Bargain shares: profit from a bid situation and a repeat buying opportunity

Of course, there are valid reasons why some companies are underpriced relative to peers, but by screening out those that offer potential share price catalysts – an upturn in trading being the obvious one – there is scope for price-to-book value multiples to re-rate sharply as the earnings recovery gathers momentum. This is exactly what has happened to the stars of my 2017 and 2020 Bargain Shares portfolios, technology groups Xaar (XAR) and BATM Advanced Communications (BATM), both of which have produced share price gains of around 345 per cent.

It’s hardly surprising that predators also run their slide rules across these bargain shares before their earnings upgrade cycles kicks in. Anexo (ANX), a provider of a litigation claims processing, is the latest company to receive a bid approach.

Private equity bid approach for Anexo

• Bid approach from DBAY Advisors
• Major shareholders backing potential 150p-a-share cash offer
• Bullish trading update at annual meeting

Liverpool-based Anexo (ANX:145p), a provider of a litigation claims processing focused on the recovery of credit hire and repair costs for impecunious non-fault motorists involved in road traffic accidents, has received a 150p indicative cash offer from 29 per cent shareholder DBAY Advisors.

It comes a fortnight after the company revealed in a trading update that in the first four months of 2021 vehicles on hire are 8.5 per cent ahead of the same period in 2020, and cash collections in its legal services division are 11.8 per cent higher year-on-year. The company continues to benefit from rival solicitors (who had been supported by whiplash claims) exiting the market, a process that should accelerate following last month’s introduction of the Civil Liability Act.

Analysts are pencilling in 28 per cent earnings recovery this year and 21 per cent growth in the 2022 financial year, implying earnings per share (EPS) of 14.3p and 17.3p, respectively. On this basis, the shares are rated on modest price/earnings (PE) ratios of 10 and 8. A price-to-book value of 1.5 times is hardly punchy either especially as Anexo has hidden balance sheet value.

That’s because the company is representing 15,000 UK claimants to pursue claims against German carmaker VW in relation to the emissions scandal. Panmure Gordon estimate Anexo’s claimants could generate £16m of operating profit for the company, a sum that’s not in its forecasts.

Chairman Alan Sellers and Samatha Moss, managing director of Anexo’s legal services subsidiary Bond Turner, control 35 per cent of the shares and DBAY will need their support for its offer to succeed. I also feel outside shareholders will demand a higher price. So, having included Anexo’s shares, at 136.9p, in my 2021 Bargain Shares portfolio, I would sit tight and await developments. Hold.

Time to snap up a smart technology stock

• Launch of non-invasive no-swab saliva-based Covid-19 test
• New rapid lateral flow test provides results in 8 to 15 minutes
• PCCW Global partnership generating NFVTime revenues
• New strategic partnership with albis-elcon

BATM Advanced Communications (BVC:80.4p), a provider of medical laboratory systems, diagnostic kits, cyber security and network solutions, has issued a raft of positive announcements since I covered the annual results even though the share price has continued its retracement since hitting a 19-year high of 150p in July 2020 (‘Running bull market winners’, 24 February 2021).

BATM’s share price is now at an important juncture, testing last autumn’s 78p low point and I strongly feel that the odds favour a rally from what is an oversold position (14-day RSI of 34) ahead of interim results later in the summer. I have good reason to think this way.

Last year, BATM doubled cash profit to $19.7m on 48 per cent higher revenue of $183.6m, a performance that massively exceeded analyst expectations and one driven by high demand for the group’s Covid-19 antigen and antibody tests. BATM is clearly building on this stellar performance. In the first half, BATM launched a non-invasive no-swab saliva-based Covid-19 test that uses the RT-PCR technique and has 100 per cent accuracy for both sensitivity and specificity, thus negating the false negative readings that can arise with lateral flow tests in the market. The test is being produced at the group’s Adaltis manufacturing facility in Rome and BATM commenced deliveries to schools and care homes last month. It has also been endorsed by the Italian Olympic Committee which will use BATM’s testing kits at next month’s Olympic Games.

In addition, Adaltis has jointly developed and launched an easy-to-use rapid lateral flow test that gives results in 8 to 15 minutes and has demonstrated sensitivity above 95 per cent in validation testing. It is being sold under a revenue share agreement with Gamidor Diagnotistics, which I understand is looking to establish another production line in Europe.

It’s worth noting, too, that BATM’s cyber security division has just landed a $4.1m (£3m) contract with a longstanding government defence department customer, highlighting the ongoing strong recurring revenue stream from this activity.

The group is also integrating its cyber solution into its cutting-edge network function virtualisation (NFV) technology that has been developed for the telecom’s industry. In layman’s terms, NFV decouples the network functions, such as network address translation, firewalling, intrusion detection, domain name service (DNS) and caching from proprietary hardware appliances so they can run in software. It’s designed to consolidate and deliver the networking components needed to support a fully virtualised infrastructure – including virtual servers, storage and even other networks. The importance of NFV should not be underestimated as it’s going to play a critical role in supporting the services 5G network operators will be able to offer their customers as they roll out their infrastructure.

