 ('Bargain Shares: golden opportunities', 14 October 2019). The selling price is used in the performance table.

Note 3: Simon advised selling Mercia Asset Management at 27.5p a share on Monday, 9 December 2019 ('Taking stock and profits', 9 December 2019). The selling price is used in the performance table.

Source: London Stock Exchange opening offer prices at 8am on Friday, 1 February 2019 and latest bid prices or on date when Simon advised exiting the holding.

Augmentum cashed up for new investments

• Record NAV per share.
• Augmentum makes £22.8m investments post year-end.
• Portfolio companies raised £185m equity during financial year.

Shares in Augmentum Fintech (AUGM:140p), the first publicly-listed fintech fund in the UK, rallied 24 per cent to an all-time high of 172p after I advised running profits (‘Exploiting share price dislocations’, 7 December 2020), having included Augmentum’s shares, at 102p, in my 2019 Bargain Shares Portfolio. The subsequent pull-back looks a buying opportunity to me and for investors backing Augmentum’s £40m latest fundraise (placing, open offer and subscription at 135.5p a share).

In the 2020/21 financial year, Augmentum booked £26.7m of unrealised gains, delivered 12.3 per cent higher NAV of 130.4p per share and an unrealised annualised IRR of 19 per cent. The fund’s largest holding, a 3.8 per cent stake in UK investment platform Interactive Investor (ii) has been revalued up by £10.1m to £32.6m, or 8.4 times cost. In 2020, ii delivered 46 per cent revenue growth (significantly ahead of budget) and 56 per cent higher pre-tax profit of £13.9m. Post the year-end, ii acquired investment platform Equinti for £48.5m which boosts assets under administration to £50bn and the customer base to 400,000.

Augmentum also booked £12m of cumulative unrealised gains from its other four largest holdings: Tide, an emerging force in the small- and medium-sized enterprises (SMEs) challenger banking sector that now has a 5 per cent market share and serves 320,000 SMEs; Onfido, a leading global provider of online identity verification that has attracted over 1,500 customers including online bank Revolut and cryptocurrency exchange Bitstamp; BullionVault, a company that offers private investors low-cost access to investment-grade bullion that doubled pre-tax profit to £10.7m in 2020, implying a read-through valuation multiple of 15 times profit on Augmentum’s holding; and Grover, the German technology rentals platform that has just raised €60m in a Series B funding round. Augmentum has successfully exited investments, too, banking £10.5m proceeds from Dext (formerly Receipt Bank) which contributed £3m of realised gains.

New investments of interest include VOLT, a leading provider of resilient payment networks using open banking ‘rails’ as an alternative to traditional card ‘rails’; Epsor, a company that has developed a next generation workplace savings platform in France, providing facilities for both pension contributions and a tax advantaged bonus savings scheme; and Cushion, a company that is targeting a parallel workplace savings opportunity to Epsor but with focus on the UK market.

Priced on a modest premium to a conservative looking NAV, I feel that the prospects of the investment manager delivering another strong performance this year is being underrated. I estimate fair value around 160p. Buy.

Ramsdens' resilient performance

• Small operating profit reflects impacts of lockdowns and travel restrictions.
• Net cash up from £11m to £15m as customer pledges redeemed and strict cash control.
• Consolidation opportunities.

Middlesbrough-based Ramsdens (RFX: 155p), a financial services group whose main activities encompass foreign-currency exchange, retail jewellery, pawnbroking and a precious metals buying and selling service, delivered a resilient first half trading performance in the face of two national lockdowns and restrictions on foreign travel.

Operating profit declined from £2.5m to £0.1m on 23 per cent lower revenue of £20.8m mainly because the currency exchange business was hit by an 89 per cent fall in the amount of currency exchanged. However, there is huge untapped demand to holiday abroad when the UK government’s green list of countries is expanded, and Ramsdens is primed to gain market share and increase gross margin when that happens given there is far less competition following the demise of Thomas Cook (acquirer Hays Travel doesn’t offer currency exchange) and less well funded independents.

Not surprisingly national lockdowns impacted Ramsdens’ pawnbroking business as its customers used surplus cash to redeem pledges, and borrowed less given the inability to spend. Expect the pledge book to rebuild as the economy bounces back and consumers can spend freely again. A reduced need for cash and lower footfall also impacted earnings from the purchase of precious metals.

Of far more importance, Ramdens is well set for a strong profit recovery when the economy is finally free from restrictions and international travel restrictions are lifted. That’s why I suggested buying the shares as a recovery play, at 142.8p, in my 2021 Bargain Shares Portfolio. The investment case has not changed. House broker Liberum Capital expects a surge in pre-tax profit from £1m to £6.5m on 30 per cent higher revenue of £57.4m in the 2021/22 financial year, a realistic assumption given that a high proportion of incremental gross margin earned falls through to operating profit.

On this basis, expect EPS of 16.1p, in line with Ramsdens’ earnings in both the 2018 and 2019 financial years. Moreover, with net cash of £15m (48p a share) on the balance sheet, the directors have ample firepower to make opportunistic earnings enhancing acquisitions. My initial target price is 200p. Buy.

This article was first published at 5pm on Tuesday, 22 June and amended at 8.45am on Wednesday, 23 June after Litigation Capital Management announced it is providing a litigation finance facility to the additional liquidator of the former Comet Group.

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