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Exploiting market anomalies

Two small-cap investment companies are set to reap hefty gains from IPOs of portfolio companies, while a property company is selling assets well above book value, too
Exploiting market anomalies

Efficient Market Theory dictates that it’s impossible to outperform the market through expert stock selection or market timing given that share prices already reflect all information.

However, the theory clearly fails to work in the under-researched small-cap space where information voids can be regularly exploited. A good example is TekCapital (TEK:32p), a technology investment company I recently highlighted when the shares were priced at 25p (‘On the hunt for hidden value’, 11 October 2021).

In the past week, Tek has closed a crowdfunding early for its Innovative Eyecare subsidiary and filed draft registration documents for a US IPO, the implication being that operational progress warrants a decent premium to the US$20m pre-money valuation previously placed on the business. In addition, the US Food and Drug Administration has provided the food industry with voluntary short-term goals for sodium content in commercially processed, packaged, and prepared foods to reduce excess population sodium intake. This is a major positive for 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. Tek’s 97 per cent stake in Salarius has a modest book value of US$3.6m. I raise my target price from 35p to 45p to reflect these developments.


Backblaze IPO supports TMT investment case

  • Hugo stake sold for $3.78m, or 112 per cent premium to book value
  • IPO of cloud storage company Backblaze to raise $100m

TMT Investments (TMT:920¢), a venture capital company that invests in high-growth, internet-based companies, has announced the disposal of its 3.55 per cent stake in Central American delivery and transportation technology company Hugo and the Nasdaq IPO of its second-largest investment, cloud storage group BackBlaze.

The Hugo exit represents a 112 per cent premium to the $1.78m book value of TMT’s 3.55 per cent stake and comes only 33 months after the company made its initial investment. This means that TMT has realised US$20.1m from exits since its 2021 half-year results on 18 August 2021. Furthermore, the company looks set to reap hefty gains on its 9.97 per cent stake in Backblaze. TMT first invested $5m in July 2012 and 2013, made a partial $2m disposal in 2019, and the holding was last valued at $56m (178¢ a share) at 30 June 2021 after which TMT invested an additional $2m in August.

I expect the IPO to be well received given the strong dynamics supporting explosive growth in digital data creation and consumption. These include artificial intelligence and machine learning, regulatory and compliance requirements (driving retention of data), and cybersecurity threats, such as ransomware, all of which make it imperative for organisations to scale up and secure their digital data storage.

Servicing 485,000 customers across more than 175 countries, Backblaze protects their business data on storage capacity of two trillion megabytes. The group’s revenue increased 25 per cent to $31.5m in the first half of this year, an organic growth rate that looks set to be maintained. Based on analysis of International Data Corporation data, Backblaze’s opportunity in the mid-market for Public Cloud Infrastructure-as-a-Service is forecast to grow to $54.6bn by 2025 (compound annual growth rate of 27 per cent) and for Data-Protection-as-a-Service to $11bn by 2025 (CAGR of 19 per cent).

True, Backblaze is lossmaking, posting a $6m pre-tax loss in the first half of 2021. However, with gross margin of 50 per cent (75 per cent excluding non-cash depreciation and amortisation costs), and net revenue retention rates above 100 per cent (average revenue per customer has risen 30 per cent to $133 in the past four years), then this is a highly scalable operationally geared business. It has also required limited outside investment since being founded in 2007.

At a $1bn potential post-money valuation on listing, the group’s holding in Backblaze would lift my pro-forma net asset value (NAV) per share by 15 per cent to 900¢. I have also taken account of the Hugo realisation, and TMT’s recent $19.3m equity raise, at 850¢. The bottom line is that TMT’s shares could be trading close to spot NAV before the year-end, a valuation that fails to reflect potential for further profitable exits from a portfolio of more than 50 investee companies. Buy.


Rounding the circle

  • £20m disposal of One Castle Park, Bristol at £0.75m above book value
  • £3.96m sale of 135 Aztec West, Bristol at £961,000 above book value post refurbishment.

Circle Property (CRC:206p), an internally managed Jersey-registered property company, has made £24m of disposals from its £132m portfolio of well-located regional office properties. The transactions have added 6p a share to Circle’s last reported NAV per share of 274p, so underpinning Cenkos Securities’ NAV estimate of 288p at 31 March 2022 (‘A smart play on the office property market recovery’, 7 July 2021). They have also reduced Circle’s pro-forma net debt to £35m, implying a net loan-to-value ratio of 32 per cent, down from 44 per cent at the 31 March 2021 year-end.

Trading on an unwarranted 28 per cent share price discount to forward NAV, and offering a 3.4 per cent prospective dividend yield, next month’s half-year results are likely to spark a re-rating. Buy.


■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at, 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