- Resumption of residential development lending.
- Cash accounts for more than half NAV.
- Potential windfall from legacy asset in Delhi.
I first highlighted the merits of Alpha Real Trust (ARTL:167p), a company that invests in high-yielding property and asset-backed debt and equity investments, when the shares were anomalously priced 35 per cent below net asset value (NAV) of 123.5p ('High-yield property play', 10 February 2016). The fact that the company's NAV per share has since increased two-thirds to 207.7p and the board has paid out total dividends of 16.6p a share not only highlights the high returns Alpha’s shrewd management team have been making, but why the current 20 per cent share price discount to book value is unwarranted.
Sensibly, the directors took a cautious approach to new investments as the Covid-19 pandemic unfolded, having previously cut their exposure to development risk and started recycling capital into asset-backed lending for residential developments. This explains why Alpha’s portfolio of secured and mezzanine property loans that generate an annual weighted average income return of 8.6 and 14.6 per cent, respectively, declined by 17 per cent to £32.8m (54p a share) in the 12 months to 31 March 2021.
Importantly, Alpha lends sensibly. Loan-to-value ratios average 59 per cent across the loan book and two-thirds of lending is focused on residential development property in the south of England, thus mitigating the risk of defaults. In fact, there haven’t been any. Moreover, with the housing market buoyant, mortgage rates at record lows and government-backed initiatives supporting first buyer activity, the back drop for development lending is clearly favourable.
Alpha’s directors have taken note and resumed lending again, granting £3.9m of new loans since the end of March. They can certainly afford to scale up as Alpha’s cash of £68.2m (112.3p a share) backs up more than half NAV of £126m (207.7p). Also, £23m (38p a share) of the current loan book is due for repayment by 30 September 2021, so there will be a growing cash pile to recycle.
Favourable risk-to-reward ratio
Effectively, cash and the loan portfolio backs up all of Alpha’s market capitalisation which means you have a free ride on £25m (41p a share) of other assets: 30 per cent stake worth £16m in the H2O shopping centre in Madrid; £6.8m equity in inflation-linked freehold industrial facility near Hamburg, Germany leased to industrial waste management group Veolia and generating a 7.1 per cent yield on equity; £1.8m equity investment in part of the Cambourne Business Park near Cambridge which generates a 9.6 per cent return on equity; and a legacy property in Liverpool worth £0.6m.
The valuation of the Hamburg property edged up slightly to €16.8m (£14.3m) over the 12-month trading period, but H20’s was reduced by 8 per cent. That’s hardly a disaster. Furthermore, there is scope for a recovery in H20’s valuation as the shopping centre’s occupancy rates are still above 90 per cent, and it continues to attract new tenants. A focus on well-funded international brands also means that the tenant mix is more resilient.
In addition, Alpha’s NAV should get a lift from the company’s legacy investment in the Galaxia project, an 11.2-acre development in an established suburb of Delhi, India. Having previously won £8.5m arbitration award against its development partner Logix, Alpha has fully recouped £0.5m more than its £2.5m original investment, so the asset is carried at nil cost in the accounts. However, the site is under offer and the purchaser has deposited £5.6m (9p a share) with the Supreme Court, India. That sum will be released to Alpha when the sale completes, albeit the purchaser is seeking an amendment of the development consents.
Factoring in the remaining £5.6m from the Logix Court award and Alpha’s proforma NAV is close to 217p a share. For good measure, the board declare a 1p a share quarterly pay-out so there is an attractive 2.4 per cent dividend yield underpinning the share price in a zero interest rate policy (Zirp) environment. Having last advised buying the shares, at 153p, at the end of last year ('Exploiting share price dislocations', 7 December 2020), I feel that a return to last year’s all-time high (212p) is not an unreasonable expectation as Alpha starts to scale up its high yielding lending activities again. Buy.
Gresham House Strategic highlights its value credentials
- NAV per share at all-time high.
- Portfolio outperforms FTSE All-Share index by 71.7 per cent in past three years.
