Bargain Shares: On the technology beat

TMT Investments (TMT:898¢), a venture capital company that invests in high-growth, internet-based companies, has reported a 23 per cent rise in net asset value (NAV) from $177.9m to $218.6m (749¢ a share) in the first six months of 2021, buoyed by eye-watering gains on two its largest holdings.

The major contributors were global ride-hailing and food delivery company Bolt ($30m valuation uplift to $66.2m on TMT’s 1.42 per cent stake), and proposal automation and contract management software provider PandaDoc ($10.4m uplift to $14m on TMT’s 1.32 per cent). Both investee companies completed equity funding rounds at significant premiums to the pre-money valuations used in TMT’s carrying valuations, thus highlighting the conservative nature of its accounting practises.

True, there was no movement on TMT’s second-largest holding, a 9.97 per cent stake in cloud storage provider, Backblaze, which remains valued at US$56m (192¢). However, in the event of an IPO of the company, as seems highly likely, the stake could easily be worth double TMT’s carrying value as I reported at the end of last year (‘Exploiting share price dislocations’, 7 December 2020). Moreover, it would wipe out TMT’s current 20 per cent share price premium to NAV at a stroke.

Importantly, there was enough movement on smaller holdings to suggest that TMT’s investment managers have been working their magic again, successfully recycling the US$41m cash proceeds from last December’s exit from customer relationship management software tool developer Pipedrive.

For example, TMT’s 1.22 per cent stake in Novakid, an English language school for children, has been revalued from $500,000 to $2.3m after the company completed a new equity funding round. TMT only made its investment last November. In addition, 3S Money Club, a UK-based bank challenger providing corporate clients with multi-currency bank accounts, completed a new equity funding round which led to an uplift of $1.9m (to $5.2m) in the fair value of TMT's investment. The company first invested in April 2020.

In the first half, the investment managers made $14.1m of investments across 13 new and existing portfolio companies, and have completed a further seven investments, worth $8.3m, since the 30 June 2021 period end including: a further $640,000 in Novakid; $2m in Collectify, a tech-enabled patient billing platform; $1.1m in VertoFX, a UK-based cross-border payments and foreign exchange solution that is rapidly expanding in Africa; and $1m in Academy of Change, a personalised educational service for women on lifestyle topics. TMT still has $14.2m of cash reserves to deploy, so expect further investments to be made.

In my opinion, there is clear potential for TMT to realise further material investment gains on its portfolio of 45 investee technology companies, the majority of which are focused on big data/cloud, e-commerce, SaaS (software-as-a-service), marketplaces and EdTech, areas that are benefiting from the accelerated shift to online consumer habits and remote working. Indeed, the tech venture capital investment space is one of the few beneficiaries of the new market environment caused by Covid-19. Importantly, the general trends in the digital technology sector are also leading to highly profitable exit opportunities – TMT booked $1.6m of gains in the first half from two full exits, for example.

Note 1: Simon advised taking profits on TMT Investments at 580¢ a share to bank 140 per cent gain including dividend of 20¢ ('Takeovers, tender offers and taking profits', 9 September 2019), and subsequently advised buying back the shares  at 318¢ ('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. Current share price 38p.

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 when Simon advised exiting the holding.

TMT’s shares have risen from 318¢ to 870¢ on an offer-to-bid basis since I turned buyer again 13 months ago (‘On the hunt for recovery buys’, 6 July 2020), albeit the share price has pulled back from the 1,100¢ level when I suggested running profits ahead of this month’s results (‘Bargain shares: Tapping into high growth technology stocks’, 6 July 2021). The share price subsequently hit 1,290¢ after that July article was published before profit taking took hold. I think it has now run its course.

So, with TMT’s shares currently priced around 900¢, the risk-reward is skewed to the upside once again for a company that has generated an eye-catching NAV-based internal rate of return (IRR) of 34.2 per cent over the past five years, and increased NAV per share 650 per cent since IPO in December 2010. TMT has paid out special dividends from realisations, too.

Please note that 81.8 per cent of the 29.2m shares in issue are owned by the 10 largest shareholders in the $263m market capitalisation company, so a below-average free float means that the shares can be volatile. I have taken this factor into account. Buy.

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