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On the hunt for hidden value

Our stockpicking expert highlights the balance sheet hidden value in another below the radar small-cap investment company
On the hunt for hidden value

One stockpicking technique I adopt is to scour the market for investment companies that have interests in unlisted high-growth technologies that offer potential to produce material valuation gains on disposal or IPO.

The disconnect between the carrying values in a company’s accounts and the price outside investors are willing to pay for these businesses explains why two constituents of my 2016 and 2019 Bargain Shares Portfolios, private equity group Oakley Capital Investments (OCI:361p) and venture capital group TMT Investments (TMT: 815¢), have produced eye-watering returns. Oakley has increased net asset value (NAV) per share by 122 per cent and paid dividends per share of 22.5p since early 2016, while TMT’s pro-forma NAV per share of 775¢ is 140 per cent higher than in February 2019. These hefty gains explain why their share prices have risen by 131 per cent and 226 per cent, respectively.

TekCapital (TEK:25p), an investment company focused on food technology, autonomous vehicles, smart eyewear and respiratory medical devices offers potential to deliver similar hefty returns. In fact, having first suggested buying the shares at 15.5p (Alpha Research: ‘Follow the smart money on technology’, 15 June 2021), I see upside to my 35p raised target. Recent newsflow is highly supportive.

 

Uncovering Tek Capital’s hidden value

  • Innovative Eyewear adds 21 retail optical stores to customer base at Vision Expo West
  • Salarius signs up major North American supermarket chain for sales of SaltMe!
  • Belluscura stake worth half Tek’s market value of £31.4m.
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Tek’s portfolio of investments includes a 100 per cent holding in Lucyd, the first company to deliver prescription glasses with Bluetooth® technology. Its frames enable many common smartphone tasks to be performed handsfree via voice assistants. Lucyd Lyte e-glasses are prescription-ready, offer streamlined designs, ultra-light weight of just 1.2-1.4 ounces, and a best-in-class playback per charge.

Lucyd is making great strides since product launch in June, having entered agreements with 85 direct retailing groups in addition to 31 indirect retailers in Canada through a multi-year distribution agreement with Marca Eyewear. Investors are now recognising the value of the technology, too. Indeed, although Tek’s stake in Lucyd almost trebled in value to US$7.9m in the six-months to 31 May 2021, Innovative Eyecare (Lucyd’s 80 per cent owned US operating subsidiary) is raising US$0.5m crowdfunding at a pre-money valuation of US$20m which doubles the value of Lucyd’s equity stake to US$16m (£11.8m).

Tek also holds a 97 per cent stake, worth US$3.6m, in Salarius, a food technology business that owns a patented process to produce nanoparticle sized salt, Microsalt®, a new all natural, non-GMO, Kosher, low-sodium salt. These small crystals dissolve faster on the tongue, so you need to use less salt, thus providing "better for you" products that taste good and reduce sodium intake.

Salarius’ approach is to target food manufacturers, snack food companies, and the retail market. Sales are gaining traction as the company has just signed up one of the largest supermarket chains in North America to roll out its own snack food brand SaltMe! across 800 stores in 2022. Expect other retailers to follow suit, and e-commerce sales to benefit from greater brand awareness.

In addition, Tek’s pre-IPO holding of 17.1m shares in recently floated Belluscura (BELL: 92p), an Aim-traded company that is developing and commercialising IP in the medical devices space, is now worth £15.7m. That’s 67 per cent higher than the carrying value in Tek’s end May 2021 NAV of $51.1m. Factor in the uplift from Innovative Eyecare, and Tek’s pro-forma NAV is heading towards $67.5m (38p). 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].

October Promotion: Subject to stock availability, the books can be purchased for the promotional price of £10 each plus £3.25 postage and packaging, or £20 for both books plus £3.95 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.