In addition, BATM’s NFVTime technology has been integrated into albis-elcon's new service delivery platform, uSphir. albis-elcon is the premier brand of UET United Electronic Technology AG (XETRA: UET), a publicly listed German technology group that delivers products and services to help international communication network providers (Deutsche Telekom, Orange, Telecom Italia, and Telefonica are customers) operate networks more efficiently and reduce energy requirements.

albis-elcon developed uSphir to enable telecom operators to create virtual software-based networks (using BATM's operating system) and offer virtualised business services to their end customers. albis-elcon has a strong position amongst tier 1 telecom operators in Europe and Latin America, so the partnership will enable BATM to extend its global reach into those end markets. In accordance with its business model, BATM will receive a monthly license fee for each end point deployed by a customer.

Importantly, BATM has revealed that it has started generating revenue from its licensing NFVTime strategic partnership agreement with Hong-Kong-based PCCW Global. The Asia-based Tier1 is present in more than 160 countries and in 3,000 cities in the Americas and EMEA, thus giving BATM access to potentially thousands of possible customers.

Analysts at Stifel Europe estimate that the PCCW contract alone could generate $3m of revenue in 2021, before scaling to $10m in 2022 and $15m in 2023 based on a 5 per cent market share. It is set to be a highly profitable income stream, too, as analysts estimate BATM will earn an 85 per cent gross margin on this new revenue stream. Clearly, if BATM lands more Tier 1 contracts then it could scale up rapidly, a possibility that is simply not in the price. Indeed, if BATM signs one Tier I contract per year alongside some mid-small contracts then Stifel’s bull case scenario points to NFV revenue exploding to $10m in 2021, $26m in 2022 and $50m in 2023.

1. Simon Thompson advised selling two-thirds of the Chariot Oil & Gas holding at 17.5p on 3 April 2017 ('Bargain shares on a tear', 3 April 2017). Simon subsequently advised participating in the one-for-8 open offer at 13p a share ('On the earnings beat', 5 Mar 2018) and buying back the shares sold at 4p ('Chariot's North African adventure', 17 April 2019). Total return reflects these transactions.

2. Simon Thompson advised selling the Cenkos Securities holding at 106p on 3 April 2017 and the 106p price quoted in the above table is the exit price on the holding ('A profitable earnings beat', 3 Apr 2017). Please note that Simon has since included the shares in his 2020 Bargain Shares Portfolio and  rates the shares a buy ('Ben Graham recovery plays', 5 October 2020).

3. Manchester and London Investment Trust paid total dividends of 3p a share on 2 May 2017. Simon Thompson then advised selling half of the holding at 366.25p on 26 June 2017 ('Top slicing and running profits', 26 June 2017), and selling the remaining half at 377p ('Bargain shares second chance', 17 August 2017). The 377p price quoted in the table is the final exit price.

4. Simon Thompson advised banking profits on half your holdings in Bowleven at 33.75p (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019 and the balance of the holding was sold at 5.5p ('Taking stock and profits', 9 December 2019).

5. Simon Thompson advised to sell Management Consulting's shares at 6p in February 2018 (‘How the 2017 Bargain share portfolio fared’, 2 February 2018). The price quoted in the table is the 6p exit price.

6. Tiso Blackstar transferred its UK listing to the Johanesburg Stock Exchange. The shares were then delisted on 23 November 2020 when shareholders received an exit cash payment of R415 per share on cancellation of their shares.

7. Simon Thompson advised banking profits on half your holdings in BATM shares at 49.9p ('Bargain Shares: Exploiting pricing anomalies and top-slicing', 3 December 2018) and subsequently bought back the shares at 43.5p ('BATM armed for a re-rating', 11 July 2019). 

Source: London Stock Exchange.

After adjusting for BATM’s net funds of $47m (7.7p a share) and the recent receipt of $28m (4.6p) from a non-core business disposal, the company has an enterprise valuation of £298m, or 17.8 times house broker Shore Capital’s cash profit estimate of $23.2m (£16.7m), up from $19.7m in 2020. That’s hardly an excessive multiple for a company that is creating a highly valuable high-margin revenue stream from its NFV technology, and one that has a growing revenue stream from its diagnostics business.

Furthermore, after deducting depreciation, amortisation and finance charges, Shore expects BATM to increase current-year adjusted pre-tax profit by more than a quarter to $17.3m and boost earnings per share (EPS) by a third to 3.04c. On this basis, the shares are rated on a cash-adjusted price/earnings (PE) ratio of 31, a multiple that could drop sharply over the coming years as BATM’s high-margin income streams scale up.

So, with the fundamental investment case strong as the forthcoming interim results will highlight, and a technical share price rally on the cards at the very least, I feel that BATM ticks all the boxes at this juncture. The holding is showing a 345 per cent return since I included the shares in my 2017 Bargain Shares portfolio and if you have been following my commentary I feel there is a good chance to double your money at the current entry point. Strong buy.

Finally, I have published an update on PCF Group following a lengthy update from the company.

■ 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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