- Outstanding performances from new investee companies.
Annual results from Aim-traded investment company Gresham House Strategic (GHS: 1,530p) highlight exactly why I maintain a positive view on the shares, having first suggested buying, at 796p, in my 2016 Bargain Shares Portfolio and banked dividends of 87.1p a share. Over the five-year period, GHS has produced a 100 per cent total shareholder return, and 81.6 per cent in the past three years, placing it second in the AIC UK Smaller Companies sector.
The investment team not only played a smart hand during the Covid-19 pandemic, delivering NAV total return of 44 per cent to 1,514p a share in the 12 months to 31 March 2021, but have maintained this eye-catching performance since the financial year-end. In the past 12 weeks, NAV has risen a further 17 per cent to another all-time high of 1,772p a share. The ongoing outperformance has been achieved through active portfolio management with £14.9m deployed in seven new holdings funded from £11.2m of net realisations.
Specifically, GHS invested in UK small companies which required further financing yet were being valued at deep discounts to their intrinsic value. The approach was to seek out those that were undervalued already and 'under-the-radar' where strategic, operational and management initiatives were underway, which would enhance returns even further on recovery.
A rampant investment portfolio
The seven new investments made include specialist distribution company Flowtech Fluidpower (FLO), an old favourite of mine; environmental and planning consultant RPS (RPS); advertising agency M&C Saatchi (SAA); Fulcrum Utility Services (FCRM), a specialist in designing and constructing electricity connections such as electric vehicle charging points and smart meters; clothing retailer Ted Baker (TED); and National World (NWOR), a company formed for the purpose of acquiring news publishing businesses.
Some of the gains have been eye-watering. For instance, £1.2m investment in National World’s unlisted convertible bond in January 2021 has since converted into listed equity currently worth £2.6m; £1.25m invested in Ted Baker in its June 2020 refinancing has almost doubled in value; and £2.6m invested in RPS’s refinancing in September 2020 is now worth £6.6m. GHS has also made a 150 per cent return on its £0.7m investment in the April 2020 refinancing of media group Bonhill (BONH).
GHS’s decision to invest in ULS Technology (ULS), a digital conveyancing platform for housing transactions, has proved prescient in light of the housing market boom. ULS subsequently sold off a non-core asset for £27m last November and its market capitalisation has almost doubled since GHS first invested at the tail end of 2019. GHS has also benefited from the dramatic re-rating of its largest holding (accounting for over a fifth of the £61.6m portfolio), hazardous waste specialist Augean (AUG). In May 2021, the company received a preliminary bid approach from private infrastructure equity firm Morgan Stanley Infrastructure Inc..
Sound investment approach
Reassuringly, the investment team led by deputy fund manager Laurence Hulse remains focused on acquiring stocks trading on a deep discount to their intrinsic worth, investing in businesses where they perceive self-help as the main driver of value creation and improved cash generation, and deploying capital into companies which are financially robust to weather more difficult conditions in the longer term. That’s a sensible approach to adhere to at this point of the economic cycle and one that should create a ‘margin of safety’, too. Moreover, the fact that GHS entered the 2021/22 financial year with 12 of its 16 holdings having net cash, and an average valuation of one times enterprise valuation to sales and six times cash profit multiple to enterprise valuation, highlights the potential for further value accretion.
Admittedly, the recent loss of Gresham House Asset Management’s (GHAM) lead investment manager Richard Staveley is far from ideal. He had made a significant impact, with two thirds of GHS's current investment portfolio made up of stocks acquired during his tenure. However, it certainly doesn’t justify the near 14 per cent share price discount to NAV, albeit GHS’s board are now conducting a strategic review which will report at the forthcoming annual meeting to consider the continuing role of GHAM as asset manager as well as determining the best course of action to provide growth in value for shareholders going forward.
GHS’s directors are also disappointed that “despite the strong investment and share price performance it has not been possible to raise additional equity due to the continued existence of the discount of the share price to NAV.” They also add that “the future growth of GHS is therefore limited due to the lack of availability of new funds for investment at a time when several attractive investment opportunities exist and GHS would be a benefit from taking larger stakes in some of its existing investments.” I can understand the frustration as GHS’s five-year investment track record since I recommended buying the shares speaks for itself.
|Simon Thompson's Bargain Shares Portfolio 2016 performance|
|Company name||TIDM||Opening offer price (p) 05.02.16||Bid price (p) 23.06.21 or exit price (see notes)||Dividends (p)||Total return (%)|
|Bioquell (see note one)||BQE||125||590||0||372.0%|
|Volvere (see note six)||VLE||419||1150||0||188.2%|
|Gresham House Strategic||GHS||796||1520||87.1||101.9%|
|Bowleven (see note two)||BLVN||18.935||5.5||15||43.2%|
|Juridica (see note three)||JIL||36.1||14||32||27.4%|
|Mind + Machines (see note four)||MMX||8||7.5||0||2.8%|
|Walker Crips (see note five)||WCW||44.9||23.2||5.59||-35.9%|
|French Connection (see note seven)||FCCN||45.7||11||0||-75.9%|
|FTSE All-Share Total Return||5180||7931||53.1%|
|FTSE AIM All-Share Total Return||747||1416||89.6%|
1. Simon Thompson advised buying Bioquell's shares at 149p in February 2016. Bioquell bought back 50 per cent of shares in issue at 200p each in June 2016 through a tender offer and Simon recommended buying back the shares in the market at 145p to give an average buy in price of 125p (‘Bargain shares updates’, 22 June 2016). Company was taken over at 590p cash per share in January 2019.
2. Simon Thompson advised banking profits on half your holdings in Bowleven shares at 33.75p, and running the balance ahead of drilling news at the Etinde prospect in Cameroon in the second quarter of 2018 (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019 and Simon then advised selling the balance of the holding at 5.5p ('Taking stock and profits', 9 December 2019).
3. Simon Thompson advised buying Juridica's shares at 41.2p in February 2016. Juridica subsequently paid out a special dividend of 8p a share in June 2016 and Simon recommended buying shares in the market at 61p using the cash proceeds to take the average buy in price to 36.1p (‘Brexit winners', 1 August 2016). Juridica then paid out a special dividend of 32p a share in September 2016 and total return reflects this distribution. Simon advised selling the holding at 14p ('Taking Q1 profits and running gains', 4 April 2017), hence the price quoted in the table.
4. Simon Thompson advised buying Mind + Machines shares at 8p in February 2016. Mind + Machines subsequently bought back 13.22 per cent of the shares in issue at 13p a share. The total return reflects this capital distribution. Simon advised selling the entire holding at 7.5p which is the exit price stated in the table ('Strategic acquisitions', 9 May 2018).
5. Simon Thompson advised selling Walker Crips shares on Monday, 4 March 2019 at 25p ('Bargain Shares Portfolio updates', 4 March 2019). This is the exit price quoted in the table.
6. Simon Thompson advised rendering 41.18 per cent of your holdings back to company at 1290p a share. Tender completed 19 June 2019 ('Tenders, takeover and hitting target prices', 3 June 2019), and subsequently advised selling balance of the holding at 1,150p ('Taking stock and profits', 9 December 2019).
7. Simon Thompson advised selling French Connection shares at 11p ('Targeting value plays', 16 March 2020).
Source: London Stock Exchange share prices
Unwarranted share price discount to NAV
The bottom line though is that the doubling of GHS's share price discount to NAV (from 6.3 per cent to 13.6 per cent in the past 12 weeks) is not only unwarranted, but represents a repeat buying opportunity. Shareholders can also look forward to a final dividend of 15.36p, a 20 per cent rise, taking the annual pay-out to 27.46p.There are decent prospects of continued investment outperformance, too, the key reason why the share price has re-rated 22 per cent since my last update six months ago ('Exploiting share price dislocations', 7 December 2020).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].
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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.